AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 2002
REGISTRATION NO. 333-86582
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
NATURAL RESOURCE PARTNERS L.P.
(Exact Name of Registrant as Specified in Its Charter)
---------------------
DELAWARE 1222 35-2164875
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification Number)
Organization)
601 JEFFERSON STREET, SUITE 3600
HOUSTON, TEXAS 77002
(713) 751-7507
(Address, Including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
DWIGHT L. DUNLAP
601 JEFFERSON STREET, SUITE 3600
HOUSTON, TEXAS 77002
(713) 751-7507
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
COPIES TO:
DAN A. FLECKMAN JOSHUA DAVIDSON
CHRISTOPHER S. COLLINS BAKER BOTTS L.L.P.
VINSON & ELKINS L.L.P. 910 LOUISIANA
1001 FANNIN, SUITE 2300 HOUSTON, TEXAS 77002
HOUSTON, TEXAS 77002 (713) 229-1234
(713) 758-2222
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
---------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 3, 2002
PROSPECTUS
(NATURAL RESOURCE PARTNERS L.P. LOGO)
NATURAL RESOURCE PARTNERS L.P.
4,576,890 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
$ PER COMMON UNIT
---------------------
We are selling 2,598,750 common units and Arch Coal, Inc., as the selling
unitholder, is selling 1,901,250 common units. We will not receive any proceeds
from the sale of common units by Arch Coal, Inc. We and Arch Coal, Inc. have
granted the underwriters a 30-day option to purchase up to an additional 675,000
common units on the same terms and conditions as set forth in this prospectus to
cover over-allotments of common units, if any. To the extent the underwriters do
not exercise this option in full, affiliates of our general partner will
purchase up to an additional 76,890 common units at the initial public offering
price, such that a minimum of 4,576,890 common units will be sold in the
offering.
We are a limited partnership recently formed by Western Pocahontas
Properties Limited Partnership, Great Northern Properties Limited Partnership,
New Gauley Coal Corporation and Arch Coal, Inc. This is the initial public
offering of our common units. We expect the initial public offering price to be
between $19.00 and $21.00 per unit. We intend to make a minimum quarterly
distribution of available cash of $0.50 per unit, or $2.00 per unit on an
annualized basis, before any distributions are paid on our subordinated units,
to the extent we have sufficient cash from operations after establishment of
cash reserves and payment of fees and expenses, including payments to our
general partner. We have applied to list the units on the New York Stock
Exchange under the symbol "NRP."
---------------------
INVESTING IN THE COMMON UNITS INVOLVES RISK. PLEASE READ "RISK FACTORS"
BEGINNING ON PAGE 14.
These risks include the following:
- We may not have sufficient cash from operations to pay the minimum
quarterly distribution following establishment of cash reserves and
payment of fees and expenses, including payments to our general partner.
- A substantial or extended decline in coal prices could reduce our coal
royalty revenues and the value of our coal reserves.
- Our lessees' coal mining operations are subject to operating risks that
could result in lower coal royalty revenues to us.
- Our lessees are subject to federal, state and local laws and regulations
that may limit their ability to produce and sell coal from our properties.
- We depend on a limited number of primary operators for a significant
portion of our coal royalty revenues.
- Due to our lack of asset diversification, adverse developments in the coal
industry could reduce our coal royalty revenues.
- A recent federal district court ruling could preclude our lessees from
obtaining Clean Water Act permits required for some of their future
operations and could also result in the revocation of existing permits.
- The owners of our general partner and their affiliates may engage in
substantial competition with us and have other conflicts of interest and
limited fiduciary responsibilities that may permit them to favor their own
interests to your detriment.
- Even if unitholders are dissatisfied, they cannot easily remove our
general partner.
- The control of our general partner may be transferred to a third party
without unitholder consent.
- You will experience immediate and substantial dilution of $6.91 per common
unit.
- You may be required to pay taxes on income from us even if you do not
receive any cash distributions from us.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
PER
COMMON
UNIT TOTAL
---------- --------
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Natural Resource Partners L.P. before expenses $ $
Proceeds to Selling Unitholder $ $
The underwriters expect to deliver the common units on or about ,
2002.
SALOMON SMITH BARNEY LEHMAN BROTHERS
A.G. EDWARDS & SONS, INC.
FRIEDMAN BILLINGS RAMSEY
RBC CAPITAL MARKETS
, 2002
TABLE OF CONTENTS
SUMMARY..................................................... 1
Natural Resource Partners................................. 1
Partnership Structure and Management...................... 6
The Offering.............................................. 8
Summary Pro Forma Financial and Operating Data............ 11
Summary of Conflicts of Interest and Fiduciary
Responsibilities....................................... 13
RISK FACTORS................................................ 14
Risks Related to Our Business............................. 14
We may not have sufficient cash from operations to pay
the minimum quarterly distribution following
establishment of cash reserves and payment of fees and
expenses, including payments to our general partner... 14
A substantial or extended decline in coal prices could
reduce our coal royalty revenues and the value of our
coal reserves......................................... 15
Our lessees' coal mining operations are subject to
operating risks that could result in lower coal
royalty revenues to us................................ 15
We depend on a limited number of primary operators for
a significant portion of our coal royalty revenues,
and the loss of or reduction in production from any of
our major operators could reduce our coal royalty
revenues.............................................. 16
We may not be able to terminate our leases if any of
our lessees declare bankruptcy, and we may experience
delays and be unable to replace lessees that do not
make royalty
payments............................................. 16
If our lessees do not manage their operations well,
their production volumes and our coal royalty revenues
could decrease........................................ 16
Due to our lack of asset diversification, adverse
developments in the coal industry could reduce our
coal royalty revenues................................. 17
Any decrease in the demand for metallurgical coal could
result in lower coal production by our lessees, which
would thereby reduce our coal royalty revenues........ 17
We may not be able to expand and our business will be
adversely affected if we are unable to replace or
increase our reserves or obtain other mineral reserves
through acquisitions.................................. 17
Any change in fuel consumption patterns by electric
power generators resulting in a decrease in the use of
coal could result in lower coal production by our
lessees, which would reduce our coal royalty
revenues.............................................. 17
Current conditions in the coal industry may make it
difficult for our lessees to extend existing contracts
or enter into supply contracts with terms of one year
or more, which could adversely affect the stability
and profitability of their operations and adversely
affect our coal royalty revenues...................... 18
Competition within the coal industry may adversely
affect the ability of our lessees to sell coal, and
excess production capacity in the industry could put
downward pressure on coal prices...................... 18
Lessees could satisfy obligations to their customers
with coal from properties other than ours, depriving
us of the ability to receive amounts in excess of
minimum royalty payments.............................. 19
Fluctuations in transportation costs and the
availability or reliability of transportation could
reduce the production of coal mined from our
properties............................................ 19
Our reserve estimates depend on many assumptions that
may be inaccurate, which could materially adversely
affect the quantities and value of our reserves....... 19
Our lessees' work forces could become increasingly
unionized in the future............................... 20
Regulatory and Legal Risks................................ 20
Our lessees are subject to federal, state and local
laws and regulations that may limit their ability to
produce and sell coal from our properties............. 20
A substantial portion of our coal has a high sulfur
content. This coal may become more difficult to sell
because the Clean Air Act limits the ability of
electric utilities to burn high sulfur coal........... 21
A recent federal district court ruling could preclude
our lessees from obtaining Clean Water Act permits
required for some of their future operations and could
also result in the revocation of existing permits..... 21
ii
The Clean Air Act affects the end-users of coal and
could significantly affect the demand for our coal and
reduce our coal royalty revenues...................... 22
We may become liable under federal and state mining
statutes if our lessees are unable to pay mining
reclamation costs..................................... 23
A recent federal district court decision could limit
our lessees' ability to conduct underground mining
operations............................................ 23
Restructuring of the electric utility industry could
lead to reduced coal prices........................... 24
We could become liable under federal and state
Superfund and waste management statutes............... 24
Risks Related to Our Partnership Structure................ 24
The WPP Group and Arch Coal may engage in substantial
competition with us................................... 24
The WPP Group, Arch Coal and their affiliates have
conflicts of interest and limited fiduciary
responsibilities, which may permit them to favor their
own interests to your detriment....................... 25
Even if unitholders are dissatisfied, they cannot
easily remove our general partner..................... 26
The control of our general partner may be transferred
to a third party without unitholder consent........... 27
Our general partner's absolute discretion in
determining the level of cash reserves may adversely
affect our ability to make cash distributions to
unitholders........................................... 27
You will experience immediate and substantial dilution
of $6.91 per common unit.............................. 28
We may issue additional common units without your
approval, which would dilute your existing ownership
interests............................................. 28
Cost reimbursements due our general partner may be
substantial and will reduce the cash available for
distribution to you................................... 28
Our general partner has a limited call right that may
require you to sell your units at an undesirable time
or price.............................................. 29
Your liability may not be limited if a court finds that
unitholder action constitutes control of our
business.............................................. 29
Tax Risks to Common Unitholders........................... 29
The IRS could treat us as a corporation for tax
purposes, which would substantially reduce the cash
available for distribution to you..................... 29
A successful IRS contest of the federal income tax
positions we take may adversely affect the market for
our common units, and the cost of any IRS contest will
be borne by our unitholders and our general partner... 30
You may be required to pay taxes on income from us even
if you do not receive any cash distributions from
us.................................................... 30
Tax gain or loss on disposition of common units could
be different than expected............................ 30
Tax-exempt entities, regulated investment companies and
foreign persons face unique tax issues from owning
common units that may result in adverse tax
consequences to them.................................. 30
We will register as a tax shelter. This may increase
the risk of an IRS audit of us or you................. 31
You will likely be subject to state and local taxes in
states where you do not live as a result of an
investment in units................................... 31
USE OF PROCEEDS............................................. 32
CAPITALIZATION.............................................. 33
DILUTION.................................................... 34
CASH DISTRIBUTION POLICY.................................... 35
Quarterly Distributions of Available Cash................. 35
Operating Surplus and Capital Surplus..................... 35
Subordination Period...................................... 36
Distributions of Available Cash From Operating Surplus
During the Subordination Period........................ 38
Distributions of Available Cash from Operating Surplus
After the Subordination Period......................... 38
Incentive Distribution Rights............................. 38
Percentage Allocations of Available Cash from Operating
Surplus................................................ 39
Distributions From Capital Surplus........................ 39
Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.................................... 40
Distributions of Cash Upon Liquidation.................... 40
CASH AVAILABLE FOR DISTRIBUTION............................. 43
iii
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA............ 46
Western Pocahontas Properties Limited Partnership......... 47
Great Northern Properties Limited Partnership............. 48
New Gauley Coal Corporation............................... 49
Arch Coal Contributed Properties.......................... 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 51
Introduction.............................................. 51
Results of Operations..................................... 53
Related Party Transactions................................ 60
Liquidity and Capital Resources........................... 60
Contractual Obligations and Commercial Commitments........ 62
Inflation................................................. 63
Environmental............................................. 63
Recent Accounting Pronouncements.......................... 63
Critical Accounting Policies.............................. 64
Quantitative and Qualitative Disclosures about Market
Risk................................................... 65
COAL INDUSTRY OVERVIEW...................................... 66
Introduction.............................................. 66
Coal Markets.............................................. 66
Industry Trends........................................... 67
Coal Royalty Business..................................... 68
Largest U.S. Coal Producers............................... 69
Imports and Exports....................................... 69
Coal Characteristics...................................... 70
Coal Mining Techniques.................................... 71
Coal Preparation.......................................... 72
Coal Regions.............................................. 72
Coal Prices............................................... 73
BUSINESS.................................................... 76
Business Strategy......................................... 76
Competitive Strengths..................................... 77
Our Relationship with the WPP Group and Arch Coal......... 78
Coal Reserves and Production.............................. 78
Coal Leases............................................... 80
Central Appalachia (Eastern Kentucky and Virginia)........ 81
Central Appalachia (Southern West Virginia)............... 84
Northern Appalachia....................................... 87
Southern Appalachia....................................... 89
Illinois Basin............................................ 91
Northern Powder River Basin............................... 93
Other Operations.......................................... 95
Coal Industry Sales Contracts............................. 95
Competition............................................... 95
Regulation................................................ 96
Title to Property......................................... 105
Employees and Labor Relations............................. 106
Legal Proceedings......................................... 106
MANAGEMENT.................................................. 107
GP Natural Resource Partners LLC Will Manage Us........... 107
Directors and Executive Officers of GP Natural Resource
Partners LLC........................................... 108
Reimbursement of Expenses of our General Partner.......... 109
Executive Compensation.................................... 109
Compensation of Directors................................. 110
Long-Term Incentive Plan.................................. 110
iv
Annual Incentive Plan..................................... 111
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 112
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 113
Distributions and Payments to the General Partner and its
Affiliates............................................. 113
Agreements Governing the Transactions..................... 114
Omnibus Agreement......................................... 115
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 119
Conflicts of Interest..................................... 119
Fiduciary Responsibilities................................ 121
SELLING UNITHOLDER.......................................... 124
DESCRIPTION OF THE COMMON UNITS............................. 125
The Units................................................. 125
Transfer Agent and Registrar.............................. 125
Transfer of Common Units.................................. 125
DESCRIPTION OF THE SUBORDINATED UNITS....................... 127
Conversion of Subordinated Units.......................... 127
Limited Voting Rights..................................... 128
Distributions Upon Liquidation............................ 128
THE PARTNERSHIP AGREEMENT................................... 129
Organization.............................................. 129
Purpose................................................... 129
Power of Attorney......................................... 129
Capital Contributions..................................... 129
Limited Liability......................................... 130
Voting Rights............................................. 131
Issuance of Additional Securities......................... 132
Amendment of the Partnership Agreement.................... 133
Actions Relating to Operating Company..................... 135
Merger, Sale or Other Disposition of Assets............... 135
Termination and Dissolution............................... 135
Liquidation and Distribution of Proceeds.................. 136
Withdrawal or Removal of the General Partner.............. 136
Transfer of General Partner Interest...................... 137
Transfer of Incentive Distribution Rights................. 138
Transfer of Ownership Interests in the General Partner.... 138
Change of Management Provisions........................... 138
Limited Call Right........................................ 138
Meetings; Voting.......................................... 139
Status as Limited Partner or Assignee..................... 139
Non-Citizen Assignees; Redemption......................... 140
Indemnification........................................... 140
Books and Reports......................................... 140
Right to Inspect Our Books and Records.................... 141
Registration Rights....................................... 141
UNITS ELIGIBLE FOR FUTURE SALE.............................. 142
MATERIAL TAX CONSEQUENCES................................... 144
Partnership Status........................................ 144
Limited Partner Status.................................... 145
Tax Consequences of Unit Ownership........................ 146
Tax Treatment of Operations............................... 150
Disposition of Common Units............................... 152
v
Tax-Exempt Organizations and Other Investors.............. 154
Administrative Matters.................................... 155
State, Local and Other Tax Considerations................. 157
INVESTMENT IN NATURAL RESOURCE PARTNERS BY EMPLOYEE BENEFIT
PLANS..................................................... 158
UNDERWRITING................................................ 159
VALIDITY OF THE COMMON UNITS................................ 161
EXPERTS..................................................... 161
WHERE YOU CAN FIND MORE INFORMATION......................... 162
FORWARD-LOOKING STATEMENTS.................................. 163
INDEX TO FINANCIAL STATEMENTS............................... F-1
Appendix A -- First Amended and Restated Agreement of
Limited Partnership of Natural Resource Partners L.P. .... A-1
Appendix B -- Application for Transfer of Common Units...... B-1
Appendix C -- Glossary of Terms............................. C-1
Appendix D -- Estimated Available Cash From Operating
Surplus................................................... D-1
Appendix E -- Coal Reserve Audit Summary Report of Weir
International Mining Consultants.......................... E-1
Appendix F -- Coal Reserve Audit Summary Report of Stagg
Resource Consultants, Inc................................. F-1
---------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should assume that the
information appearing in this prospectus is accurate as of the date on the front
cover of this prospectus only. Our business, financial condition, results of
operations and prospects may have changed since that date.
Until , 2002 (25 days after the date of this prospectus), all
dealers effecting transactions in our common units, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
vi
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider before
investing in the common units. You should read the entire prospectus carefully,
including the financial statements and the notes to those statements. The
information presented in this prospectus assumes (1) an initial public offering
price of $20.00 per common unit, (2) that the underwriters' over-allotment
option is not exercised and (3) that an additional 76,890 common units are
purchased by New Gauley Coal Corporation and Great Northern Properties Limited
Partnership. We present the reserve information for Natural Resource Partners in
this prospectus on a pro forma basis as if the reserves had been contributed to
us on December 31, 2001. You should read "Summary of Risk Factors" beginning on
page 2 and "Risk Factors" beginning on page 14 for more information about
important risks that you should consider before buying common units. In this
prospectus, we refer to Western Pocahontas Properties Limited Partnership, Great
Northern Properties Limited Partnership and New Gauley Coal Corporation
collectively as the WPP Group. The estimates of Arch Coal, Inc.'s and the WPP
Group's proven and probable reserves have been audited as of December 31, 2001
by Weir International Mining Consultants and Stagg Resource Consultants, Inc.,
respectively. Their Coal Reserve Audit Summary Reports have been included in
this prospectus as Appendices E and F, respectively. Additionally, we have
included a "Glossary of Terms" as Appendix C.
NATURAL RESOURCE PARTNERS
We are a limited partnership recently formed by the WPP Group, the largest
owner of coal reserves in the United States other than the U.S. government, and
Arch Coal, Inc., the second largest U.S. coal producer. 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, 2001, we controlled approximately
1.15 billion tons of proven and probable coal reserves in eight states. In 2001,
our lessees produced 29 million tons of coal from our properties and our total
revenues were $47.2 million on a pro forma basis, including coal royalty
revenues of $42.4 million.
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 royalty payments are based on the higher of a percentage
of the gross sales price or a fixed price per ton of coal sold, subject to a
minimum payment. Our reserves are located on 45 separate properties and are
subject to 61 leases with 31 lessees. In 2001, approximately 57% of the coal
produced from our properties came from underground mines and 43% came from
surface mines. As of December 31, 2001, approximately 65% 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.
Approximately 12% of our lessees' 2001 coal production was metallurgical coal,
which our lessees sold to steel companies in the Eastern United States, South
America, Europe and Asia. The table below shows coal production, coal royalty
revenues and reserve tonnage for our properties as of December 31, 2001 on a pro
forma basis.
COAL ROYALTY REVENUES, PRODUCTION AND RESERVES BY REGION
YEAR ENDED AT DECEMBER 31,
DECEMBER 31, 2001 2001
------------------------- -----------------
COAL ROYALTY PROVEN AND
REVENUES PRODUCTION PROBABLE RESERVES
------------ ---------- -----------------
(IN THOUSANDS)
Appalachia..................................... $32,327 19,648 958,581
Illinois Basin................................. 3,155 2,659 28,398
Western United States.......................... 6,951 6,683 166,939
------- ------ ---------
Total..................................... $42,433 28,990 1,153,918
======= ====== =========
1
DEMAND FOR COAL
Over the last two decades, total domestic coal consumption in the United
States has increased from approximately 733 million tons in 1981 to 1.1 billion
tons in 2001. The growth in demand for coal has been primarily driven by growth
in electricity consumption. In 2001, electric utilities accounted for
approximately 90% of domestic coal consumption.
We believe that demand for coal will continue to grow for the following
reasons:
- Demand for electricity will continue to increase as the economy
grows. In order to meet the projected increase in demand for
electricity, demand for coal by electricity generators is expected to
increase by 1.2% per year between 2000 and 2020. We believe much of the
projected increase in demand for electricity will be supplied by existing
coal-fired power plants because they possess excess capacity that can be
utilized at low incremental costs.
- Coal prices have historically been lower and more stable than natural gas
prices. The market price of natural gas has historically been more
volatile and higher on an energy-equivalent basis than the market price
of coal. While new natural gas-fired power plants generally are less
expensive to construct than new coal-fired plants, we believe that higher
prices and volatility will continue to make natural gas a less attractive
energy source than coal for many utilities, particularly for baseload
electricity generation.
- There is an abundant supply of coal. Coal makes up approximately 95% of
fossil fuel reserves in the United States, with an estimated 250-year
supply of coal based on current usage rates.
- Coal is increasingly less polluting. As a result of improved technology
and coal consumption trends to lower sulfur coal, sulfur dioxide
emissions from U.S. coal-fired power plants have declined by more than
20% since 1970, even as coal consumption for domestic electric power
generation has almost tripled.
- Demand for non-compliance coal production will continue. Although the
Clean Air Act emission requirements have caused a general shift in demand
toward lower sulfur coal, we believe that demand for our medium and high
sulfur coal will continue because utilities currently may satisfy the
Clean Air Act requirements by (1) burning lower sulfur coal mixed with
medium or high sulfur coal, (2) installing pollution control devices,
such as scrubbers, to reduce emissions from high sulfur coal or (3)
purchasing or trading emission credits.
SUMMARY OF RISK FACTORS
An investment in our common units involves risks associated with our
business, regulatory and legal matters, our partnership structure and the tax
characteristics of our common units. Please carefully read the risks relating to
these matters under "Risk Factors."
RISKS RELATED TO OUR BUSINESS
- We may not have sufficient cash from operations to pay the minimum
quarterly distribution following establishment of cash reserves and
payment of fees and expenses, including payments to our general partner.
- A substantial or extended decline in coal prices could reduce our coal
royalty revenues and the value of our coal reserves.
- Our lessees' coal mining operations are subject to operating risks that
could result in lower coal royalty revenues to us.
- We depend on a limited number of primary operators for a significant
portion of our coal royalty revenues, and the loss of or reduction in
production from any of our major operators could reduce our coal royalty
revenues.
2
- We may not be able to terminate our leases if any of our lessees declare
bankruptcy, and we may experience delays and be unable to replace lessees
that do not make royalty payments.
- If our lessees do not manage their operations well, their production
volumes and our coal royalty revenues could decrease.
- Due to our lack of asset diversification, adverse developments in the
coal industry could reduce our coal royalty revenues.
- Any decrease in demand for metallurgical coal could result in lower coal
production by our lessees, which would thereby reduce our coal royalty
revenues.
REGULATORY AND LEGAL RISKS
- Our lessees are subject to federal, state and local laws and regulations
that may limit their ability to produce and sell coal from our
properties.
- A substantial portion of our coal has a high sulfur content. This coal
may become more difficult to sell because the Clean Air Act limits the
ability of electric utilities to burn high sulfur coal.
- A recent federal district court ruling could preclude our lessees from
obtaining Clean Water Act permits required for some of their future
operations and could also result in the revocation of existing permits.
- The Clean Air Act affects the end-users of coal and could significantly
affect the demand for our coal and reduce our coal royalty revenues.
- We may become liable under federal and state mining statutes if our
lessees are unable to pay mining reclamation costs.
- A recent federal district court decision could limit our lessees' ability
to conduct underground mining operations.
RISKS RELATED TO OUR PARTNERSHIP STRUCTURE
- The WPP Group and Arch Coal may engage in substantial competition with
us.
- The WPP Group, Arch Coal and their affiliates have conflicts of interest
and limited fiduciary responsibilities, which may permit them to favor
their own interests to your detriment.
- Even if unitholders are dissatisfied, they cannot easily remove our
general partner.
- The control of our general partner may be transferred to a third party
without unitholder consent.
- Our general partner's absolute discretion in determining the level of
cash reserves may adversely affect our ability to make cash distributions
to unitholders.
- You will experience immediate and substantial dilution of $6.91 per
common unit.
TAX RISKS TO COMMON UNITHOLDERS
- The IRS could treat us as a corporation for tax purposes, which would
substantially reduce the cash available for distribution to you.
- A successful IRS contest of the federal income tax positions we take may
adversely affect the market for our common units, and the cost of any IRS
contest will be borne by our unitholders and our general partner.
- You may be required to pay taxes on income from us even if you do not
receive any cash distributions from us.
- Tax gain or loss on disposition of common units could be different than
expected.
3
BUSINESS STRATEGY
We intend to execute the following strategies that we believe reflect our
competitive strengths:
- Maximize royalty revenues from our existing properties. We work with our
lessees by providing technical knowledge of our reserves, including
information about title and geology. We also review mine plans to assure
efficient recovery of reserves and periodically audit our lessees to
verify that royalties have been properly paid.
- Explore new opportunities with our existing lessees. Our lessees are
generally subsidiaries of large coal producers that have long-term plans
to expand their operations. We intend to further develop our
relationships with our current lessees in order to participate in future
opportunities that our lessees may identify for acquiring or leasing new
properties.
- Add new lessees to diversify our coal mine operator base. We have
identified additional public and private coal mine operators that meet
our guidelines as qualified lessee candidates. As we expand our royalty
business, we will be seeking new lessees to mine our properties. The
addition of these new lessees will allow us to further diversify our coal
mine operator base.
- Expand and diversify our coal reserves. We intend to actively pursue
opportunities to expand and diversify our reserves by acquiring
additional coal properties that generate royalty income. We will review
potential reserve acquisitions in all coal producing regions of the
United States in order to acquire marketable reserves that we believe
will be attractive to lessees. We expect to fund any acquisitions with
borrowings under our credit facility and proceeds from the issuance of
our common units.
COMPETITIVE STRENGTHS
We believe the following competitive strengths will enable us to execute
our business strategies successfully:
- Our royalty structure generates stable production and cash flow. Our
leases provide for royalty rates generally equal to the higher of a
percentage of the gross sales price or a fixed price per ton of coal,
subject to a minimum payment. This structure generally allows our
production and cash flow to be stable and predictable in periods of low
coal prices, while enabling us to benefit during periods of higher coal
prices.
- We do not directly bear operating costs and risks. Because we do not
operate any mines, we do not bear ordinary operating costs and have
limited direct exposure to environmental compliance, permitting and labor
risks, which are principally borne by our lessees, the operators of the
mines.
- We primarily lease to large lessees that have a diverse customer
base. Our royalty income is primarily from leases to subsidiaries of
publicly-held coal companies. In 2001, we derived approximately 76% of
our revenues from subsidiaries of seven of the top ten coal producers in
the United States.
- Our reserves are diverse and strategically located. Our reserves are
geographically diverse and cover a broad range of heat and sulfur
content. By offering both metallurgical and steam coal, our coal reserves
are marketable to a diverse customer base, thereby enabling our lessees
to adjust to changing markets and sustain sales volumes and prices.
- We are well-positioned to pursue acquisitions of coal reserves and other
minerals. The coal royalty business is highly fragmented and
characterized by numerous small entities that present potentially
attractive acquisition opportunities. In conjunction with this offering,
we are entering into a $100 million credit facility that, combined with
our ability to issue additional units, should provide the financial
flexibility to pursue acquisitions. Upon the closing of this offering, we
anticipate that we will have no outstanding indebtedness.
4
- We have experienced, knowledgeable management. Our management team has a
successful record of managing, leasing and acquiring properties. Each
member of our management team has at least 20 years of experience in the
mining industry.
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 79.6% 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. While our relationship with both the WPP Group
and Arch Coal should provide significant benefits to us, it is also a source of
potential conflict. In addition, the WPP Group and Arch Coal may engage in
substantial competition with us. Please read "Conflicts of Interest and
Fiduciary Responsibilities" and "Certain Relationships and Related
Transactions -- Omnibus Agreement."
5
PARTNERSHIP STRUCTURE AND MANAGEMENT
Our operations will be conducted through, and our operating assets will be
owned by, our subsidiaries. We will own our subsidiaries through an operating
company, NRP (Operating) LLC. Upon consummation of the offering of the common
units and the related transactions:
- NRP (GP) LP, our general partner, will own 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 $0.55 per unit in any quarter;
- the WPP Group will own 25% of the incentive distribution rights and Arch
Coal will own the remaining 10% of the incentive distribution rights;
- we will own 100% of the membership interests in the operating company;
and
- the operating company will own 100% of the membership interests in its
subsidiaries: NNG LLC, WPP LLC, GNP LLC and ACIN 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 will make decisions on behalf of us. 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. For additional
disclosure regarding our formation and the negotiations that resulted in the
division of responsibilities and ownership, please read "Certain Relationships
and Related Transactions."
The senior executives and other officers who currently manage Western
Pocahontas Properties Limited Partnership will continue to manage us. They will
remain employees of Western Pocahontas Properties Limited Partnership and will
allocate varying percentages of their time to managing our operations. Neither
our general partner, GP Natural Resource Partners LLC, nor their affiliates will
receive any management fee or other compensation in connection with the
management of our business but will be 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.
The chart on the following page depicts the organization and ownership of
Natural Resource Partners after giving effect to the offering of the common
units and the related formation transactions.
6
[Chart depicting the organization and ownership of Natural Resource Partners]
7
THE OFFERING
Common units offered by us.... 2,598,750 common units.
2,988,563 common units if the underwriters
exercise their over-allotment option from us in
full. To the extent the underwriters exercise
their over-allotment option, the net proceeds
received by us from the sale of 57.75% of the
additional units pursuant to the over-allotment
option will be used to redeem common units from
Western Pocahontas Properties Limited
Partnership and New Gauley Coal Corporation. To
the extent the underwriters do not exercise
this over-allotment option, New Gauley Coal
Corporation and Great Northern Properties
Limited Partnership will purchase up to 76,890
additional common units from us.
Common units offered by Arch
Coal, Inc., as the selling
unitholder.................... 1,901,250 common units.
2,186,437 common units offered by Arch Coal if
the underwriters exercise their over-allotment
option in full. We will not receive any
proceeds from the sale of common units by Arch
Coal.
Units outstanding after this
offering...................... 12,005,000 common units and 12,005,000
subordinated units, each representing
approximately a 49% limited partner interest in
us.
Cash distributions............ We intend to make minimum quarterly
distributions of $0.50 per common unit to the
extent we have sufficient cash from our
operations after establishment of cash reserves
and payment of fees and expenses, including
payments to our general partner. In general, we
will pay any cash distributions we make each
quarter in the following manner:
- first, 98% to the common units and 2% to the
general partner, until each common unit has
received a minimum quarterly distribution of
$0.50 plus any arrearages in the payment of
the minimum quarterly distribution from prior
quarters;
- second, 98% to the subordinated units and 2%
to the general partner, until each
subordinated unit has received a minimum
quarterly distribution of $0.50; and
- third, 98% to all units, pro rata, and 2% to
the general partner, until each unit has
received a distribution of $0.55.
If cash distributions per unit exceed $0.55 in
any quarter, the holders of the incentive
distribution rights will receive, on a pro rata
basis, a higher percentage of the cash we
distribute in excess of that amount in
increasing percentages up to an aggregate of
48%. We refer to these distributions as
incentive distributions.
We must distribute all of our cash on hand at
the end of each quarter, after payment of fees
and expenses, less reserves established by our
general partner in its discretion. We refer to
this cash as available cash, and we define its
meaning in our partnership agreement and in the
glossary in Appendix C. The amount of available
cash, if any, at the end of any quarter may be
greater than or less than the minimum quarterly
distribution.
8
We believe, based on the assumptions beginning
on page 44 of this prospectus, that we will
have sufficient cash from operations to enable
us to make the minimum quarterly distribution
of $0.50 on the common units and the
subordinated units for each quarter through
June 30, 2003. The amount of pro forma cash
available for distribution generated during
2001 and the three months ended March 31, 2002
would have been sufficient to allow us to pay
the full minimum quarterly distribution on the
common units and 64.8% and 68.7%, respectively,
of the minimum quarterly distribution on the
subordinated units during these periods. Please
read "Cash Available for Distribution" and
Appendix D to this prospectus for the
calculation of our ability to have paid the
minimum quarterly distributions during these
periods.
Subordination period.......... During the subordination period, the
subordinated units will not be entitled to
receive any distributions until the common
units have received the minimum quarterly
distribution plus any arrearages from prior
quarters. The subordination period will end
once we meet the financial tests in the
partnership agreement, but it generally cannot
end before June 30, 2007. When the
subordination period ends, all remaining
subordinated units will convert into common
units on a one-for-one basis and the common
units will no longer be entitled to arrearages.
Early conversion of
subordinated
units......................... If we meet the financial tests in the
partnership agreement for any quarter ending on
or after June 30, 2005, 25% of the subordinated
units will convert into common units. If we
meet these tests for any quarter ending on or
after June 30, 2006, an additional 25% of the
subordinated units will convert into common
units. The early conversion of the second 25%
of the subordinated units may not occur until
at least one year after the early conversion of
the first 25% of subordinated units.
Issuance of additional
units......................... In general, during the subordination period we
may issue up to 6,002,500 additional common
units, or 50% of the common units outstanding
immediately after this offering, without
obtaining unitholder approval. We can also
issue an unlimited number of common units for
acquisitions that increase cash flow from
operations per unit on a pro forma basis, and
we can issue additional common units if the
proceeds of the issuance are used to repay up
to $25 million of certain of our indebtedness.
Limited voting rights......... Our general partner will manage and operate us.
Unlike the holders of common stock in a
corporation, you will have only limited voting
rights on matters affecting our business. You
will have no right to elect our general partner
or the directors of GP Natural Resource
Partners LLC on an annual or other regular
basis. Our general partner may not be removed
except by the vote of the holders of at least
66 2/3% of the outstanding units, including
units owned by our general partner and its
affiliates, voting together as a single class.
Upon the consummation of this offering, our
general partner and its affiliates will own an
aggregate of 81.3% of our common and
subordinated units. This
9
will give our general partner the practical
ability to prevent its involuntary removal.
Limited call right............ If at any time our general partner and its
affiliates own more than 80% of the outstanding
common units, our general partner has the
right, but not the obligation, to purchase all
of the remaining common units at a price not
less than their then current market price. Upon
completion of this offering, our general
partner and its affiliates will own 7,505,000,
or 62.5%, of our outstanding common units and
will not be able to exercise this call right.
If we do not issue any equity securities prior
to the expiration of the subordination period,
upon the conversion of subordinated units into
common units at the end of the subordination
period, our general partner and its affiliates
will own 81.3% of our outstanding common units
and will be able to exercise this call right.
Estimated ratio of taxable
income to distributions....... We estimate that if you own the common units
that you purchase in this offering through June
30, 2005 you will be allocated, on a cumulative
basis, an amount of federal taxable income for
that period that will be approximately %
of the cash distributed to you with respect to
that period. A substantial portion of the
income that will be allocated to you is
expected to be long-term capital gain, which
for individuals is subject to a significantly
lower maximum federal income tax rate
(currently 20%) than ordinary income (currently
taxable at a maximum rate of 38.6%). If you are
an individual taxable at the maximum rate of
38.6% on ordinary income, the effect of this
lower capital gains rate is to produce an after
tax return to you that is the same as if the
amount of federal ordinary taxable income
allocated to you for that period were
approximately % of the cash distributed to
you for that period. Please read "Material Tax
Consequences -- Tax Consequences of Unit
Ownership -- Ratio of Taxable Income to
Distributions" for the basis of this estimate.
Exchange listing.............. We have applied to list our common units on the
New York Stock Exchange, or NYSE, under the
symbol "NRP."
10
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
We derived the summary pro forma combined information by combining the
historical financial statements of Western Pocahontas Properties Limited
Partnership, Great Northern Properties Limited Partnership, New Gauley Coal
Corporation and the Arch Coal Contributed Properties as of March 31, 2002 and
for the three months ended March 31, 2002 and the year ended December 31, 2001.
We adjusted the summary pro forma combined financial statements to reflect net
assets and operations that are not being contributed to us.
The pro forma as adjusted financial statements of Natural Resource Partners
L.P. show the pro forma effect of the offering and the related transactions. We
derived the summary pro forma as adjusted financial and operating data presented
below as of March 31, 2002 and for the three months ended March 31, 2002 and the
year ended December 31, 2001 from the unaudited pro forma combined financial
statements. The pro forma as adjusted balance sheet assumes the offering and the
related transactions occurred as of March 31, 2002, and the pro forma combined
statements of revenues and expenses assume that the offering and the related
transactions occurred as of the beginning of the period presented. A more
complete explanation of the pro forma adjustments can be found in "Notes to Pro
Forma Financial Statements."
We derived the information in the following table from, and that
information should be read together with and is qualified in its entirety by
reference to, the audited historical and the unaudited pro forma financial
statements and the accompanying notes included elsewhere in this prospectus. You
should read the table together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." While the WPP Group will
contribute substantially all of its coal royalty producing assets and operations
to us, it will retain some assets and liabilities.
11
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 2001 MARCH 31, 2002
----------------------------- ----------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
COMBINED(A) AS ADJUSTED(B) COMBINED(A) AS ADJUSTED(B)
------------ -------------- ----------- --------------
(IN THOUSANDS, EXCEPT PRICE DATA)
(UNAUDITED)
REVENUES AND DIRECT COSTS AND EXPENSES DATA:
REVENUES:
Coal royalties................................... $42,433 $42,433 $11,066 $11,066
Timber royalties................................. -- -- -- --
Gain on sale of property......................... 220 220 -- --
Lease and easement income........................ 381 381 -- --
Property taxes................................... 2,187 2,187 856 856
Other............................................ 2,028 2,028 562 562
------- ------- -------- --------
Total revenues................................... 47,249 47,249 12,484 12,484
DIRECT COSTS AND EXPENSES:
General and administrative(c).................... -- -- -- --
Taxes other than income.......................... 2,187 2,187 856 856
Depreciation, depletion and amortization......... 9,892 20,103 2,810 5,363
Other............................................ 283 283 197 197
------- ------- -------- --------
Total expenses................................... 12,362 22,573 3,863 6,416
------- ------- -------- --------
Excess of revenues over direct costs and
expenses........................................... $34,887 $24,676 $8,621 $6,068
======= ======= ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Total assets....................................... $210,783 $340,255
Long-term debt..................................... 46,558 --
Deferred revenue................................... 19,606 19,606
Total liabilities.................................. 66,164 19,606
Owners' equity/partners' capital(d)................ 144,619 320,649
OTHER DATA:
Royalty coal tons produced by lessees.............. 28,990 28,990 6,750 6,750
Average gross coal royalty per ton................. $ 1.46 $ 1.46 $ 1.64 $ 1.64
OTHER FINANCIAL DATA:
Estimated available cash from operating
surplus(c)....................................... $40,379 $40,379 $ 10,331 $ 10,331
---------------
(a) We derived the pro forma combined information by adjusting the historical
WPP Group amounts to reflect net assets and operations that are not being
contributed to us and by adding the historical Arch Coal Contributed
Properties amounts being contributed to us. We also eliminated historical
general and administrative expenses for the WPP Group in order to reflect
only the direct costs and expenses for its operations.
(b) The pro forma as adjusted information was derived by adjusting the pro forma
combined information for the offering and related transactions.
(c) We define available cash and operating surplus under "Cash Distribution
Policy." Estimated available cash from operating surplus includes annual
general and administrative costs of $4.4 million that reflect our estimates
of the costs of operating the properties contributed to us by the WPP Group
and Arch Coal and the costs of being a publicly traded partnership. We base
these estimates upon currently available information and they are subject to
change. Please read "Cash Distribution Policy" and Appendix D. To the extent
our general partner and its affiliates incur these costs on our behalf, we
will reimburse them prior to making any distribution on the common units.
(d) If at any time our general partner and its affiliates own more than 80% of
the outstanding common units, our 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. Upon completion of this offering, our general
partner and its affiliates will own 62.5% of the outstanding common units.
If we do not issue any equity securities prior to the expiration of the
subordination period, upon the conversion of subordinated units into common
units at the end of the subordination period, our general partner and its
affiliates will own 81.3% of our outstanding common units and will be able
to exercise this call right.
12
SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
NRP (GP) LP, our general partner, has a legal duty to manage us in a manner
beneficial to our unitholders. This legal duty originates in state statutes and
judicial decisions and is commonly referred to as a "fiduciary" duty. Because
our general partner and its general partner, GP Natural Resource Partners LLC,
are owned by the WPP Group and Arch Coal, however, the officers and directors of
GP Natural Resource Partners LLC also have fiduciary duties to manage GP Natural
Resource Partners LLC's and our general partner's business in a manner
beneficial to the owners of the WPP Group and to the stockholders of Arch Coal.
The officers of GP Natural Resource Partners LLC have significant relationships
with, and responsibilities to, the WPP Group, and the directors of GP Natural
Resource Partners LLC have significant relationships with, and responsibilities
to, the WPP Group and Arch Coal. As a result of these relationships, conflicts
of interest may arise in the future between us and our unitholders, on the one
hand, and our general partner and its affiliates, on the other hand. For a more
detailed description of the conflicts of interest and fiduciary responsibilities
of our general partner and GP Natural Resource Partners LLC, please read
"Conflicts of Interest and Fiduciary Responsibilities."
Our partnership agreement limits the liability and reduces the fiduciary
duties owed by our general partner to unitholders. Our partnership agreement
also restricts the remedies available to unitholders for actions that might
otherwise constitute breaches of our general partner's fiduciary duty. By
purchasing a common unit, you are treated as having consented to various actions
contemplated in the partnership agreement and conflicts of interest that might
otherwise be considered a breach of fiduciary or other duties under applicable
state law.
Although the WPP Group and Arch Coal have agreed in the omnibus agreement
to restrictions on their ability to compete with us in the leasing of coal
reserves, these restrictions are subject to numerous exceptions that will enable
the WPP Group and Arch Coal to engage in substantial competition with us should
they choose to do so. For a description of the terms of the omnibus agreement
that contains these noncompete provisions, please read "Risk Factors -- The WPP
Group and Arch Coal may engage in substantial competition with us" and "Certain
Relationships and Related Transactions -- Omnibus Agreement."
We will enter into four coal mining leases with Ark Land Company, a
subsidiary of Arch Coal. Please read "Certain Relationships and Related
Transactions -- Coal Leases with Ark Land Company" for a description of these
leases.
13
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which we are subject are
similar to those that would be faced by a corporation engaged in a similar
business. You should carefully consider the following risk factors together with
all of the other information included in this prospectus in evaluating an
investment in our common units.
If any of the following risks were actually to occur, our business,
financial condition or results of operations could be materially and adversely
affected. In that case, we might not be able to pay the minimum quarterly
distribution on our common units, the trading price of our common units could
decline and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT HAVE SUFFICIENT CASH FROM OPERATIONS TO PAY THE MINIMUM QUARTERLY
DISTRIBUTION FOLLOWING ESTABLISHMENT OF CASH RESERVES AND PAYMENT OF FEES AND
EXPENSES, INCLUDING PAYMENTS TO OUR GENERAL PARTNER.
The amount of cash we can distribute on our units principally depends upon
the amount of royalties we receive from our lessees, which will fluctuate from
quarter to quarter based on, among other things:
- the amount of coal our lessees are able to produce from our properties;
- the price at which our lessees are able to sell coal;
- the level of our operating costs, including payments to our general
partner; and
- prevailing economic conditions.
In addition, the actual amount of cash we will have available for
distribution will depend on other factors that include:
- the costs of acquisitions, if any;
- fluctuations in our working capital;
- the level of capital expenditures we make;
- the restrictions contained in our debt instruments and our debt service
requirements;
- our ability to borrow under our working capital facility to make
distributions to our unitholders; and
- the amount, if any, of cash reserves established by our general partner
in its discretion.
In determining the number of units and the minimum quarterly distribution,
we have made the assumptions set forth in "Cash Available for Distribution"
about the factors listed above. These assumptions are inherently uncertain and
are subject to significant business, economic, regulatory and competitive risks
and uncertainties that could cause actual results to differ materially from
those we expect. If these assumptions are not realized, we may not be able to
pay the minimum quarterly distribution or any amount on the common units or the
subordinated units, in which event the market price of the common units may
decline materially.
You should also be aware that our ability to pay the minimum quarterly
distribution each quarter depends primarily on our cash flow, including cash
flow from financial reserves and working capital borrowings, and not solely on
profitability, which is affected by non-cash items. As a result, we may make
cash distributions during periods when we record losses and we may not make
distributions during periods when we record net income.
The amount of available cash we need to pay the minimum quarterly
distribution for four quarters on the common units, the subordinated units and
the general partner interest to be outstanding immediately after the offering is
approximately $49 million. If we had completed the transactions contemplated in
this prospectus on January 1, 2001, estimated available cash from operating
surplus generated during 2001 and
14
the three months ended March 31, 2002 would have been approximately $40.4
million and $10.3 million, respectively. These amounts would have been
sufficient to allow us to pay the full minimum quarterly distribution on the
common units and 64.8% and 68.7%, respectively, of the minimum quarterly
distribution on the subordinated units during these periods. For a calculation
of our ability to make distributions to unitholders based on our pro forma
results, please read "Cash Available for Distribution" and Appendix D.
A SUBSTANTIAL OR EXTENDED DECLINE IN COAL PRICES COULD REDUCE OUR COAL ROYALTY
REVENUES AND THE VALUE OF OUR COAL RESERVES.
After the rapid increase in coal prices that began in late 2000 and
prevailed through most of 2001, spot prices began to decline in late 2001 as
demand for coal fell due to unusually warm weather and the sluggish U.S.
economy. The prices our lessees receive for their coal depend upon factors
beyond their or our control, including:
- the supply of and demand for domestic and foreign coal;
- weather conditions;
- the proximity to and capacity of transportation facilities;
- worldwide economic conditions;
- domestic and foreign governmental regulations and taxes;
- the price and availability of alternative fuels; and
- the effect of worldwide energy conservation measures.
A substantial or extended decline in coal prices could materially and
adversely affect us in two ways. First, lower prices may reduce the quantity of
coal that may be economically produced from our properties. This, in turn, could
reduce our coal royalty revenues and the value of our coal reserves. Second,
even if production is not reduced, the royalties we receive on each ton of coal
sold may be reduced. Additionally, volatility in coal prices could make it
difficult to estimate with precision the value of our coal reserves and any coal
reserves that we may consider for acquisition.
OUR LESSEES' COAL MINING OPERATIONS ARE SUBJECT TO OPERATING RISKS THAT COULD
RESULT IN LOWER COAL ROYALTY REVENUES TO US.
Our coal royalty revenues are largely dependent on our lessees' level of
production from our coal reserves. The level of our lessees' production is
subject to operating conditions or events beyond their or our control including:
- the inability to acquire necessary permits or mining or surface rights;
- changes or variations in geologic conditions, such as the thickness of
the coal deposits and the amount of rock embedded in or overlying the
coal deposit;
- changes in governmental regulation of the coal industry or the electric
utility industry;
- mining and processing equipment failures and unexpected maintenance
problems;
- interruptions due to transportation delays;
- adverse weather and natural disasters, such as heavy rains and flooding;
- labor-related interruptions; and
- fires and explosions.
15
These conditions may increase our lessees' cost of mining and delay or halt
production at particular mines either permanently or for varying lengths of
time. Any interruptions to the production of coal from our reserves could reduce
our coal royalty revenues.
WE DEPEND ON A LIMITED NUMBER OF PRIMARY OPERATORS FOR A SIGNIFICANT PORTION
OF OUR COAL ROYALTY REVENUES, AND THE LOSS OF OR REDUCTION IN PRODUCTION FROM
ANY OF OUR MAJOR OPERATORS COULD REDUCE OUR COAL ROYALTY REVENUES.
We depend on a limited number of primary operators for a significant
portion of our coal royalty revenues. In 2001, the following six operators and
their subsidiaries, affiliates or contractors, accounted for approximately 84%
of our coal royalty revenues: Arch Coal, Inc. (25%), Massey Energy Company
(14%), CONSOL Energy Inc. (12.5%), Western Energy Company (12.5%), Resource
Development L.L.C. (11%) and Peabody Energy Corporation (9%). As a result of
lower spot coal prices caused by unusually warm winter weather and the sluggish
U.S. economy, Arch Coal, Massey Energy, Peabody Energy and CONSOL Energy have
each recently announced reduced production and capital expenditure estimates for
2002, including reduced production on our leases. Additionally, we are aware of
proposed but unannounced reductions by some of our smaller lessees. If these
reductions in production are implemented on our properties and sustained, our
revenues may be substantially affected. If a lessee were to experience financial
difficulty, the lessee might not be able to pay its royalty payments or continue
its operations, which could have a material adverse impact on us.
WE MAY NOT BE ABLE TO TERMINATE OUR LEASES IF ANY OF OUR LESSEES DECLARE
BANKRUPTCY, AND WE MAY EXPERIENCE DELAYS AND BE UNABLE TO REPLACE LESSEES THAT
DO NOT MAKE ROYALTY PAYMENTS.
A failure on the part of our lessees to make coal royalty payments could
give us the right to terminate the lease, repossess the property and enforce
payment obligations under the lease. If we repossessed any of our properties, we
would seek a replacement lessee. We might not be able to find a replacement
lessee and, if we did, we might not be able to enter into a new lease on
favorable terms within a reasonable period of time. In addition, the outgoing
lessee could be subject to bankruptcy proceedings that could further delay the
execution of a new lease or the assignment of the existing lease to another
operator. If we enter into a new lease, the replacement operator might not
achieve the same levels of production or sell coal at the same price as the
lessee it replaced. In addition, it may be difficult for us to secure new or
replacement lessees for small or isolated coal reserves, since industry trends
toward consolidation favor larger-scale, higher-technology mining operations in
order to increase productivity.
IF OUR LESSEES DO NOT MANAGE THEIR OPERATIONS WELL, THEIR PRODUCTION VOLUMES
AND OUR COAL ROYALTY REVENUES COULD DECREASE.
We depend on our lessees to effectively manage their operations on our
properties. Our lessees make their own business decisions with respect to their
operations within the constraints of their leases, including decisions relating
to:
- marketing of the coal mined;
- mine plans, including the amount to be mined and the method of mining;
- processing and blending coal;
- credit risk of their customers;
- permitting;
- insurance and surety bonding;
- acquisition of surface rights and other mineral estates;
- employee wages;
- coal transportation arrangements;
16
- compliance with applicable laws, including environmental laws;
- negotiations and relations with unions; and
- mine closure and reclamation.
If our lessees do not manage their operations well, their production could
be reduced, which would result in lower coal royalty revenues to us.
DUE TO OUR LACK OF ASSET DIVERSIFICATION, ADVERSE DEVELOPMENTS IN THE COAL
INDUSTRY COULD REDUCE OUR COAL ROYALTY REVENUES.
Our coal royalty business generates substantially all of our revenues. Due
to our lack of asset diversification, an adverse development in the coal
industry would have a significantly greater impact on our financial condition
and results of operations than if we owned more diverse assets.
ANY DECREASE IN THE DEMAND FOR METALLURGICAL COAL COULD RESULT IN LOWER COAL
PRODUCTION BY OUR LESSEES, WHICH WOULD THEREBY REDUCE OUR COAL ROYALTY
REVENUES.
Our lessees produce a significant amount of the metallurgical coal that is
used in both the U.S. and foreign steel industries. In 2001, approximately 12%
of the coal production from our properties was metallurgical coal that was sold
to the steel industry for the manufacture of coke. The steel industry has
increasingly relied on electric arc furnaces or pulverized coal processes to
make steel. These processes do not use coke. If this trend continues, the amount
of metallurgical coal that our lessees mine could further decrease.
Additionally, since the amount of steel that is produced is tied to global
economic conditions, a decline in those conditions could result in the decline
of steel, coke and coal production. Since metallurgical coal is priced higher
than steam coal, some mines on our properties may only operate profitably if all
or a portion of their production is sold as metallurgical coal. If they are
unable to sell metallurgical coal, these mines may not be economically viable
and may close.
WE MAY NOT BE ABLE TO EXPAND AND OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE
ARE UNABLE TO REPLACE OR INCREASE OUR RESERVES OR OBTAIN OTHER MINERAL
RESERVES THROUGH ACQUISITIONS.
Because our reserves decline as our lessees mine our coal, our future
success and growth depend, in part, upon our ability to acquire additional coal
reserves or other mineral reserves that are economically recoverable. If we are
unable to replace or increase our coal reserves or acquire other mineral
reserves on acceptable terms, our royalty revenues will decline as our reserves
are depleted. In addition, if we are unable to successfully integrate the
companies, businesses or properties we are able to acquire, our royalty revenues
may decline and we could experience a material adverse effect on our business,
financial condition or results of operations. If we acquire additional reserves,
there is a possibility that any acquisition could be dilutive to earnings and
reduce our ability to make distributions to unitholders. Any debt we incur to
finance an acquisition may similarly affect our ability to make distributions to
unitholders. Our ability to make acquisitions in the future also could be
limited by restrictions under our existing or future debt agreements,
competition from other mineral companies for attractive properties or the lack
of suitable acquisition candidates. Please read "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Description of
Credit Facility" for a discussion of restrictions on our ability to borrow funds
to pay for acquisitions.
ANY CHANGE IN FUEL CONSUMPTION PATTERNS BY ELECTRIC POWER GENERATORS RESULTING
IN A DECREASE IN THE USE OF COAL COULD RESULT IN LOWER COAL PRODUCTION BY OUR
LESSEES, WHICH WOULD REDUCE OUR COAL ROYALTY REVENUES.
Domestic electric power generation accounts for approximately 90% of
domestic coal consumption. The amount of coal consumed for domestic electric
power generation is affected primarily by the overall demand for electricity,
the price and availability of competing fuels for power plants such as natural
gas, nuclear, fuel oil and hydroelectric power and environmental and other
governmental regulations. We expect many new power plants will be built to
produce electricity during peak periods of demand. Many of these
17
new power plants will likely be fired by natural gas because of lower
construction costs compared to coal-fired plants and because natural gas is a
cleaner burning fuel. As discussed under "-- Regulatory and Legal Risks," the
increasingly stringent requirements of the Clean Air Act may result in more
electric power generators shifting from coal to natural gas-fired power plants.
CURRENT CONDITIONS IN THE COAL INDUSTRY MAY MAKE IT DIFFICULT FOR OUR LESSEES
TO EXTEND EXISTING CONTRACTS OR ENTER INTO SUPPLY CONTRACTS WITH TERMS OF ONE
YEAR OR MORE, WHICH COULD ADVERSELY AFFECT THE STABILITY AND PROFITABILITY OF
THEIR OPERATIONS AND ADVERSELY AFFECT OUR COAL ROYALTY REVENUES.
As electric utilities adjust to the Phase II requirements of the Clean Air
Act and the possible deregulation of their industry, they are becoming
increasingly less willing to enter into coal supply contracts with terms of more
than one year. Instead, these utilities are purchasing higher percentages of
coal on the spot market. The industry shift away from long-term supply contracts
could adversely affect our lessees, and the level of our royalties, in several
ways. First, fewer electric utilities will have a contractual obligation to
purchase coal from our lessees, thereby increasing the risk that our lessees
will not have a market for their coal production. Second, the prices our lessees
receive in the spot market may be less than a contractual price an electric
utility is willing to pay for a committed supply. Finally, spot market prices
tend to be more volatile than contractual prices, which could result in
decreased coal royalty revenues and adversely affect our ability to pay the
minimum quarterly distribution in any one quarter.
In addition, price adjustment, price reopener and other similar provisions
in supply contracts with terms of one year or more may reduce the protection
from short-term coal price volatility traditionally provided by such contracts.
Some coal supply contracts contain provisions which allow for the price at which
coal is purchased to be renegotiated at periodic intervals. These price reopener
provisions may automatically set a new price based on the prevailing market
price or, in some instances, require the parties to agree on a new price. In
some circumstances, failure of the parties to agree on a price under a price
reopener provision can lead to termination of the contract. Any adjustment or
renegotiation leading to a significantly lower contract price could result in
decreased coal royalty revenues. Accordingly, supply contracts with terms of one
year or more may provide only limited protection during adverse market
conditions.
Some supply contracts also contain provisions which allow the customer to
suspend or terminate performance under the contract upon the occurrence or
continuation of specified events. These events typically include:
- the inability of our lessees to deliver the volume or qualities of coal
specified;
- changes in the Clean Air Act rendering use of coal inconsistent with the
customer's pollution control strategies; and
- the occurrence of events beyond the reasonable control of the affected
party, including labor disputes, mechanical malfunctions and changes in
government regulations.
COMPETITION WITHIN THE COAL INDUSTRY MAY ADVERSELY AFFECT THE ABILITY OF OUR
LESSEES TO SELL COAL, AND EXCESS PRODUCTION CAPACITY IN THE INDUSTRY COULD PUT
DOWNWARD PRESSURE ON COAL PRICES.
Our lessees compete with numerous other coal producers in various regions
of the United States for domestic sales. During the mid-1970s and early 1980s,
increased demand for coal attracted new investors to the coal industry, spurred
the development of new mines and resulted in additional production capacity
throughout the industry, all of which led to increased competition and lower
coal prices. Any increases in coal prices could also encourage the development
of expanded capacity by new or existing coal producers. Any resulting
overcapacity could reduce coal prices and therefore reduce our coal royalty
revenues.
Competition from coal with lower production costs shipped east from western
coal mines has resulted in increased competition for coal sales in the
Appalachian region and the Illinois Basin. This competition could result in
decreased market share for our lessees operating in these regions and decreased
coal royalty revenues to us.
18
The amount of coal exported from the United States has declined over the
last few years due to adverse economic conditions in Asia and the higher
relative cost of U.S. coal due to the strength of the U.S. dollar. In addition,
the recently imposed tariff on steel imports could exacerbate this decline in
coal exports. This decline could cause competition among coal producers in the
United States to intensify, potentially resulting in additional downward
pressure on coal prices.
LESSEES COULD SATISFY OBLIGATIONS TO THEIR CUSTOMERS WITH COAL FROM PROPERTIES
OTHER THAN OURS, DEPRIVING US OF THE ABILITY TO RECEIVE AMOUNTS IN EXCESS OF
MINIMUM ROYALTY PAYMENTS.
Coal supply contracts do not generally require operators to satisfy their
obligations to their customers with coal mined from specific reserves. Several
factors may influence a lessee's decision to supply its customers with coal
mined from properties we do not own or lease, including the royalty rates under
the lessee's lease with us, mining conditions, mining operations costs, cost and
availability of transportation, and customer coal specifications. If a lessee
satisfies its obligations to its customers with coal from properties we do not
own or lease, production on our properties will decrease and we will receive
lower coal royalty revenues.
FLUCTUATIONS IN TRANSPORTATION COSTS AND THE AVAILABILITY OR RELIABILITY OF
TRANSPORTATION COULD REDUCE THE PRODUCTION OF COAL MINED FROM OUR PROPERTIES.
Transportation costs represent a significant portion of the total cost of
coal for the customers of our lessees. Increases in transportation costs could
make coal a less competitive source of energy or could make coal produced by
some or all of our lessees less competitive than coal produced from other
sources. On the other hand, significant decreases in transportation costs could
result in increased competition for our lessees from coal producers in other
parts of the country.
Our lessees depend upon railroads, barges, trucks and beltlines to deliver
coal to their customers. Disruption of these transportation services due to
weather-related problems, mechanical difficulties, strikes, lockouts,
bottlenecks and other events could temporarily impair the ability of our lessees
to supply coal to their customers. Our lessees' transportation providers may
face difficulties in the future that may impair the ability of our lessees to
supply coal to their customers, resulting in decreased coal royalty revenues to
us.
OUR RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY BE INACCURATE, WHICH
COULD MATERIALLY ADVERSELY AFFECT THE QUANTITIES AND VALUE OF OUR RESERVES.
Our reserve estimates may vary substantially from the actual amounts of
coal our lessees may be able to economically recover from our reserves. There
are numerous uncertainties inherent in estimating quantities of reserves,
including many factors beyond our control. Estimates of coal reserves
necessarily depend upon a number of variables and assumptions, any one of which
may, if incorrect, result in an estimate that varies considerably from actual
results. These factors and assumptions relate to:
- future coal prices, operating costs, capital expenditures, severance and
excise taxes, and development and reclamation costs;
- future mining technology improvements;
- the effects of regulation by governmental agencies; and
- geologic and mining conditions, which may not be fully identified by
available exploration data and may differ from our experiences in areas
where our lessees currently mine.
Actual production, revenue and expenditures with respect to our reserves
will likely vary from estimates, and these variations may be material. As a
result, you should not place undue reliance on the coal reserve data included in
this prospectus.
19
OUR LESSEES' WORK FORCES COULD BECOME INCREASINGLY UNIONIZED IN THE FUTURE.
Eight mines on our properties are operated by unionized employees of our
lessees or their affiliates. Our lessees' employees could become increasingly
unionized in the future. Some labor unions active in our lessees' areas of
operations are attempting to organize the employees of some of our lessees. If
some or all of our lessees' non-unionized operations were to become unionized,
it could adversely affect their productivity, increase costs and increase the
risk of work stoppages. In addition, our lessees' operations may be adversely
affected by work stoppages at unionized companies, particularly if union workers
were to orchestrate boycotts against our lessees' operations. Any further
unionization of our lessees' employees could adversely affect the stability of
production from our reserves and reduce our coal royalty revenues.
REGULATORY AND LEGAL RISKS
OUR LESSEES ARE SUBJECT TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT
MAY LIMIT THEIR ABILITY TO PRODUCE AND SELL COAL FROM OUR PROPERTIES.
Our lessees may incur substantial costs and liabilities under increasingly
strict federal, state and local environmental, health and safety and endangered
species laws, including regulations and governmental enforcement policies.
Failure to comply with these laws and regulations may result in the assessment
of administrative, civil and criminal penalties, the imposition of cleanup and
site restoration costs and liens, the issuance of injunctions to limit or cease
operations, the suspension or revocation of permits and other enforcement
measures that could have the effect of limiting production from our lessees'
operations. Our lessees may also incur costs and liabilities resulting from
claims for damages to property or injury to persons arising from their
operations. If our lessees are pursued for these sanctions, costs and
liabilities, their mining operations and, as a result, our coal royalty
revenues, could be adversely affected.
For example, the West Virginia Department of Environmental Protection has
issued "show cause" orders to Green Valley Coal Company, our lessee, and Marfork
Coal Company, both of which are subsidiaries of Massey Energy Company, for
alleged patterns of violations relating to water quality, which could affect our
Dorothy-Sarita, Eunice and New Gauley properties in West Virginia. In early
2002, the West Virginia Department of Environmental Protection entered two
orders finding a pattern of violations and suspending one of Green Valley's
permits for three days and another permit for thirty days. Green Valley filed
appeals and obtained stays of enforcement of the orders pending resolution of
the appeals. The thirty day suspension was upheld on appeal on April 9, 2002.
Also, in January 2002, the West Virginia Department of Environmental Protection
entered an order finding a pattern of violations by Marfork Coal 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. The suspension has been temporarily blocked pending entry of the order and
an appeal by Massey Energy to the circuit court. The show cause order issued to
Marfork Coal could also have an impact on the longwall mining operations of
another subsidiary of Massey Energy, Performance Coal, that are conducted at the
Eunice property because coal mined from this part of the Eunice property is sent
to the Marfork Coal preparation plant for processing. If this show cause order
is not resolved on favorable terms, the permits issued to Massey Energy and its
subsidiaries could be suspended or revoked and production could be decreased at
mines on the Dorothy-Sarita property and at the longwall mine operated by
Performance Coal at the Eunice property, reducing our coal royalty revenues.
If these permits are revoked, Massey Energy and its subsidiaries could be
prohibited from obtaining additional permits. In the event of future violations
at these properties or at other properties operated by these entities, the
existence of those orders may increase the nature and gravity of any sanctions
sought in the event that the state decides to pursue any enforcement.
Recently, water from a mine operated by Marfork Coal has leaked through the
subsurface strata, resulting in a discharge of water into water from a nearby
creek. This discharge is from a mine that is not on our property, but it is
possible that Marfork Coal could be subject to further enforcement actions that
20
could impact its ability to continue mining on our property, or that this could
be taken into account in connection with the show cause order discussed above.
During its 2002 session, the West Virginia House of Representatives
considered legislation that, if passed, would have significantly increased the
scope of powers available to enforce the current weight restrictions on trucks
carrying coal. Past sessions of the legislature have considered, but not
adopted, similar legislation. The legislature and the governor have appointed a
task force to study the issue and to recommend legislation, if necessary. If
increased enforcement of the existing weight restrictions continues, the costs
of transporting coal in the state would increase. An increase in transportation
costs could have an adverse effect on our lessees' ability to increase or to
maintain production on our properties and a similar adverse effect on our coal
royalty revenues.
Some species indigenous to our properties are protected under the
Endangered Species Act. Federal and state legislation for the protection of
endangered species may have the effect of prohibiting or delaying our lessees
from obtaining mining permits and may include restrictions on road building and
other mining activities in areas containing the affected species. Additional
species on our properties may receive protected status, and currently protected
species may be discovered within our properties. Either event could result in
increased costs to us or our lessees.
New environmental legislation and new regulations under existing
environmental laws, including regulations to protect endangered species, could
further regulate or tax the coal industry and may also require our lessees to
change their operations significantly or to incur increased costs which could
decrease our coal royalty revenues. Please read "Business -- Regulation."
A SUBSTANTIAL PORTION OF OUR COAL HAS A HIGH SULFUR CONTENT. THIS COAL MAY
BECOME MORE DIFFICULT TO SELL BECAUSE THE CLEAN AIR ACT LIMITS THE ABILITY OF
ELECTRIC UTILITIES TO BURN HIGH SULFUR COAL.
In 1995, Phase I of the Clean Air Act required high sulfur coal plants to
reduce their emissions of sulfur dioxide to 2.5 pounds or less per million Btus,
and in 2000, Phase II of the Clean Air Act tightened these sulfur dioxide
restrictions further to 1.2 pounds of sulfur dioxide per million Btus. These
restrictions may significantly reduce the demand by electric utilities for high
sulfur coal. Currently, electric utilities operating coal-fired plants can
purchase credits that allow them to comply with the sulfur dioxide emission
compliance requirements. Many of the power plants supplied by our lessees do not
currently have scrubbers. As of December 31, 2001, 75% of our coal reserves were
not compliance coal. If our lessees' customers, or their potential customers in
our market areas, choose not to purchase our noncompliance coal, our lessees may
be unable to find other buyers for this coal at current price and volume levels,
which could materially adversely affect our revenues and our ability to make
distributions to our unitholders. See "Business -- Regulation -- Clean Air Act"
for a description of the Phase II requirements of the Clean Air Act.
A RECENT FEDERAL DISTRICT COURT RULING COULD PRECLUDE OUR LESSEES FROM
OBTAINING CLEAN WATER ACT PERMITS REQUIRED FOR SOME OF THEIR FUTURE OPERATIONS
AND COULD ALSO RESULT IN THE REVOCATION OF EXISTING PERMITS.
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, if it is not overturned by an appellate court or
subsequent legislation, will be to make mountaintop mining uneconomical in those
areas subject to the injunction. We would be materially affected by this
injunction because any mountaintop mining valley fill permits required to be
obtained by our lessees would need to be issued by the Huntington, West Virginia
office of the U.S. Army Corps of Engineers.
21
The court's injunction also prohibits the issuance of permits authorizing
fill activities associated with types of mining activities other than
mountaintop mining where the primary purpose or use of those fill activities is
the disposal of waste. Such activities might include those associated with
slurry impoundments and coal refuse disposal areas. If the injunction is not
overturned by an appellate court or subsequent legislation, our lessees may not
be able to obtain permits in many cases to use these common fill activities,
which could render these operations uneconomical. Any consequent reduction or
cessation of their operations would reduce mining on our properties and our
royalty revenue.
Following the issuance of the court's May 8, 2002 order, the plaintiff in
the Kentuckians case filed a motion for further injunctive relief requesting
that the court require the Huntington, West Virginia office of the U.S. Army
Corps of Engineers to revoke the Section 404 valley fill permit identified in
the plaintiff's complaint. In addition, various defendants and intervenors filed
motions seeking a clarification of the court's order, a stay pending appeal, and
a dismissal for failure to join a necessary party. In response to the
defendants' motion for clarification, the court decided that its injunction
applies to any fill activity that does not have a "constructive primary
purpose," citing as an example fills used solely for the disposal of waste. The
court noted that such fills could include not only valley fills, but also other
mining activities such as refuse impoundments, fills from standard contour or
surface mines, or fills related to mine sites with "approximate original
contour" waivers. The court noted, however, that determining whether a
particular fill has a "constructive primary purpose" is up to the technical
expertise of the U.S. Army Corps of Engineers. The court denied both the
defendants' motion for stay pending appeal and their motion for dismissal.
If lawsuits challenging our lessees' permits were successful, our lessees
would most likely be required to suspend or cease their surface mining on our
properties. If the decision is not overturned on appeal or by new legislation,
we would suffer a material decrease in our royalty revenue. Please read
"Business -- Regulation -- Clean Water Act."
THE CLEAN AIR ACT AFFECTS THE END-USERS OF COAL AND COULD SIGNIFICANTLY AFFECT
THE DEMAND FOR OUR COAL AND REDUCE OUR COAL ROYALTY REVENUES.
The Clean Air Act and corresponding state and local laws extensively
regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides and
other compounds emitted from industrial boilers and power plants, including
those that use our coal. These regulations constitute a significant burden on
coal customers and stricter regulation could adversely affect the demand for and
price of our coal, especially higher sulfur coal, resulting in lower coal
royalty revenues.
In July 1997, the U.S. Environmental Protection Agency adopted more
stringent ambient air quality standards for particulate matter and ozone.
Particulate matter includes small particles that are emitted during the coal
combustion process. In a February 2001 decision, the U.S. Supreme Court largely
upheld the EPA's position, although it remanded the EPA's ozone implementation
policy for further consideration. On remand, the Court of Appeals for the D.C.
Circuit affirmed the EPA's adoption of these more stringent ambient air quality
standards. As a result of the finalization of these standards, states that have
not attained these standards will have to revise their State Implementation
Plans to include provisions for the control of ozone precursors and/or
particulate matter. Revised State Implementation Plans could require electric
power generators to further reduce nitrogen oxide and particulate matter
emissions. The potential need to achieve such emissions reductions could result
in reduced coal consumption by electric power generators. Thus, future
regulations regarding ozone, particulate matter and other by-products of coal
combustion could restrict the market for coal and the development of new mines
by our lessees. This in turn may result in decreased production by our lessees
and a corresponding decrease in our coal royalty revenues.
Furthermore, in October 1998, the EPA finalized a rule that will require 19
states in the Eastern United States that have ambient air quality problems to
make substantial reductions in nitrogen oxide emissions by the year 2004. To
achieve these reductions, many power plants will be required to install
additional control measures. The installation of these measures will make it
more costly to operate coal-
22
fired power plants and, depending on the requirements of individual state
implementation plans, could make coal a less attractive fuel.
Additionally, the U.S. Department of Justice, on behalf of the EPA, has
filed lawsuits against several investor-owned electric utilities and brought an
administrative action against one government-owned electric utility for alleged
violations of the Clean Air Act. The EPA claims that the power plants operated
by these utilities have failed to obtain permits required under the Clean Air
Act for facility modifications. Our lessees supply coal to some of the affected
utilities, and it is possible that other of our lessees' customers will be sued.
These lawsuits could require the affected utilities to pay penalties and install
pollution control equipment or undertake other emission reduction measures,
which could adversely affect their demand for coal. Any outcome that adversely
affects our lessees' customers and their demand for coal could adversely affect
our coal royalty revenues.
Other proposed initiatives may have an effect upon our lessees' coal
operations. One such proposal is the Bush Administration's recently announced
Clear Skies Initiative. As proposed, this initiative is designed to reduce
emissions of sulfur dioxide, nitrogen oxides and mercury from power plants.
Other so-called multi-pollutant bills, which could regulate additional air
pollutants, have been proposed in Congress. While the details of all of these
proposed initiatives vary, there appears to be a movement towards increased
regulation of a number of air pollutants. Were such initiatives enacted into
law, power plants could choose to shift away from coal as a fuel source to meet
these requirements.
The Clean Air Act also imposes standards on sources of hazardous air
pollutants. Although these standards have not yet been extended to coal mining
operations, the EPA recently announced that it will regulate hazardous air
pollutants from coal-fired power plants. Under the Clean Air Act, coal-fired
power plants will be required to control hazardous air pollution emissions by
approximately 2009. These controls are likely to require significant new
investments in controls by power plant owners. Like other environmental
regulations, these standards and future standards could result in a decreased
demand for coal. Please read "Business -- Regulation -- Clean Air Act."
WE MAY BECOME LIABLE UNDER FEDERAL AND STATE MINING STATUTES IF OUR LESSEES
ARE UNABLE TO PAY MINING RECLAMATION COSTS.
The Surface Mining Control and Reclamation Act of 1977, or SMCRA, and state
statutes adopted pursuant to SMCRA impose various permitting and operational
requirements on mine operators. In addition, SMCRA assigns to operators the
responsibility of restoring the land to its approximate original contour or
compensating the surface owner for types of damages occurring as a result of
mining operations, and requires mine operators to post performance bonds to
ensure compliance with any reclamation obligations. Regulatory authorities may
attempt to assign the liabilities of our lessees to us if any of our lessees are
not financially capable of fulfilling those obligations. Please read
"Business -- Regulation."
A RECENT FEDERAL DISTRICT COURT DECISION COULD LIMIT OUR LESSEES' ABILITY TO
CONDUCT UNDERGROUND MINING OPERATIONS.
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, within a variety of federally protected lands,
within national forests and within a certain proximity of occupied dwellings.
The lawsuit, Citizens Coal Council v. Norton, was filed in February 2000 to
challenge regulations issued by the Department of Interior providing, 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 plaintiffs' 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
the federally protected lands or national forests where SMCRA restricts surface
mining, or within any real proximity to occupied
23
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 this restriction.
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, sought a stay of the order pending appeal to the U.S. Court of
Appeals for the District of Columbia Circuit and the stay was granted. If the
District Court's decision is not overturned, or if some legislative solution is
not enacted, this ruling could have a material adverse affect on all coal mine
operations that utilize underground mining techniques, including those of our
lessees. While it may still 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.
RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY COULD LEAD TO REDUCED COAL
PRICES.
A number of states and the District of Columbia have passed legislation to
allow retail price competition in the electric utility industry. If ultimately
implemented at both the state and federal levels, restructuring of the electric
utility industry is expected to compel electric utilities to be more aggressive
in developing and defending market share, to be more focused on their pricing
and cost structures and to be more flexible in reacting to changes in the
market. Congress is currently contemplating legislation that would further
enhance competition in the electric industry. We believe that a fully
competitive electricity market may put downward pressure on fuel prices,
including coal, because electric utilities will be competing with other
suppliers and will no longer necessarily be able to pass increased fuel costs on
to their customers. In addition, some of these initiatives may or do mandate the
increased use of alternative or renewable fuels as alternatives to burning
fossil fuels.
WE COULD BECOME LIABLE UNDER FEDERAL AND STATE SUPERFUND AND WASTE MANAGEMENT
STATUTES.
The Comprehensive Environmental Response, Compensation and Liability Act,
known as CERCLA or "Superfund," and similar state laws create liabilities for
the investigation and remediation of releases and threatened releases of
hazardous substances to the environment and damages to natural resources. As
landowners, we are potentially subject to liability for these investigation and
remediation obligations. Please read "Business -- Regulation."
RISKS RELATED TO OUR PARTNERSHIP STRUCTURE
THE WPP GROUP AND ARCH COAL MAY ENGAGE IN SUBSTANTIAL COMPETITION WITH US.
We rely on the employees of our general partner's affiliates, including the
WPP Group, to conduct our business. Although the WPP Group and Arch Coal have
agreed in the omnibus agreement to some restrictions on their ability to compete
with us in the leasing of coal reserves, these restrictions are subject to
numerous exceptions that will enable the WPP Group and Arch Coal to engage in
substantial competition with us should they choose to do so. The restrictions on
Arch Coal's ability to compete with us are materially less burdensome than the
restrictions on the WPP Group. The partnership agreement provides that the
engaging in of competitive activities by Arch Coal and the WPP Group that are
not prohibited by the omnibus agreement will not constitute a breach of their
fiduciary duties to us or the unitholders. To the extent that Arch Coal or the
WPP Group competes with us, our growth prospects may be reduced and our results
of operations and financial condition may be materially adversely affected.
Furthermore, because they control us, the WPP Group and Arch Coal may have
information regarding our operations and business strategies that may give them
an advantage in competing with us that a third-party competitor would not have.
24
The exceptions to the noncompete obligations of the WPP Group and Arch Coal
include the following:
- The WPP Group or Arch Coal may lease their owned coal reserves within the
United States to affiliates. For example, Arch Coal or an Arch Coal
subsidiary may acquire new coal reserves and lease them directly to an
operating subsidiary of Arch Coal and collect royalties on the lease
without offering us the opportunity to acquire these reserves.
- The WPP Group or Arch Coal may compete with us as long as the fair market
value of the assets of any competing business are $10 million or less;
provided, that with respect to the WPP Group, the total value of all
competing businesses do not exceed $75 million. In addition, with respect
to the WPP Group, any coal reserves that are owned and unleased at the
time of the closing of the offering that are subsequently leased to third
parties will not be considered in calculating the $75 million limitation.
- In certain circumstances, the WPP Group and Arch Coal will be required to
offer a competing business to us for purchase, but if they make a good
faith decision in their sole discretion not to accept our offer, they
will be able to continue to own and operate the business in competition
with us. There is no provision in the omnibus agreement requiring the WPP
Group or Arch Coal to sell the business to us at a fair market value
determined by a third party investment banking firm or appraiser.
- Arch Coal is not required to offer us the opportunity to buy its interest
in a competing business if that interest is a general partner interest or
a managing member interest in a limited liability company. Arch Coal may
buy such an interest provided it divests itself of such interest within
six months of acquisition or it divests itself of participation in the
control of our general partner. During the time Arch Coal owns such
general partner interest or managing member interest, it may operate it
in competition with us, but during such time the representatives of Arch
Coal on the Board of Directors of GP Natural Resources Partners LLC must
recuse themselves from all board functions and governance of our general
partner or us.
- There is no restriction on the ability of the WPP Group and Arch Coal to
compete with us in the ownership and operation of other business,
including the leasing of other mineral properties such as oil and gas and
iron ore. It is our strategy to diversify into the acquisition of mineral
properties in addition to coal properties.
- There is no restriction on the ability of the WPP Group and Arch Coal to
own a noncontrolling equity interest in a competing business, including
an economic stake that is greater than their stake in us.
If the WPP Group or Arch Coal, as applicable, ceases to participate in the
control of our general partner, then it will no longer be bound by the
noncompetition provisions of the omnibus agreement.
Please see "Certain Relationships and Related Transactions -- Omnibus
Agreement" for a description of the omnibus agreement.
THE WPP GROUP, ARCH COAL AND THEIR AFFILIATES HAVE CONFLICTS OF INTEREST AND
LIMITED FIDUCIARY RESPONSIBILITIES, WHICH MAY PERMIT THEM TO FAVOR THEIR OWN
INTERESTS TO YOUR DETRIMENT.
Following the offering, the WPP Group, Arch Coal and their affiliates will
own an aggregate of 81.3% of our common and subordinated units and together will
own and control our general partner. Conflicts of interest may arise between the
WPP Group, Arch Coal and their affiliates, including our general partner, on the
one hand, and us and our unitholders, on the other hand. As a result of these
conflicts, our general partner may favor its own interests and the interests of
its affiliates over the interests of the unitholders. These conflicts include,
among others, the following situations:
- Some officers of the WPP Group, who will provide services to us, will
also devote significant time to the businesses of the WPP Group and will
be compensated by the WPP Group for the services
25
they provide. Please read "Management -- Directors and Executive Officers
of GP Natural Resource Partners LLC."
- Neither the partnership agreement nor any other agreement requires the
WPP Group or Arch Coal to pursue a business strategy that favors us. The
directors and officers of the WPP Group have a fiduciary duty to make
decisions in the best interests of the WPP Group's limited partners and
shareholders, and Arch Coal's directors and officers have a fiduciary
duty to make decisions in the best interests of Arch Coal's shareholders.
- As described above, the WPP Group and its affiliates and Arch Coal and
its affiliates may engage in substantial competition with us.
- Our general partner is allowed to take into account the interests of
parties other than us, such as the WPP Group and Arch Coal, in resolving
conflicts of interest, which has the effect of limiting its fiduciary
duty to the unitholders.
- Our general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to unitholders for
actions that might, without the limitations, constitute breaches of
fiduciary duty. As a result of purchasing units, you are deemed to
consent to some actions and conflicts of interest that might otherwise
constitute a breach of fiduciary or other duties under applicable law.
- Our general partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings, issuances of additional
limited partner interests and reserves, each of which can affect the
amount of cash that is distributed to unitholders.
- Our general partner determines which costs incurred by it and its
affiliates are reimbursable by us.
- Our partnership agreement does not restrict our general partner from
causing us to pay it or its affiliates for any services rendered on terms
that are fair and reasonable to us or entering into additional
contractual arrangements with any of these entities on our behalf.
- Our general partner controls the enforcement of obligations owed to us by
our general partner and its affiliates.
- Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
- In some instances, our general partner may cause us to borrow funds in
order to permit the payment of distributions, even if the purpose or
effect of the borrowing is to make a distribution on the subordinated
units, to make incentive distributions or to hasten the expiration of the
subordination period.
Please read "Certain Relationships and Related Transactions -- Omnibus
Agreement" and "Conflicts of Interest and Fiduciary Responsibilities."
EVEN IF UNITHOLDERS ARE DISSATISFIED, THEY CANNOT EASILY REMOVE OUR GENERAL
PARTNER.
Unlike the holders of common stock in a corporation, unitholders have only
limited voting rights on matters affecting our business and, therefore, limited
ability to influence management's decisions regarding our business. Unitholders
did not elect our general partner or the board of directors of GP Natural
Resource Partners LLC and will have no right to elect our general partner or the
board of directors of GP Natural Resource Partners LLC on an annual or other
continuing basis.
The board of directors of GP Natural Resource Partners LLC is elected by
Corbin J. Robertson, Jr., our chief executive officer and chairman and an
affiliate of the WPP Group, and by Arch Coal. Mr. Robertson has the right to
elect five members and Arch Coal has the right to elect three members of the
board. Although our general partner has a fiduciary duty to manage our business
in a manner
26
beneficial to us and the unitholders, the directors of GP Natural Resource
Partners LLC have a fiduciary duty to manage the general partner in a manner
beneficial to its members, Mr. Robertson and Arch Coal.
Furthermore, if unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our general partner.
First, our general partner generally may not be removed except upon the vote of
the holders of at least 66 2/3% of the outstanding units voting together as a
single class. Because affiliates of the general partner will control
approximately 81.3% of all the outstanding units, the general partner currently
cannot be removed without the consent of the general partner and its affiliates.
Also, if our general partner is removed without cause during the subordination
period and units held by the general partner and its affiliates are not voted in
favor of that removal, all remaining subordinated units will automatically be
converted into common units and any existing arrearages on the common units will
be extinguished. A removal of the general partner under these circumstances
would adversely affect the common units by prematurely eliminating their
distribution and liquidation preference over the subordinated units, which would
otherwise have continued until we had met certain distribution and performance
tests.
Cause is narrowly defined to mean that a court of competent jurisdiction
has entered a final, non-appealable judgment finding the general partner liable
for actual fraud, gross negligence, or willful or wanton misconduct in its
capacity as our general partner. Cause does not include most cases of charges of
poor management of the business, so the removal of the general partner because
of the unitholders' dissatisfaction with the general partner's performance in
managing our partnership will most likely result in the termination of the
subordination period.
Furthermore, unitholders' voting rights are further restricted by the
partnership agreement provision providing that any units held by a person that
owns 20% or more of any class of units then outstanding, other than the general
partner, its affiliates, their transferees and persons who acquired such units
with the prior approval of the board of directors of our general partner, cannot
be voted on any matter. In addition, the partnership agreement contains
provisions limiting the ability of unitholders to call meetings or to acquire
information about our operations, as well as other provisions limiting the
unitholders' ability to influence the manner or direction of management.
As a result of these provisions, the price at which our common units will
trade may be lower because of the absence or reduction of a takeover premium in
the takeover price.
THE CONTROL OF OUR GENERAL PARTNER MAY BE TRANSFERRED TO A THIRD PARTY WITHOUT
UNITHOLDER CONSENT.
Our general partner may transfer its general partner interest to a third
party in a merger or in a sale of all or substantially all of its assets without
the consent of the unitholders. Furthermore, there is no restriction in the
partnership agreement on the ability of the owners of our general partner or its
general partner, GP Natural Resource Partners LLC, from transferring their
ownership interest in the general partner to a third party. The new owner of our
general partner would then be in a position to replace the board of directors
and officers of our general partner with its own choices and thereby influence
the decisions taken by the board of directors and officers.
OUR GENERAL PARTNER'S ABSOLUTE DISCRETION IN DETERMINING THE LEVEL OF CASH
RESERVES MAY ADVERSELY AFFECT OUR ABILITY TO MAKE CASH DISTRIBUTIONS TO
UNITHOLDERS.
Our partnership agreement requires our general partner to deduct from
operating surplus cash reserves that in its reasonable discretion are necessary
to fund our future operating expenditures. In addition, the partnership
agreement permits our general partner to reduce available cash by establishing
cash reserves for the proper conduct of our business, to comply with applicable
law or agreements to which we are a party or to provide funds for future
distributions to partners. These cash reserves will reduce the amount of cash
available for distribution to unitholders.
27
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF $6.91 PER COMMON
UNIT.
The assumed initial public offering price of $20.00 per unit exceeds pro
forma net tangible book value of $6.60 per unit. Based on the assumed initial
public offering price, you will incur immediate and substantial dilution of
$6.91 per common unit. The main factor causing dilution is that our general
partner and its affiliates acquired interests in us at equivalent per unit
prices less than the public offering price. Please read "Dilution."
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR APPROVAL, WHICH WOULD DILUTE
YOUR EXISTING OWNERSHIP INTERESTS.
During the subordination period, our general partner may cause us to issue
up to 6,002,500 additional common units without your approval. Our general
partner may also cause us to issue an unlimited number of additional common
units or other equity securities of equal rank with the common units, without
your approval, in a number of circumstances, such as:
- the issuance of common units in connection with acquisitions or capital
improvements that our general partner determines would increase cash flow
from operations per unit on a pro forma basis;
- the conversion of subordinated units into common units;
- the conversion of units of equal rank with the common units into common
units under some circumstances;
- the conversion of the general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of
our general partner;
- the issuance of common units under our incentive plans; or
- issuances of common units to repay up to $25 million of certain
indebtedness.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of the
unitholders. Our partnership agreement does not give the unitholders the right
to approve our issuance at any time of equity securities ranking junior to the
common units.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
- your proportionate ownership interest in us will decrease;
- the amount of cash available for distribution on each unit may decrease;
- because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of the
minimum quarterly distribution will be borne by the common unitholders
will increase;
- the relative voting strength of each previously outstanding unit may be
diminished; and
- the market price of the common units may decline.
COST REIMBURSEMENTS DUE OUR GENERAL PARTNER MAY BE SUBSTANTIAL AND WILL REDUCE
THE CASH AVAILABLE FOR DISTRIBUTION TO YOU.
Prior to making any distribution on the common units, we will reimburse our
general partner and its affiliates, including GP Natural Resource Partners LLC
and the officers and directors of GP Natural Resource Partners LLC, for all
expenses they incur on our behalf. Please read "Conflicts of Interest and
Fiduciary Responsibilities -- Conflicts of Interest." The reimbursement of
expenses could adversely affect our ability to pay cash distributions to you.
Please read "Certain Relationships and Related Transactions." Our general
partner has sole discretion to determine the amount of these expenses. In
addition, our general partner and its affiliates may provide us with other
services for which we will be charged fees as
28
determined by our general partner. Excluding reimbursements for costs and
expenses associated with this offering and the related transactions, we estimate
that the total amount of the reimbursements and fees will be approximately $4.4
million in the first year following this offering.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL YOUR
UNITS AT AN UNDESIRABLE TIME OR PRICE.
If, at any time, our general partner and its affiliates own more than 80%
of the common units then outstanding, our general partner has the right, but not
the obligation, which it may assign to any of its affiliates or to us, to
acquire all, but not less than all, of the remaining common units at a price not
less than the then-current market price of the units. If we do not issue any
equity securities prior to the expiration of the subordination period, upon the
conversion of subordinated units into common units at the end of the
subordination period, our general partner and its affiliates will own 81.3% of
our outstanding common units and will be able to exercise this call right. As a
result, you may be required to sell your common units at an undesirable time or
price and may therefore not receive any return on your investment. You may also
incur tax liability upon a sale of your units. For further information about the
call right, please read "The Partnership Agreement -- Limited Call Right."
YOUR LIABILITY MAY NOT BE LIMITED IF A COURT FINDS THAT UNITHOLDER ACTION
CONSTITUTES CONTROL OF OUR BUSINESS.
A general partner of a partnership generally has unlimited liability for
the obligations of the partnership, except for those contractual obligations of
the partnership that are expressly made without recourse to the general partner.
While our partnership is organized under Delaware law, we conduct business in a
number of other states. The limitations on the liability of holders of limited
partner interests for the obligations of a limited partnership have not been
clearly established in some of the other states in which we do business. You
could be liable for our obligations as if you were a general partner if:
- a court or government agency determined that we were conducting business
in a state but had not complied with that particular state's partnership
statute; or
- your right to act with other unitholders to remove or replace the general
partner, to approve some amendment to our partnership agreement or to
take other actions under our partnership agreement constitute "control"
of our business.
In addition, Section 17-607 of the Delaware Revised Uniform Limited
Partnership Act provides that, under some circumstances, a unitholder may be
liable to us for the amount of a distribution for a period of three years from
the date of the distribution. Please read "The Partnership Agreement -- Limited
Liability" for a discussion of the implications of the limitations on the
liability of a unitholder.
TAX RISKS TO COMMON UNITHOLDERS
You should read "Material Tax Consequences" for a full discussion of the
expected material federal income tax consequences of owning and disposing of
common units.
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO YOU.
The after-tax economic benefit of an investment in the common units depends
largely on our being treated as a partnership for federal income tax purposes.
We have not requested, and do not plan to request, a ruling from the IRS on this
or any other tax matter affecting us.
If we were treated as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently a maximum of 35%. Distributions to you may be taxed again as corporate
dividends, and no income, gains, losses or deductions would flow through to you.
Because a tax would be imposed upon us as a corporation, our cash available for
distribution to you would be substantially reduced. If we were treated as a
corporation there would be a material reduction in
29
the after-tax return to the unitholders, likely causing a substantial reduction
in the value of our common units.
Current law may change so as to cause us to be treated as a corporation for
federal income tax purposes or otherwise subject us to entity-level taxation.
The partnership agreement provides that if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal, state
or local income tax purposes, the minimum quarterly distribution amount and the
target distribution amounts will be adjusted to reflect the impact of that law
on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY AFFECT THE MARKET FOR OUR COMMON UNITS, AND THE COST OF ANY IRS
CONTEST WILL BE BORNE BY OUR UNITHOLDERS AND OUR GENERAL PARTNER.
We have not requested a ruling from the IRS with respect to our treatment
as a partnership for federal income tax purposes or any other matter affecting
us. The IRS may adopt positions that differ from the conclusions of our counsel
expressed in this prospectus or from the positions we take. It may be necessary
to resort to administrative or court proceedings to sustain some or all of our
counsel's conclusions or the positions we take. A court may not agree with all
of our counsel's conclusions or positions we take. Any contest with the IRS may
materially and adversely impact the market for our common units and the price at
which they trade. In addition, our costs of any contest with the IRS will be
borne indirectly by our unitholders and our general partner because the costs
will reduce our cash available for distribution.
YOU MAY BE REQUIRED TO PAY TAXES ON INCOME FROM US EVEN IF YOU DO NOT RECEIVE
ANY CASH DISTRIBUTIONS FROM US.
You will be required to pay any federal income taxes and, in some cases,
state and local income taxes on your share of our taxable income even if you
receive no cash distributions from us. You may not receive cash distributions
from us equal to your share of our taxable income or even the tax liability that
results from that income.
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.
If you sell your common units, you will recognize a gain or loss equal to
the difference between the amount realized and your tax basis in those common
units. Prior distributions to you in excess of the total net taxable income you
were allocated for a common unit, which decreased your tax basis in that common
unit, will, in effect, become taxable income to you if the common unit is sold
at a price greater than your tax basis in that common unit, even if the price is
less than your original cost. A substantial portion of the amount realized,
whether or not representing gain, may be ordinary income. In addition, if you
sell your units, you may incur a tax liability in excess of the amount of cash
you receive from the sale.
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN PERSONS FACE
UNIQUE TAX ISSUES FROM OWNING COMMON UNITS THAT MAY RESULT IN ADVERSE TAX
CONSEQUENCES TO THEM.
Investment in common units by tax-exempt entities, such as individual
retirement accounts (known as IRAs), regulated investment companies (known as
mutual funds) and non-U.S. persons raises issues unique to them. For example,
some of our income allocated to organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, may be
unrelated business taxable income and will be taxable to such a unitholder. Very
little of our income will be qualifying income to a regulated investment
company. Distributions to non-U.S. persons will be reduced by withholding tax at
the highest effective tax rate applicable to individuals, and non-U.S.
unitholders will be required to file federal income tax returns and pay tax on
their share of our taxable income.
30
WE WILL REGISTER AS A TAX SHELTER. THIS MAY INCREASE THE RISK OF AN IRS AUDIT
OF US OR YOU.
We intend to register with the IRS as a "tax shelter." The federal income
tax laws require that some types of entities, including some partnerships,
register as tax shelters in response to the perception that they claim tax
benefits that may be unwarranted. As a result, we may be audited by the IRS and
tax adjustments may be made. Any unitholder owning less than a 1% profit
interest in us has very limited rights to participate in the income tax audit
process. Further, any adjustments in our tax returns will lead to adjustments in
your tax returns and may lead to audits of your tax returns and adjustments of
items unrelated to us. You would bear the cost of any expense incurred in
connection with an examination of your tax return.
YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES IN STATES WHERE YOU DO NOT
LIVE AS A RESULT OF AN INVESTMENT IN UNITS.
In addition to federal income taxes, you will likely be subject to other
taxes, including foreign, state and local taxes, unincorporated business taxes
and estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property, even if you do not live
in any of those jurisdictions. You will likely be required to file foreign,
state and local income tax returns and pay state and local income taxes in some
or all of these jurisdictions. Further, you may be subject to penalties for
failure to comply with those requirements. We will initially own assets and do
business in Alabama, Illinois, Indiana, Kentucky, Maryland, Montana, Virginia
and West Virginia. Each of these states currently imposes a personal income tax.
It is your responsibility to file all United States federal, foreign, state and
local tax returns. Our counsel has not rendered an opinion on the state or local
tax consequences of an investment in the common units.
31
USE OF PROCEEDS
We expect to receive net proceeds of approximately $50.1 million from the
sale of 2,675,640 common units offered by this prospectus, after deducting
underwriting discounts but before paying estimated offering expenses. We base
these proceeds on an assumed public offering price of $20.00 per common unit, an
assumed purchase of 76,890 common units by New Gauley Coal Corporation and Great
Northern Properties Limited Partnership and no exercise of the underwriters'
over-allotment option. We will not receive any proceeds from the sale of the
common units by Arch Coal, Inc.
We anticipate using the aggregate net proceeds of this offering to:
- repay $46.6 million of debt we will assume from the WPP Group consisting
of:
- $36.0 million assumed from Western Pocahontas Properties Limited
Partnership, of which $30.0 million was incurred with the purchase
of CSX's reversionary interest in March 2002;
- $1.6 million assumed from New Gauley Coal Corporation;
- $9.0 million assumed from Great Northern Properties Limited
Partnership;
- pay $2.8 million for expenses associated with the offering and related
transactions;
- fund working capital of $0.6 million; and
- distribute $0.1 million to the WPP Group.
In addition, Arch Coal will contribute $0.8 million to us to pay $0.4
million for its share of deferred financing costs and to fund $0.4 million in
working capital.
If the underwriters do not exercise any portion of their over-allotment
option, New Gauley Coal Corporation and Great Northern Properties Limited
Partnership will purchase 76,890 common units from us at the assumed initial
public offering price of $20.00 per unit. We will receive net proceeds of $1.5
million from such sale, which will not be reduced by the underwriting discount.
If the underwriters exercise their over-allotment option in full, we will
sell 389,813 units (57.75% of the total over-allotment option) for net proceeds
of $7.3 million and Arch Coal will sell 285,187 units (42.25% of the total
over-allotment option) for net proceeds of $5.3 million. We will use our net
proceeds from this exercise to redeem 312,924 common units from Western
Pocahontas Properties Limited Partnership and New Gauley Coal Corporation in
reimbursement of capital expenditures made by them, and we will use the
remainder to repay indebtedness assumed from New Gauley Coal Corporation and
Great Northern Properties Limited Partnership.
As of March 31, 2002, $6.0 million of the debt to be repaid by Western
Pocahontas Properties Limited Partnership bore interest at 7.6% and matures in
April 2013 and $30.0 million bore interest at 4.91% and matures in March 2012;
the debt to be repaid by New Gauley Coal Corporation bore interest at 7.6% and
matures in April 2013; and the debt to be repaid by Great Northern Properties
Limited Partnership bore interest at 4.7% and matures in September 2004.
32
CAPITALIZATION
The following table shows (1) our historical capitalization as of March 31,
2002 on an actual basis and (2) our pro forma capitalization as of March 31,
2002, as adjusted to reflect the offering of the common units and the
application of the net proceeds in the manner described under "Use of Proceeds."
This table is derived from, should be read in conjunction with, and is qualified
in its entirety by reference to, our historical and pro forma financial
statements and the accompanying notes included elsewhere in this prospectus. You
should also read the table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
AT MARCH 31, 2002
--------------------------------------
HISTORICAL
HISTORICAL ARCH COAL
COMBINED CONTRIBUTED PRO FORMA
WPP GROUP PROPERTIES AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
Cash and cash equivalents.......................... $ 7,088 $ -- $ 1,000
======== ======= ========
Long-term debt..................................... $140,247 -- $ --
Owners' equity/partners' capital:
Owners' equity................................... 41,283 78,550 --
Common unitholders............................... -- -- 150,660
Subordinated unitholders......................... -- -- 163,323
General partner.................................. -- -- 6,666
-------- ------- --------
Total owners' equity/partners' capital........ 41,283 78,550 320,649
-------- ------- --------
Total capitalization............................... $181,530 $78,550 $320,649
======== ======= ========
33
DILUTION
Dilution is the amount by which the offering price paid by the purchasers
of common units sold in this offering will exceed the pro forma net tangible
book value per unit after the offering. On a pro forma basis as of March 31,
2002, after giving effect to the offering of common units and the related
transactions, our net tangible book value was $320.6 million, or $13.09 per
unit. Purchasers of common units in this offering will experience substantial
and immediate dilution in net tangible book value per common unit for financial
accounting purposes, as illustrated in the following table:
Assumed initial public offering price per common unit.............. $20.00
Pro forma net tangible book value per common unit before the
offering(1)............................................... $6.60
Increase in net tangible book value per common unit
attributable to purchasers in the offering................ 6.49
-----
Less: Pro forma net tangible book value per common unit after the
offering(2)...................................................... 13.09
------
Immediate dilution in tangible net book value per common unit to
new investors.................................................... $ 6.91
======
---------------
(1) Determined by dividing the number of units to be issued to affiliates of our
general partner (9,406,250 common units, 12,005,000 subordinated units and
the 2% general partner interest, which has a dilutive effect equivalent to
490,000 units) for their contribution of assets and liabilities to us into
the net pro forma tangible book value of the contributed assets and
liabilities.
(2) Determined by dividing the total number of units to be outstanding after the
offering and the related transactions (12,005,000 common units, 12,005,000
subordinated units and the 2% general partner interest, which has a dilutive
effect equivalent to 490,000 units) into our pro forma net tangible book
value, after giving effect to the application of the net proceeds of the
offering and the related transactions.
The following table sets forth the number of units that we will issue and
the total consideration contributed to us by the general partner and its
affiliates in respect of their units and by the purchasers of common units in
this offering upon consummation of the transactions contemplated by this
prospectus:
UNITS ACQUIRED
-------------------- TOTAL
NUMBER PERCENT CONSIDERATION PERCENT
---------- ------- -------------- -------
(IN THOUSANDS)
General partner and its
affiliates(1)(2)....................... 21,901,250 89.4% $273,629 84.0%
New investors............................ 2,598,750 10.6% 51,975 16.0%
---------- ------ -------- ------
Total.................................. 24,500,000 100.0% $325,604 100.0%
========== ====== ======== ======
---------------
(1) The units acquired by the general partner and its affiliates consist of
9,406,250 common units, including 76,890 common units acquired by affiliates
if the underwriters' over-allotment option is not exercised, 12,005,000
subordinated units and the 2% general partner interest, having a dilutive
effect equivalent to 490,000 units.
(2) The net assets contributed by the WPP Group were recorded at historical cost
and the net assets contributed by Arch Coal were recorded at their fair
values. The value of the consideration provided by our general partner and
its affiliates, as of March 31, 2002, after giving effect to the application
of the net proceeds of the offering, is as follows:
(IN THOUSANDS)
Historical book value of net assets contributed excluding
assets and liabilities retained -- WPP Group.............. $ 66,770
Historical book value of net assets contributed excluding
assets and liabilities retained -- Arch Coal.............. 77,849
Fair value adjustments for Arch Coal........................ 127,472
Additional units purchased by New Gauley Coal Corporation
and Great Northern Properties Limited Partnership......... 1,538
--------
$273,629
========
34
CASH DISTRIBUTION POLICY
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
General. Within 45 days after the end of each quarter, beginning with the
quarter ending September 30, 2002, we will distribute all of our available cash
to unitholders of record on the applicable record date. We will adjust the
minimum quarterly distribution for the period from the closing of the offering
through September 30, 2002 based on the actual length of the period.
Definition of Available Cash. We define available cash in the glossary,
and it generally means, for each fiscal quarter, all cash on hand at the end of
the quarter:
- less the amount of cash reserves that our general partner determines in
its reasonable discretion is necessary or appropriate to:
- provide for the proper conduct of our business;
- comply with applicable law, any of our debt instruments or other
agreements; or
- provide funds for distributions to our unitholders and our general
partner for any one or more of the next four quarters;
- plus all cash on hand on the date of determination of available cash for
the quarter resulting from working capital borrowings made after the end
of the quarter. Working capital borrowings are generally borrowings that
are made under our credit facility and in all cases are used solely for
working capital purposes or to pay distributions to partners.
Intent to Distribute the Minimum Quarterly Distribution. We intend to
distribute to the holders of common units and subordinated units on a quarterly
basis at least the minimum quarterly distribution of $0.50, or $2.00 per year,
to the extent we have sufficient cash from our operations after establishment of
cash reserves and payment of fees and expenses, including payments to our
general partner and its affiliates. There is no guarantee, however, that we will
pay the minimum quarterly distribution on the common units in any quarter, and
we will be prohibited from making any distributions to unitholders if it would
cause an event of default, or if an event of default is existing, under our
credit facility.
OPERATING SURPLUS AND CAPITAL SURPLUS
General. All cash distributed to unitholders will be characterized as
either "operating surplus" or "capital surplus." We distribute available cash
from operating surplus differently than available cash from capital surplus.
Maintenance capital expenditures are capital expenditures made to maintain,
over the long term, the operating capacity of our assets as they existed at the
time of the expenditure. Expansion capital expenditures are capital expenditures
made to increase over the long term the operating capacity of our assets as they
existed at the time of the expenditure. The general partner has the discretion
to determine how to allocate a capital expenditure for the acquisition or
expansion of coal reserves between maintenance capital expenditures and
expansion capital expenditures, and its good faith allocation will be
conclusive. Maintenance capital expenditures reduce operating surplus, from
which we pay the minimum quarterly distribution, but expansion capital
expenditures do not.
Definition of Operating Surplus. We define operating surplus in the
glossary, and it generally means:
- our cash balance on the closing date of this offering; plus
- $15.0 million (as described below); plus
- all of our cash receipts after the closing of this offering, excluding
cash from borrowings that are not working capital borrowings, sales of
equity and debt securities and sales or other dispositions of assets
outside the ordinary course of business; plus
35
- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for that quarter; less
- all of our operating expenditures after the closing of this offering,
including the repayment of working capital borrowings, but not the
repayment of other borrowings, and including maintenance capital
expenditures; less
- the amount of cash reserves that the general partner deems necessary or
advisable to provide funds for future operating expenditures.
Definition of Capital Surplus. We also define capital surplus in the
glossary, and it will generally be generated only by:
- borrowings other than working capital borrowings; or
- sales of debt and equity securities; or
- sales or other dispositions of assets for cash, other than inventory,
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.
Characterization of Cash Distributions. We will treat all available cash
distributed as coming from operating surplus until the sum of all available cash
distributed since we began operations equals the operating surplus as of the
most recent date of determination of available cash. We will treat any amount
distributed in excess of operating surplus, regardless of its source, as capital
surplus. As reflected above, operating surplus includes $15.0 million in
addition to our cash balance on the closing date of this offering, cash receipts
from our operations and cash from working capital borrowings. This amount does
not reflect actual cash on hand at closing that is available for distribution to
our unitholders. Rather, it is a provision that will enable us, if we choose, to
distribute as operating surplus up to $15.0 million of cash we receive in the
future from non-operating sources, such as asset sales, issuances of securities,
and long-term borrowings, that would otherwise be distributed as capital
surplus. We do not anticipate that we will make any distributions from capital
surplus.
SUBORDINATION PERIOD
General. During the subordination period, which we define below and in the
glossary, the common units will have the right to receive distributions of
available cash from operating surplus in an amount equal to the minimum
quarterly distribution of $0.50 per unit, plus any arrearages in the payment of
the minimum quarterly distribution on the common units from prior quarters,
before any distributions of available cash from operating surplus may be made on
the subordinated units. The purpose of the subordinated units is to increase the
likelihood that during the subordination period there will be available cash to
be distributed on the common units.
Definition of Subordination Period. We define the subordination period in
the glossary. The subordination period will extend until the first day of any
quarter beginning after June 30, 2007 that each of the following tests are met:
- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the "adjusted operating surplus" (as defined below) generated during each
of the three consecutive, non-overlapping four-quarter periods
immediately preceding that date equaled or exceeded the sum of the
minimum quarterly distributions on all of the outstanding common units
and subordinated units during those periods on a fully diluted basis and
the related distribution on the 2% general partner interest during those
periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
36
Early Conversion of Subordinated Units. Before the end of the
subordination period, 50% of the subordinated units, or up to 6,002,500
subordinated units, will convert into common units on a one-for-one basis
immediately after the distribution of available cash to partners in respect of
any quarter ending on or after:
- June 30, 2005, with respect to 25% of the subordinated units; and
- June 30, 2006, with respect to 25% of the subordinated units.
The early conversions will occur if at the end of the applicable quarter
each of the following occurs:
- distributions of available cash from operating surplus on each of the
outstanding common units and the subordinated units equaled or exceeded
the minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
The second early conversion of the subordinated units may not occur,
however, until at least one year following the first early conversion of the
subordinated units.
Definition of Adjusted Operating Surplus. We define adjusted operating
surplus in the glossary and for any period it generally means:
- operating surplus generated with respect to that period; less
- any net increase in working capital borrowings with respect to that
period; less
- any net reduction in cash reserves for operating expenditures with
respect to that period not relating to an operating expenditure made with
respect to that period; plus
- any net decrease in working capital borrowings with respect to that
period; plus
- any net increase in cash reserves for operating expenditures with respect
to that period required by any debt instrument for the repayment of
principal, interest or premium.
Adjusted operating surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net increases in
working capital borrowings and net reductions of reserves of cash generated in
prior periods.
Effects of Expiration of Subordination Period. Upon expiration of the
subordination period, all remaining subordinated units will convert into common
units on a one-for-one basis and will then participate, pro rata, with the other
common units in distributions of available cash. In addition, if the unitholders
remove our general partner other than for cause and units held by the general
partner and its affiliates are not voted in favor of that removal:
- the subordination period will end and each subordinated unit will
immediately convert into one common unit;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- the general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
37
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter during the subordination period in the following manner:
- First, 98% to the common unitholders, pro rata, and 2% to our general
partner, until we have distributed for each outstanding common unit an
amount equal to the minimum quarterly distribution for that quarter;
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we have distributed for each outstanding common unit an
amount equal to any arrearages in payment of the minimum quarterly
distribution on the common units for any prior quarters during the
subordination period;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until we have distributed for each subordinated unit an
amount equal to the minimum quarterly distribution for that quarter; and
- Thereafter, in the manner described in "-- Incentive Distribution Rights"
below.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter after the subordination period in the following manner:
- First, 98% to all unitholders, pro rata, and 2% to the general partner,
until we have distributed for each outstanding unit an amount equal to
the minimum quarterly distribution for that quarter; and
- Thereafter, in the manner described in "-- Incentive Distribution Rights"
below.
INCENTIVE DISTRIBUTION RIGHTS
Incentive distribution rights represent the right to receive an increasing
percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the target distribution levels have
been achieved. Our general partner, the members of the WPP Group and Arch Coal
currently hold 65%, 25% and 10%, respectively, of the incentive distribution
rights. The WPP Group and Arch Coal may transfer these rights, but our general
partner may only transfer these rights separately from its general partner
interest in accordance with restrictions in the partnership agreement.
If for any quarter:
- we have distributed available cash from operating surplus on each common
unit and subordinated unit in an amount equal to the minimum quarterly
distribution; and
- we have distributed available cash from operating surplus on outstanding
common units in an amount necessary to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution;
then we will distribute any additional available cash from operating surplus for
that quarter among the unitholders and the general partner in the following
manner:
- First, 98% to all unitholders, pro rata, and 2% to the general partner,
until each unitholder has received a total of $0.55 per unit for that
quarter (the "first target distribution");
- Second, 85% to all unitholders, and 13% to the holders of the incentive
distribution rights, pro rata, and 2% to our general partner, until each
unitholder has received a total of $0.65 per unit for that quarter (the
"second target distribution");
- Third, 75% to all unitholders, and 23% to the holders of the incentive
distribution rights, pro rata, and 2% to our general partner, until each
unitholder has received a total of $0.75 per unit for that quarter (the
"third target distribution"); and
38
- Thereafter, 50% to all unitholders and 48% to the holders of the
incentive distribution rights, pro rata, and 2% to our general partner.
In each case, the amount of the target distribution set forth above is
exclusive of any distributions to common unitholders to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution.
PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS
The following table illustrates the percentage allocations of the
additional available cash from operating surplus among the unitholders, our
general partner and the holders of the incentive distribution rights up to the
various target distribution levels. The amounts set forth under "Marginal
Percentage Interest in Distributions" are the percentage interests of the
unitholders, our general partner and the holders of the incentive distribution
rights in any available cash from operating surplus we distribute up to and
including the corresponding amount in the column "Total Quarterly Distribution
Target Amount," until available cash we distribute reaches the next target
distribution level, if any. The percentage interests shown for the unitholders
and our general partner for the minimum quarterly distribution are also
applicable to quarterly distribution amounts that are less than the minimum
quarterly distribution.
MARGINAL PERCENTAGE INTEREST IN
DISTRIBUTIONS
------------------------------------
HOLDERS OF
TOTAL QUARTERLY INCENTIVE
DISTRIBUTION TARGET GENERAL DISTRIBUTION
AMOUNT UNITHOLDERS PARTNER RIGHTS
------------------- ----------- ------- ------------
Minimum Quarterly
Distribution................ $0.50 98% 2% --
First Target Distribution..... $0.50 up to $0.55 98% 2% --
Second Target Distribution.... above $0.55 up to $0.65 85% 2% 13%
Third Target Distribution..... above $0.65 up to $0.75 75% 2% 23%
Thereafter.................... above $0.75 50% 2% 48%
DISTRIBUTIONS FROM CAPITAL SURPLUS
How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus, if any, in the following
manner:
- First, 98% to all unitholders, pro rata, and 2% to the general partner,
until we have distributed for each common unit that was issued in this
offering an amount of available cash from capital surplus equal to the
initial public offering price;
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we have distributed for each common unit an amount of
available cash from capital surplus equal to any unpaid arrearages in
payment of the minimum quarterly distribution on the common units; and
- Thereafter, we will make all distributions of available cash from capital
surplus as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. The partnership agreement
treats a distribution of capital surplus as the repayment of the initial unit
price from this initial public offering, which is a return of capital. The
initial public offering price less any distributions of capital surplus per unit
is referred to as the "unrecovered initial unit price." Each time a distribution
of capital surplus is made, the minimum quarterly distribution and the target
distribution levels will be reduced in the same proportion as the corresponding
reduction in the unrecovered initial unit price. Because distributions of
capital surplus will reduce the minimum quarterly distribution, after any of
these distributions are made, it may be easier for the general partner to
receive incentive distributions and for the subordinated units to convert into
common units. Any distribution of capital surplus before the unrecovered initial
unit price is reduced to zero cannot be applied, however, to the payment of the
minimum quarterly distribution or any arrearages.
39
Once we distribute capital surplus on a unit issued in this offering in an
amount equal to the initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero. We will then make all
future distributions from operating surplus, with 50% being paid to the holders
of units, 48% to the holders of the incentive distribution rights and 2% to our
general partner.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, if we combine
our units into fewer units or subdivide our units into a greater number of
units, we will proportionately adjust:
- the minimum quarterly distribution;
- the target distribution levels;
- the unrecovered initial unit price;
- the number of common units issuable during the subordination period
without a unitholder vote; and
- the number of common units into which a subordinated unit is convertible.
For example, if a two-for-one split of the common units should occur, the
minimum quarterly distribution, the target distribution levels and the
unrecovered initial unit price would each be reduced to 50% of its initial
level. We will not make any adjustment by reason of the issuance of additional
units for cash or property.
In addition, if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum of the highest
marginal federal corporate income tax rate that could apply and any increase in
the effective overall state and local income tax rates. For example, if we
become subject to a maximum combined marginal federal, and effective state and
local income tax rate of 38%, then the minimum quarterly distribution and the
target distribution levels would each be reduced to 62% of their previous
levels.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
If we dissolve in accordance with the partnership agreement, we will sell
or otherwise dispose of our assets in a process called liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and our general partner, in
accordance with their capital account balances, as adjusted to reflect any gain
or loss upon the sale or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended, to the
extent possible, to entitle the holders of outstanding common units to a
preference over the holders of outstanding subordinated units upon our
liquidation, to the extent required to permit common unitholders to receive
their unrecovered initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid arrearages in
payment of the minimum quarterly distribution on the common units. There may not
be sufficient gain upon our liquidation, however, to enable the holder of common
units to fully recover all of these amounts, even though there may be cash
available for distribution to the holders of subordinated units. Any further net
gain recognized upon liquidation will be allocated in a manner that takes into
account the incentive distribution rights of our general partner.
40
Manner of Adjustment for Gain. The manner of the adjustment is set forth
in the partnership agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any gain to the partners in the following
manner:
- First, to our general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;
- Second, 98% to the common unitholders, pro rata, and 2% to our general
partner until the capital account for each common unit is equal to the
sum of:
(1) the unrecovered initial unit price; plus
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs; plus
(3) any unpaid arrearages in payment of the minimum quarterly
distribution;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to our
general partner until the capital account for each subordinated unit is
equal to the sum of:
(1) the unrecovered initial unit price; and
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
- Fourth, 98% to all unitholders, pro rata, and 2% to our general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the first target distribution per unit over
the minimum quarterly distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the minimum quarterly distribution
per unit that was distributed 98% to the unitholders, pro rata, and 2%
to our general partner for each quarter of our existence;
- Fifth, 85% to all unitholders, pro rata, 13% to the holders of the
incentive distribution rights, pro rata, and 2% to our general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the second target distribution per unit over
the first target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the first target distribution per
unit that was distributed 85% to the unitholders, pro rata, 13% to the
holders of the incentive distribution rights, pro rata, and 2% to our
general partner for each quarter of our existence;
- Sixth, 75% to all unitholders, pro rata, 23% to the holders of the
incentive distribution rights, pro rata, and 2% to our general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the third target distribution per unit over
the second target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the second target distribution per
unit that was distributed 75% to the unitholders, pro rata, 23% to the
holders of the incentive distribution rights, pro rata and 2% to our
general partner for each quarter of our existence; and
- Thereafter, 50% to all unitholders, pro rata, and 48% to the holders of
the incentive distribution rights, pro rata, and 2% to our general
partner.
41
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clause (3) of the second bullet point above and all of the third bullet point
above will no longer be applicable.
Manner of Adjustment for Losses. Upon our liquidation, we will generally
allocate any loss to the general partner and the unitholders in the following
manner:
- First, 98% to holders of subordinated units, pro rata, and 2% to the
general partner, until the capital accounts of the holders of the
subordinated units have been reduced to zero;
- Second, 98% to the holders of common units, pro rata, and 2% to the
general partner, until the capital accounts of the common unitholders
have been reduced to zero; and
- Thereafter, 100% to the general partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
the first bullet point above will no longer be applicable.
Adjustments to Capital Accounts upon the Issuance of Additional Units. We
will make adjustments to capital accounts upon the issuance of additional units.
In doing so, we will allocate any unrealized and, for tax purposes, unrecognized
gain or loss resulting from the adjustments to the unitholders and the general
partner in the same manner as we allocate gain or loss upon liquidation. In the
event that we make positive adjustments to the capital accounts upon the
issuance of additional units, we will allocate any later negative adjustments to
the capital accounts resulting from the issuance of additional units or upon our
liquidation in a manner that results, to the extent possible, in the general
partner's capital account balances equaling the amount that they would have been
if no earlier positive adjustments to the capital accounts had been made.
42
CASH AVAILABLE FOR DISTRIBUTION
We intend to pay each quarter, to the extent we have sufficient available
cash from operating surplus including working capital borrowings, the minimum
quarterly distribution of $0.50 per unit, or $2.00 per year, on all the common
units and subordinated units. Available cash for any quarter will consist
generally of all cash on hand at the end of that quarter, plus working capital
borrowings after the end of the quarter, as adjusted for reserves. Operating
surplus generally consists of cash on hand at closing, cash generated from
operations after deducting related expenditures and other items, plus working
capital borrowings after the end of the quarter, plus $15.0 million, as adjusted
for reserves. The definitions of available cash and operating surplus are in the
glossary.
The amount of available cash from operating surplus needed to pay the
minimum quarterly distribution for one quarter and for four quarters on the
common units and the subordinated units and to pay the related distribution on
the general partner interest to be outstanding immediately after this offering
are approximately:
ONE QUARTER FOUR QUARTERS
----------- -------------
(IN THOUSANDS)
Common units................................................ $ 6,002.5 $24,010.0
Subordinated units.......................................... 6,002.5 24,010.0
2% general partner interest................................. 245.0 980.0
--------- ---------
Total..................................................... $12,250.0 $49,000.0
========= =========
ESTIMATED AVAILABLE CASH FROM OPERATING SURPLUS DURING 2001 WOULD NOT HAVE
BEEN SUFFICIENT TO PAY THE MINIMUM QUARTERLY DISTRIBUTION ON ALL UNITS.
If we had completed the transactions contemplated in this prospectus on
January 1, 2001, our pro forma available cash from operating surplus generated
during 2001 and the three months ended March 31, 2002 would have been
approximately $44.8 million and $11.4 million, respectively. Pro forma available
cash from operating surplus excludes any expenses associated with the
reversionary interest purchased by Western Pocahontas Properties Limited
Partnership in December 2001 and March 2002 and eliminates general and
administrative expenses in order to reflect only the direct costs and expenses
for our operations. Estimated available cash from operating surplus includes
general and administrative expenses, such as cost of tax return preparation,
accounting support services, annual and quarterly reports to unitholders,
investor relations and registrar and transfer agents fees, of approximately $1.5
million per year that we expect to incur as a result of being a publicly traded
partnership and also includes approximately $2.9 million per year of general and
administrative expenses that we will incur related to our operation of the
properties contributed to us by the WPP Group and Arch Coal. Our estimated
available cash from operating surplus generated during 2001 and the three months
ended March 31, 2002 would have been approximately $40.4 million and $10.3
million, respectively. These amounts would have been sufficient to allow us to
pay the full minimum quarterly distribution on the common units and
approximately 64.8% and 68.7%, respectively, of the minimum quarterly
distribution on the subordinated units during these periods.
Our pro forma excess of revenues over direct costs and expenses comes from
our pro forma financial statements. The pro forma financial statements do not
purport to present our results of operations had the transactions contemplated
in this prospectus actually been completed as of the dates indicated.
Furthermore, available cash from operating surplus as defined in the partnership
agreement is a cash accounting concept, while our pro forma financial statements
have been prepared on an accrual basis. A more complete explanation of the pro
forma adjustments can be found in the Notes to Pro Forma Financial Statements
for Natural Resource Partners. We derived the amounts of estimated available
cash from operating surplus shown above in the manner described in Appendix D.
As a result, the amount of estimated available cash from operating surplus
should only be viewed as a general indication of the
43
amount of available cash from operating surplus that we might have generated had
we been formed in earlier periods.
WE BELIEVE WE WILL HAVE SUFFICIENT AVAILABLE CASH FROM OPERATING SURPLUS
FOLLOWING THE OFFERING TO PAY THE MINIMUM QUARTERLY DISTRIBUTION ON ALL UNITS
THROUGH JUNE 30, 2003.
We believe that we will have sufficient available cash from operating
surplus to allow us to make the full minimum quarterly distribution on all the
common units and subordinated units for each quarter through June 30, 2003.
Our belief is based on a number of general business assumptions that
include:
- we will not be obligated to make any unexpected cash payments associated
with post-mine reclamation, workers' compensation claims or environmental
litigation or cleanup;
- there will be no changes in federal, state or local environmental,
regulatory or tax laws or the enforcement or interpretation thereof that
would materially affect our lessees' operations;
- none of our lessees will have their permits to mine our properties
revoked or suspended;
- we will not experience any unanticipated loss of, or material changes in
the terms of, any material lease with a lessee and our lessees will
perform their obligations under their leases with us;
- our lessees will not experience any labor or industrial disputes or other
disturbances or disputes that would materially affect our operations;
- our lessees will not have any major mine-related accidents or production
interruptions;
- we will not make any acquisitions or dispositions of assets; and
- there will not be any material adverse change in the domestic coal
industry, the electric power generation industry, the domestic steel
industry or in general economic conditions.
In addition to the assumptions above, the financial and operating
assumptions include:
- Our coal royalty revenues will increase to $55.6 million for the twelve
months ending June 30, 2003 from $42.4 million for the year ended
December 31, 2001, an increase of $13.2 million, or 31%, due to a 19%
increase in coal production, from 29.0 million tons to 34.5 million tons.
This increased production will occur on our Appalachia properties and
will be partially offset by marginal decreases on our Illinois Basin and
Northern Powder River Basin properties. Coal prices received by our
lessees will be essentially unchanged from the prices received in late
2001, as they reflect the contractual prices of coal that were negotiated
prior to the increase in the spot price of coal in late 2000 and 2001.
- Production at our Appalachia properties will increase to 27.4 million
tons from 19.6 million tons, an increase of 7.8 million tons, or 39%, for
the following principal reasons:
- Production from the Eunice property will increase 1.4 million tons,
from 1.8 million tons to 3.2 million tons, or 78%, as a longwall
mining operation moves onto our property from an adjacent property in
2002. This increase follows a 1.3 million ton decrease from 2000 to
2001 due primarily to the closure of another longwall mine as a result
of adverse geologic conditions and a portion of the surface mining
being performed on an adjacent property during 2001.
- Production from our Y&O property will increase 557,000 tons, from
853,000 tons to 1,410,000 tons, or 65%, due to the opening of a new
mine in early 2003 by our lessee.
- Production from our West Fork property will increase 2.4 million tons,
from 0.2 million tons to 2.6 million tons, as our lessee moves its
longwall mining operations onto our property from an adjacent property
in mid-2002.
44
- Production from our Welch/Wyoming property will increase 509,000 tons,
from 221,000 tons to 730,000 tons, primarily because the twelve months
ending June 30, 2003 will reflect a full year's operations of a new
continuous miner that began operating in mid-2001.
- Production from our Kingston property will increase 498,000 tons, from
740,000 tons to 1,238,000 tons, or 67%, as a continuous mining
operation that had been on an adjacent property during 2001 moved back
onto our property in mid-2002. In addition, our lessee opened a new
underground mine in early 2002.
- Our Sincell property, which had no production in 2001, will produce
499,000 tons in the twelve months ending June 30, 2003, as our
lessee's operations move onto our property from an adjacent property
in early 2003.
- Production from our Lynch property will increase 0.3 million tons,
from 3.1 million tons to 3.4 million tons, or 9%, due to an
underground mine reaching full production and the commencement of
operations of a new surface mine in early 2003.
- Production from our Lone Mountain property will increase 0.3 million
tons, from 2.8 million tons to 3.1 million tons, or 10%, due to our
lessee adding an additional continuous mining unit to its mining
operation in late 2001.
- Production at our Northern Powder River Basin properties will decline 2.2
million tons, from 6.7 million tons to 4.5 million tons, or 32%. This
decrease is the result of the typical variations that can result from our
checkerboard ownership pattern on our properties in this area.
- Other income will decrease $1.5 million, from $2.5 million to $1.0
million, because other income for 2001 included the recognition of
transportation fees from a lessee that had been previously unreported by
the lessee for several years.
- General and administrative expenses will be $4.4 million and will consist
of general and administrative expenses of approximately $2.9 million per
year related to the WPP Group and Arch Coal Contributed Properties and
annual costs of approximately $1.5 million that we expect to incur as a
result of becoming a publicly traded partnership. These latter expenses
include costs associated with tax return preparation, accounting support
fees, annual and quarterly reports to unitholders, investor relations and
registrar and transfer agent fees.
- We will have no interest expense as we do not anticipate having any
outstanding borrowings during the year ending June 30, 2003. We will,
however, incur a commitment fee of $0.5 million on our bank credit
facility.
- We will incur less than $100,000 in capital expenditures, consistent with
our assumption that we will not make any acquisitions during this period.
If we do make any acquisitions, we will fund them with borrowings under
our credit facility and proceeds from the issuance of our common units. A
portion of any such capital expenditures may be maintenance capital
expenditures, which will be deducted from our pro forma operating surplus
for the period.
While we believe that these assumptions are reasonable in light of
management's current beliefs concerning future events, the assumptions
underlying the projections are inherently uncertain and are subject to
significant business, economic, regulatory and competitive risks and
uncertainties that could cause actual results to differ materially from those we
anticipate. If our assumptions are not realized, the actual available cash from
operating surplus that we generate could be substantially less than that
currently expected and could, therefore, be insufficient to permit us to make
the full minimum quarterly distribution on all units, in which event the market
price of the common units may decline materially. Consequently, the statement
that we believe that we will have sufficient available cash from operating
surplus to pay the full minimum quarterly distribution on all units for each
quarter through June 30, 2003 should not be regarded as a representation by us
or the underwriters or any other person that we will make such a distribution.
When reading this section, you should keep in mind the risk factors and other
cautionary statements under the heading "Risk Factors" and elsewhere in this
prospectus.
45
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following tables show selected historical financial and operating data
for Western Pocahontas Properties Limited Partnership, Great Northern Properties
Limited Partnership, New Gauley Coal Corporation and the Arch Coal Contributed
Properties, in each case for the periods and as of the dates indicated. We
derived the selected historical financial data for the WPP Group as of and for
the years ended December 31, 1997, 1998, 1999, 2000 and 2001 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 and 2001 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, 1997 and 1998 from the accounting records of Arch Coal. We
derived the selected historical financial data for the WPP Group and the Arch
Coal Contributed Properties for the three months ended March 31, 2001 and 2002
from the unaudited financial statements of the WPP Group and the Arch Coal
Contributed Properties. In the opinion of these entities, they have prepared the
unaudited financial statements on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of this information.
We derived the information in the following tables from, and that
information should be read together with and is qualified in its entirety by
reference to, the historical financial statements and the accompanying notes
included elsewhere in this prospectus. The tables should be read together with
"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 are being contributed to us, some assets and
liabilities are being retained by the WPP Group.
46
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
(IN THOUSANDS, EXCEPT PRICE DATA)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- ------- --------
(UNAUDITED)
INCOME STATEMENT DATA:
REVENUES:
Coal royalties...................... $ 15,475 $ 20,412 $ 15,754 $ 11,585 $ 15,458 $ 2,982 $ 4,779
Timber royalties.................... 3,475 3,738 3,770 4,236 3,691 1,697 623
Gain on sale of property............ 75 70 205 3,982(a) 3,125(a) 5 61
Property taxes...................... 1,264 1,538 1,163 1,404 1,184 572 587
Other............................... 1,175 1,416 1,293 1,342 2,512 313 211
-------- -------- -------- -------- -------- ------- --------
Total revenues...................... 21,464 27,174 22,185 22,549 25,970 5,569 6,261
EXPENSES:
General and administrative.......... 2,977 3,092 3,161 3,009 2,981 812 823
Taxes other than income............. 1,596 1,858 1,447 1,701 1,457 665 697
Depreciation, depletion and
amortization...................... 1,708 1,996 1,270 1,168 1,369 327 707
-------- -------- -------- -------- -------- ------- --------
Total expenses...................... 6,281 6,946 5,878 5,878 5,807 1,804 2,227
-------- -------- -------- -------- -------- ------- --------
Income from operations................ 15,183 20,228 16,307 16,671 20,163 3,765 4,034
Other income (expense):
Interest expense.................... (4,894) (5,505) (4,353) (4,167) (3,966) (1,011) (1,322)
Interest income..................... 225 292 254 321 270 87 35
Reversionary interest............... -- -- -- -- (1,924)(b) -- (561)(b)
-------- -------- -------- -------- -------- ------- --------
Net income............................ $ 10,514 $ 15,015 $ 12,208 $ 12,825 $ 14,543 $ 2,841 $ 2,186
======== ======== ======== ======== ======== ======= ========
BALANCE SHEET DATA (AT PERIOD END):
Total assets.......................... $ 79,521 $ 78,297 $ 76,089 $ 76,510 $ 88,224 $75,648 $124,981
Deferred revenue...................... 8,512 7,191 7,301 7,468 7,916 7,769 7,717
Long-term debt........................ 33,048 55,979 53,431 50,681 47,716 49,961 91,939
Total liabilities..................... 50,017 66,378 64,038 61,584 68,055 60,981 103,126
Partners' capital..................... 29,504 11,919 12,051 14,926 20,169 14,667 21,885
CASH FLOW DATA:
Net cash flow provided by (used in):
Operating activities................ $ 12,186 $ 16,210 $ 13,838 $ 10,670 $ 13,056 $ 3,831 $ 884
Investing activities................ 48 (46) 188 3,976 2,685 (20) (42,914)
Financing activities................ (12,607) (15,472) (14,645) (14,630) (15,434) (3,836) 43,589(b)
OTHER DATA:
Royalty coal tons produced by
lessees............................. 8,681 10,568 9,799 7,422 10,309 2,336 2,677
Average gross coal royalty per ton.... $ 1.78 $ 1.93 $ 1.61 $ 1.56 $ 1.50 $ 1.27 $ 1.79
OTHER FINANCIAL DATA:
Capital expenditures.................. 48 109 23 25 8,974(b) 25 35,127(b)
---------------
(a) Western Pocahontas Properties Limited Partnership sold surface land at a
gain of $4.0 million and $3.1 million in 2000 and 2001, respectively.
(b) The previous owner of Western Pocahontas Properties Limited Partnership's
coal and timber properties retained a reversionary interest in those
properties whereby it received either a 25% or 28% interest in the net
revenues of the properties after July 1, 2001. Western Pocahontas Properties
Limited Partnership accrued approximately $1.9 million related to the
reversionary interest in 2001 and $561,000 in the three months ended March
31, 2002. In December 2001, Western Pocahontas Properties Limited
Partnership purchased the reversionary interest related to its Kentucky
properties for approximately $8.9 million. In March 2002, Western Pocahontas
Properties Limited Partnership purchased the remaining portion of the
reversionary interest for approximately $35.1 million. These purchases were
financed with a $45 million loan.
47
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
(IN THOUSANDS, EXCEPT PRICE DATA)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -----------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
INCOME STATEMENT DATA:
REVENUES:
Coal royalties................................ $ 7,421 $ 8,684 $11,688 $ 7,966 $ 7,457 $ 2,110 $ 1,444
Lease and easement income..................... 568 490 480 583 787 85 139
Gain on sale of property...................... 1,845 930 12 709 439 -- --
Property taxes................................ 89 82 81 87 88 -- --
Other......................................... 120 101 73 45 31 -- 93
------- ------- ------- ------- ------- ------- -------
Total revenues................................ 10,043 10,287 12,334 9,390 8,802 2,195 1,676
EXPENSES:
General and administrative.................... 698 488 574 481 611 133 130
Taxes other than income....................... 104 100 98 107 110 4 5
Depreciation, depletion and amortization...... 1,971 2,178 2,725 2,244 2,144 689 696
------- ------- ------- ------- ------- ------- -------
Total expenses................................ 2,773 2,766 3,397 2,832 2,865 826 831
------- ------- ------- ------- ------- ------- -------
Income from operations.......................... 7,270 7,521 8,937 6,558 5,937 1,369 845
Other income (expense):
Interest expense.............................. (6,153) (5,450) (4,999) (4,657) (3,652) (1,072) (562)
Interest income............................... 201 30 63 376 307 108 39
------- ------- ------- ------- ------- ------- -------
Net income before extraordinary item............ 1,318 2,101 4,001 2,277 2,592 405 322
Loss on early extinguishment of debt.......... -- -- (2,678)(a) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income...................................... $ 1,318 $ 2,101 $ 1,323 $ 2,277 $ 2,592 $ 405 $ 322
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT PERIOD END):
Total assets.................................... $69,177 $68,148 $69,616 $70,514 $70,236 $69,821 $69,454
Deferred revenue................................ 1,368 1,783 1,207 1,297 1,034 1,547 1,029
Long-term debt.................................. 54,391 51,115 50,125 48,625 47,125 48,250 46,750
Total liabilities............................... 62,492 59,362 53,508 52,129 50,110 51,882 49,667
Partners' capital............................... 6,685 8,786 16,108(a) 18,385 20,126 17,939 19,787
CASH FLOW DATA:
Net cash flow provided by (used in):
Operating activities.......................... $ 54 $ 3,522 $ 3,150 $ 5,731 $ 3,677 $ 1,030 $ 1,513
Investing activities.......................... 4,029 1,102 2 726 475 -- --
Financing activities.......................... (4,416) (3,984) (3,136) (6,205) (4,564) (1,882) (1,829)
OTHER DATA:
Royalty coal tons produced by lessees........... 8,896 9,744 11,746 9,172 8,509 2,270 1,870
Average gross coal royalty per ton.............. $ 0.83 $ 0.89 $ 1.00 $ 0.87 $ 0.88 $ 0.97 $ 0.77
OTHER FINANCIAL DATA:
Capital expenditures............................ -- -- -- -- -- -- --
---------------
(a) Great Northern Properties Limited Partnership paid a prepayment penalty and
expensed deferred financing costs related to the retirement of $57.0 million
of debt in 1999. These expenses were classified as an extraordinary loss on
the early extinguishment of debt. Simultaneously with the debt
extinguishment, Great Northern Properties Limited Partnership borrowed $52.0
million and the partners contributed $6.0 million to the partnership.
48
NEW GAULEY COAL CORPORATION
(IN THOUSANDS, EXCEPT PRICE DATA)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- ---------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------ ------- ------ ------
(UNAUDITED)
INCOME STATEMENT DATA:
REVENUES:
Coal royalties................................. $ 327 $ 1,429 $ 1,332 $ 955 $ 1,609 $ 413 $ 528
Gain on sale of property....................... -- -- -- -- 25 -- --
Property taxes................................. 10 23 26 25 28 -- --
Other.......................................... 4 65 75 32 61 28 --
------- ------- ------- ------ ------- ------ ------
Total revenues................................. 341 1,517 1,433 1,012 1,723 441 528
EXPENSES:
General and administrative..................... 17 30 27 32 41 8 19
Taxes other than income........................ 55 62 54 48 45 -- 12
Depreciation, depletion and amortization....... 34 160 214 132 212 53 32
------- ------- ------- ------ ------- ------ ------
Total expenses................................. 106 252 295 212 298 61 63
------- ------- ------- ------ ------- ------ ------
Income from operations........................... 235 1,265 1,138 800 1,425 380 465
Other income (expense):
Interest expense............................... (270) (175) (145) (139) (132) (34) (32)
Interest income................................ 26 6 -- -- 15 -- 8
Reversionary interest(a)....................... -- -- -- -- (85) -- (34)
------- ------- ------- ------ ------- ------ ------
Net income....................................... $ (9) $ 1,096 $ 993 $ 661 $ 1,223 $ 346 $ 407
======= ======= ======= ====== ======= ====== ======
BALANCE SHEET DATA (AT PERIOD END):
Total assets..................................... $ 4,599 $ 4,925 $ 4,636 $4,553 $ 4,625 $4,813 $4,905
Long-term debt................................... 1,964 1,866 1,781 1,682 1,584 1,658 1,558
Deferred revenue................................. 4,589 4,189 3,902 3,747 3,601 298 3,459
Total liabilities................................ 6,438 6,169 5,787 5,542 5,391 5,457 5,264
Stockholders' deficit............................ (1,839) (1,244) (1,151) (989) (766) (644) (359)
CASH FLOW DATA:
Net cash flow provided by (used in):
Operating activities........................... $ 316 $ 600 $ 900 $ 604 $ 1,323 $ 305 $ 306
Investing activities........................... (21) -- (67) -- (175) -- --
Financing activities........................... (505) (370) (979) (591) (1,091) (23) (24)
OTHER DATA:
Royalty coal tons produced by lessees............ 118 522 572 356 718 194 178
Average gross coal royalty per ton............... $ 2.77 $ 2.74 $ 2.33 $ 2.68 $ 2.24 $ 2.13 $ 2.97
OTHER FINANCIAL DATA:
Capital expenditures............................. 21 -- 67 -- -- -- --
---------------
(a) The previous owner of New Gauley Coal's Corporation's Alabama property
retained a 25% interest in the net revenue of the property after July 1,
2001. New Gauley Coal Corporation accrued approximately $85,000 related to
the reversionary interest in 2001 and $34,000 related to the first quarter
of 2002.
49
ARCH COAL CONTRIBUTED PROPERTIES
(IN THOUSANDS, EXCEPT PRICE DATA)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- -----------------
1997 1998 1999 2000 2001 2001 2002
----------- ----------- -------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA:
REVENUES:
Coal royalties.......................... $ 9,306 $ 11,379 $ 13,193 $16,152 $18,415 $ 4,642 $ 4,351
Other royalties......................... 971 954 983 907 1,363 383 448
Property taxes.......................... 975 1,239 1,173 1,204 1,033 258 269
-------- -------- -------- ------- ------- ------- -------
Total revenues.......................... 11,252 13,572 15,349 18,263 20,811 5,283 5,068
DIRECT COSTS AND EXPENSES:
Depletion............................... 3,095 4,769 5,625 5,395 6,382 1,561 1,469
Property taxes.......................... 975 1,239 1,173 1,204 1,033 258 269
Other expense........................... -- -- -- 18 283 83 197
Write-down of impaired assets........... -- -- 65,229(a) -- -- -- --
-------- -------- -------- ------- ------- ------- -------
Total expenses.......................... 4,070 6,008 72,027 6,617 7,698 1,902 1,935
-------- -------- -------- ------- ------- ------- -------
Excess (deficit) of revenues over direct
costs and expenses...................... $ 7,182 $ 7,564 $(56,678) $11,646 $13,113 $ 3,381 $ 3,133
======== ======== ======== ======= ======= ======= =======
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................. $112,562 $107,932 $102,168 $97,230 $90,733 $95,279 $88,812
Deferred revenue.......................... 7,857 8,971 10,078 10,035 10,409 9,977 9,981
Total liabilities......................... 8,583 9,897 10,937 10,954 11,180 10,300 10,262
Net assets purchased...................... 103,979 98,035 91,231 86,276 79,553 84,979 78,550
CASH FLOW DATA:
Direct cash flow from contributed
properties.............................. (b) $ 13,508 $ 15,355 $16,601 $19,836 $ 4,678 $ 4,136
OTHER DATA:
Royalty coal tons produced by lessees..... 4,634 6,565 7,702 9,862 11,281 2,886 2,627
Average gross coal royalty per ton........ $ 2.01 $ 1.73 $ 1.71 $ 1.64 $ 1.63 $ 1.61 $ 1.66
OTHER FINANCIAL DATA:
Capital Expenditures...................... -- -- -- -- -- -- --
---------------
(a) During 1999, pursuant to SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the carrying
value of certain coal reserves was written down to fair value resulting in a
non-cash impairment charge of $65.2 million.
(b) Cash flow information for 1997 is not available.
50
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 and pro forma
financial statements and notes thereto included elsewhere in this prospectus.
For more detailed information regarding the basis of presentation for the
following financial information, see the notes to the historical and pro forma
financial statements.
After the Introduction, there is a separate section for each of Western
Pocahontas Properties Limited Partnership, Great Northern Properties Limited
Partnership, New Gauley Coal Corporation and for 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.
This discussion includes certain forward-looking statements. You should not
put undue reliance on any forward-looking statements. When considering
forward-looking statements, we urge you to review the risk factors set forth in
"Risk Factors" beginning on page 14. These and other risks could cause our
actual results to differ materially from those contained in any forward-looking
statement. Please read "Forward Looking Statements."
INTRODUCTION
We are a limited partnership recently formed by the WPP Group, the largest
owner of coal reserves in the United States other than the U.S. government, and
Arch Coal, Inc., the second largest U.S. coal producer. 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, 2001, we controlled approximately
1.15 billion tons of proven and probable coal reserves in eight states. In 2001,
our lessees produced 29 million tons of coal from our properties and our total
revenues were $47.2 million on a pro forma basis, including coal royalty
revenues of $42.4 million.
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 royalty payments are based on the higher of a percentage
of the gross sales price or a fixed price per ton of coal sold, subject to a
minimum payment. Our reserves are located on 45 separate properties and are
subject to 61 leases with 31 lessees. In 2001, approximately 57% of the coal
produced from our properties came from underground mines and 43% came from
surface mines. As of December 31, 2001, approximately 65% 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.
Approximately 12% of our lessees' 2001 coal production was metallurgical coal,
which our lessees sold to steel companies in the Eastern United States, South
America, Europe and Asia.
The WPP Group retained coal reserve properties that are leased to third
parties but that are short-lived, that are subject to leases that contain
uneconomic terms or that are experiencing permitting problems. The WPP Group has
retained other unleased coal reserve properties, surface lands and timberlands
that generated approximately $5.7 million, $10.5 million, and $9.9 million of
revenue for the years ended 1999, 2000 and 2001, respectively. The historical
financial statements and related discussions that follow for the members of the
WPP Group include results of operations related to these retained properties.
The historical financial statements for the WPP Group do not reflect the
historical results that would have been obtained if only the contributed
properties had been presented.
The Arch Coal Contributed Properties historical financial statements
include only properties that are being contributed to us. The Arch Coal
Contributed Properties is not a legal entity and, except for revenues earned
from the properties and certain direct costs and expenses of the properties, no
separate financial information was maintained or is presented.
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"
51
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 effect
of these lower spot prices on our results of operations for the near future will
be limited because our lessees are receiving contractual prices for much of
their production. If these lower spot prices continue, we expect our per ton
revenues from coal royalties and our lessees' production to decline, which will
reduce our coal royalty revenues.
During the first quarter of 2002, in response to lower spot coal prices, a
number of producers announced reductions in anticipated coal production at
various mines, some of which are on our property. The companies announcing
reductions include Arch Coal, Massey Energy, CONSOL Energy and Peabody Energy.
Additionally, we are aware of proposed but unannounced reductions by some of our
smaller lessees. However, to date, production on our properties has not
materially declined and our overall revenues have not been materially affected
by these announced reductions. If these production reductions are implemented on
our properties and are sustained, our revenues may be substantially affected.
During 2001, approximately 14% 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 due to its
higher price. If they are unable to sell metallurgical coal, these mines may not
be economically viable and may close.
In addition to coal royalty revenue, we will generate nominal revenue from
the royalty 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. We will not have any
timber revenues in the future because the WPP Group has retained all of the
timber on our properties and the Arch Coal Contributed Properties does not
include any timber assets.
Most lessees are required to reimburse us for property taxes we pay on the
leased property. These property tax reimbursements are shown as revenue on the
historical financial statements included in this prospectus. 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 is retaining 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 do not maintain stand-alone corporate
treasury, legal, tax, human resources, general administration or other similar
corporate support functions. Corporate general and administrative expenses have
not been previously allocated to the Arch Coal Contributed Properties because
there was not sufficient information to develop a reasonable cost allocation. In
the future, we will reimburse our general partner and its affiliates for direct
and indirect expenses they incur on our behalf, including general and
administrative expenses.
Depreciation, depletion and amortization consists primarily of depletion on
the coal properties. Depletion of coal reserve properties is calculated on a
unit-of-production basis and thus closely correlates to the amount of coal
production and coal royalty revenue for the period.
52
RESULTS OF OPERATIONS
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
Three months ended March 31, 2002 compared with three months ended March 31,
2001
Revenues: Combined revenues for the three months ended March 31, 2002 were
$6.3 million compared to $5.6 million in the three months ended March 31, 2001,
an increase of $0.7 million, or 12%.
Coal royalty revenues in the three months ended March 31, 2002 were $4.8
million compared to $3.0 million in the three months ended March 31, 2001, an
increase of $1.8 million, or 60%. Over these same periods, production increased
by 340,000 tons, or 15%, from 2.3 million tons to 2.7 million tons. The
increases in production and coal royalties were primarily due to:
- Eastern Kentucky: Production from the Evans-Laviers property increased
120,000 tons from 740,000 tons to 860,000 tons, which resulted in
increased revenues of $250,000. This increase was due to the addition of
another section to an underground mine. On the Chesapeake Minerals
property, production increased by 110,000 tons in the three months ended
March 31, 2002, resulting in a royalty revenue increase of $250,000. This
increase was due to a reopening of a mine after the purchase of the mine
by a new owner.
- Southern West Virginia: Production from the Eunice property increased by
250,000 tons from 490,000 tons to 740,000 tons, resulting in increased
royalty revenues of $733,000. This increase was due to a longwall mining
operation moving back onto the property and also to a higher sales price
for the coal. Additionally, on the West Fork property, production
increased by 106,000 tons from the three months ended March 31, 2001,
resulting in increased royalty revenues of $200,000. This increase was
due to continuing development work as a result of a longwall mine
approaching the property. Also, on the Wyoming property, production
increased by 128,000 tons from the three months ended March 31, 2001,
resulting in increased royalty revenue of $287,000. This increase was due
to a new mine opening on the property. These increases were partially
offset by a decrease in production at the Rockhouse Fork property of
120,000 tons, which led to a royalty revenue reduction of $316,000. This
reduction was due to problems with the contract miner.
- Indiana: Production from the Hocking-Wolford/Cummings property decreased
by 210,000 tons from 392,000 tons to 182,000 tons, resulting in a
decrease in royalty revenue of $248,000. This decrease was due to a shift
in mining to adjacent non-owned properties.
Timber revenues decreased by $1.1 million from $1.7 million in the three
months ended March 31, 2001 to $600,000 in the three months ended March 31,
2002. This decrease was due to a greater than normal harvest in the three months
ended March 31, 2001 and a smaller harvest in the three months ended March 31,
2002 due to timber markets.
Expenses: Aggregate expenses for the three months ended March 31, 2002
were $2.2 million compared to $1.8 million for the three months ended March 31,
2001, an increase of $423,000. This increase is primarily due to increased
depletion due to increased production.
Other Income (Expense): Interest expense was $1.3 million for the three
months ended March 31, 2002 compared to $1.0 million for the three months ended
March 31, 2001. This increase was due to increased debt arising from the
acquisition of the CSX reversionary interest. Other expense included $561,000 in
reversionary interest expense in the three months ended March 31, 2002.
Net Income: Net income was $2.2 million for the three months ended March
31, 2002 compared to $2.8 million for the three months ended March 31, 2001, a
decrease of $655,000, or 23%. This decrease was primarily due to the CSX
reversionary interest.
Year ended December 31, 2001 compared with year ended December 31, 2000
Revenues: Combined revenues in 2001 were $26.0 million compared to $22.5
million in 2000, an increase of $3.5 million, or 15%.
53
Coal royalty revenues in 2001 were $15.5 million compared to $11.6 million
in 2000, an increase of $3.9 million, or 33%. Over these same periods,
production increased by 2.9 million tons, or 39%, from 7.4 million tons to 10.3
million tons. The increases in production and coal royalties were primarily due
to:
- Eastern Kentucky: Production from the Evans-Laviers property increased
2.6 million tons, from 1.2 million tons to 3.8 million tons, which
resulted in increased royalty revenues of $3.8 million. This increase was
primarily due to the opening of a new deep mine late in 2000, a large
underground mine reaching full production in 2001 and the reopening of a
temporarily idled surface and highwall mine in July 2001 at a higher
royalty rate. On the Chesapeake Mineral property, production increased by
218,000 tons in 2001 due to the reopening of the mine under new
ownership. This was partially offset by the reduction of production at
another lease on this property. This resulted in a royalty revenue
increase of $269,000.
- Southern West Virginia: Production from the Eunice property decreased by
1.3 million tons, from 3.1 million tons to 1.8 million tons, resulting in
a decrease in royalty revenues of $1.1 million. This decrease was due
primarily to the closure of a longwall mine as a result of adverse
geologic conditions and surface mining being performed on adjacent
property during the year. This decrease in production was partially
offset by an increase in production from the Dorothy-Sarita property of
301,000 tons, from 351,000 tons to 652,000 tons, that resulted in
increased royalty revenues of $400,000. This increase in production was
due to the addition of a surface and highwall mine. On the Rockhouse Fork
property, production decreased by 148,000 tons, from 470,000 tons to
322,000 tons, that reduced royalty revenues by $348,000. This decrease in
production was due to a decision to mine in a thinner part of the coal
seam, geologic conditions and a change in contractors by the lessee.
Timber revenues decreased to $3.7 million in 2001 from $4.2 million in
2000, a decrease of $0.5 million, or 13%. The decrease was due to a one-time
sale of timber in 2000 for $700,000 on a parcel in Northern Appalachia, which
contained 1.5 million board feet of timber.
Gain on sale of property was $3.1 million in 2001 and $4.0 million in 2000.
These gains were related to the sale of 1,928 and 1,391 acres of land in 2001
and 2000, respectively.
Other revenues increased to $2.5 million in 2001 from $1.3 million in 2000,
an increase of $1.2 million, or 87%. This increase was due to a determination
that a lessee was required to pay transportation fees that were previously
unreported by the lessee for several years.
Expenses: Aggregate expenses for 2001 were $5.8 million compared to $5.9
million for 2000, a decrease of $0.1 million or 1%, primarily due to a decrease
in property taxes that was partially offset by increased depletion attributed to
higher coal production.
Other Income (Expense): Interest expense was $4.0 million for 2001
compared to $4.2 million for 2000, a decrease of $0.2 million, or 5%. This
decrease was due to scheduled principal reductions.
Reversionary Interest: The previous owner of Western Pocahontas Properties
Limited Partnership's coal and timber properties (CSX Corporation and certain of
its affiliates) retained a reversionary interest in those properties whereby it
received either a 25% or 28% interest in the properties and the net revenues of
the properties after July 1, 2001, and in the net proceeds of any property sale
occurring prior to July 1, 2001. In 2001, we accrued $1.9 million related to the
reversionary interest.
Net Income: Net income was $14.5 million in 2001 compared to $12.8 million
in 2000, an increase of $1.7 million or 13%. This increase was primarily due to
increased coal production by our lessees and correspondingly higher royalty
payments.
Year ended December 31, 2000 compared with year ended December 31, 1999
Revenues: Combined revenues in 2000 were $22.5 million compared to $22.2
million in 1999, an increase of $0.3 million, or 2%.
54
Coal royalty revenues in 2000 were $11.6 million compared to $15.8 million
in 1999, a decrease of $4.2 million, or 26%. Over these same periods, production
decreased by 2.4 million tons, or 24%, from 9.8 million tons to 7.4 million
tons. The decreases in production and coal royalties were primarily due to:
- Eastern Kentucky: Production from the Evans-Laviers property decreased
0.6 million tons, from 1.8 million tons to 1.2 million tons, which
resulted in decreased royalty revenue of $0.8 million. The decrease
resulted primarily from a sublessee losing a major sales contract in
February 2000 and a resulting decision to temporarily idle the mine.
- Southern West Virginia: Production from the Dorothy-Sarita property
decreased by 564,000 tons, from 915,000 tons to 351,000 tons, which
resulted in decreased royalty revenue of $783,000. The decrease resulted
primarily from the closing of a deep mine due to exhaustion of reserves
in the seam being mined. This decrease in production was partially offset
by an increase in certain royalty rates. On the Eunice property,
production was nearly constant but royalty revenue decreased $465,000
because of a decrease in the sales price of the coal and a shift in
production to mining methods that yielded a lower royalty rate. On the
Y&O property, production decreased 515,000 tons, from 1,249,000 tons to
734,000 tons, which resulted in decreased royalty revenue of $1.3
million. This decrease was primarily due to the lessee's longwall mine
ceasing operations in early 2000 upon exhaustion of reserves in the seam
being mined and was partially offset by production increases at two other
leases on this property. On the Rockhouse Fork property, production
decreased 100,000 tons from 570,000 tons to 470,000 tons, which resulted
in a royalty revenue decrease of $228,000. This decrease was due to the a
thinning coal seam and other adverse geologic conditions.
Timber revenues increased to $4.2 million in 2000 from $3.8 million in
1999, an increase of $0.4 million, or 12%. This increase was primarily
attributable to higher rates under a renegotiated contract starting in January
2000 with our principal timber operator in Southern West Virginia.
Gain on sale of property was $4.0 million in 2000 and $0.2 million in 1999.
The gain in 2000 was the result of the sale of 1,391 acres of surface land.
Other Income (Expense): Interest expense was $4.2 million for 2000
compared to $4.4 million for 1999, a decrease of $0.2 million, or 4%, resulting
from principal reductions.
Net Income: Net income was $12.8 million for 2000 compared to $12.2
million for 1999, an increase of $0.6 million, or 5%. This increase primarily
resulted from a gain on sale of property and was partially offset by decreased
coal royalty payments.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
Three months ended March 31, 2002 compared with three months ended March 31,
2001
Revenues: Combined revenues in the three months ended March 31, 2002 were
$1.7 million compared to $2.2 million in the three months ended March 31, 2001,
a decrease of $0.5 million, or 24%. Coal royalty revenues in the three months
ended March 31, 2002 were $1.4 million compared to $2.1 million in the three
months ended March 31, 2001, a decrease of $0.7 million, or 32%. Over these
periods, production decreased by 1.0 million tons, from 2.9 million tons to 1.9
million tons, or 35%. These decreases in production and coal royalties were
primarily due to:
- Production from the Western Energy property decreased by 1.0 million tons
from 1.8 million tons to 0.8 million tons, which resulted in decreased
coal royalty revenues of $1.0 million. This decrease in production was
the result of the typical variations which can result from the
checkerboard ownership pattern in this mine. This ownership pattern
causes mining operations to periodically move from the property to
contiguous non-owned property and back again.
Other Income (Expense): Interest expense for the three months ended March
31, 2002 was $562,000 compared to $1,072,000 for the three months ended March
31, 2001, a decrease of $510,000, or 48%. This was due to the reduction in the
principal balance of debt, combined with a decrease in interest
55
rates from an average of 9.39% in the three months ended March 31, 2001 to 4.70%
in the three months ended March 31, 2002.
Net Income: Net income was $322,000 for the three months ended March 31,
2002 compared to $405,000 for the three months ended March 31, 2001, a decrease
of $83,000, or 21%. This decrease primarily resulted from a reduction in coal
royalty revenue partially offset by a reduction in interest expense.
Year ended December 31, 2001 compared with year ended December 31, 2000
Revenues: Combined revenues in 2001 were $8.8 million compared to $9.4
million in 2000, a decrease of $0.6 million, or 6%. Coal royalty revenues in
2001 were $7.5 million compared to $8.0 million in 2000, a decrease of $0.5
million, or 6%. Over these periods, production decreased by 663,000 tons, or 7%,
from 9.2 million tons to 8.5 million tons. These decreases in production and
coal royalties were primarily due to:
- Production from the Western Energy property decreased by 783,000 tons,
from 5.7 million tons to 4.9 million tons, which resulted in decreased
royalty revenues of $1.1 million. This decrease in production was the
result of the typical variations which can result from the checkerboard
ownership pattern in this mine. This ownership pattern causes mining
operations to periodically move from the property to contiguous non-owned
property and back again.
- Production from the Big Sky property increased by 0.4 million tons, from
1.4 million to 1.8 million tons, which resulted in increased royalty
revenues of $0.4 million. These increases were due to the favorable
location of mining operations relative to the checkerboard ownership
pattern.
Lease and easement income in 2001 was $787,000 compared to $583,000 in
2000. This increase was primarily attributable to surface use payments relating
to increased mining on surface property owned by us.
Gain on sale of property was $439,000 in 2001.
Other Income (Expense): Interest expense was $3.7 million for 2001
compared to $4.7 million for 2000, a decrease of $1.0 million, or 21%. This
decrease primarily resulted from a reduction in the outstanding principal
balance of debt combined with a reduction in interest rates from an average of
9.3% in 2000 to 7.5% in 2001.
Net Income: Net income was $2.6 million for 2001 compared to $2.3 million
for 2000, an increase of $0.3 million, or 14%. This increase primarily resulted
from a reduction in interest expense that was partially offset by lower coal
royalties.
Year ended December 31, 2000 compared with year ended December 31, 1999
Revenues: Combined revenues in 2000 were $9.4 million compared to $12.3
million in 1999, a decrease of $2.9 million, or 24%. Coal royalty revenues in
2000 were $8.0 million compared to $11.7 million in 1999, a decrease of $3.7
million, or 32%. Over these same periods, production decreased by 2.5 million
tons, or 22%, from 11.7 million tons to 9.2 million tons. The decrease in
production and coal royalties were primarily due to:
- Production from the Western Energy property decreased in 2000 by 1.6
million tons, from 7.3 million tons to 5.7 million tons, and the contract
price per ton decreased as a result of a price reopener provision, which
resulted in decreased royalty revenues of $2.2 million. This decrease in
production was the result of the typical variations which can result from
the checkerboard ownership pattern in the mine.
- Production from the Big Sky property decreased in 2000 by 1.4 million
tons, from 2.8 million tons to 1.4 million tons, which resulted in
decreased royalty revenues of $1.4 million. This decrease in
56
production was primarily due to the lessee losing a significant sales
contract at the beginning of 2000.
Gain on sale of property was $709,000 in 2000 resulting from the sale of
surface land in Montana.
Lease and easement income in 2000 was $583,000 compared to $480,000 in
1999. This increase was primarily attributable to surface use payments from
increased mining on surface property owned by us.
Expenses: Aggregate expenses for 2000 were $2.8 million compared to $3.4
million for 1999, a decrease of $0.6 million, or 17%. The decrease in expenses
in 2000 primarily related to the decrease in depletion associated with the
reduction in production during the period.
Other Income (Expense): Interest expense was $4.7 million for 2000
compared to $5.0 million for 1999, an increase of $0.3 million, or 7%. This
increase was due to an increase in interest rates, which was partially offset by
the reduction in the principal balance.
Interest income increased to $376,000 for 2000 from $63,000 in 1999, due to
cash placed in restricted accounts as required under the loan agreement.
Extraordinary Item: In 1999, there was a one-time loss of $2.7 million
relating to the early extinguishment of debt.
Net Income: Net income was $2.3 million for 2000 compared to $1.3 million
for 1999, an increase of $1.0 million, or 72%. This increase was primarily due
to the extraordinary item in 1999, partially offset by lower coal revenues in
2000.
NEW GAULEY COAL CORPORATION
Three months ended March 31, 2002 compared with three months ended March 31,
2001
Revenues: Combined revenues in the three months ended March 31, 2002 were
$528,000 compared to $441,000 in the three months ended March 31, 2001, an
increase of $87,000, or 20%. Coal royalty revenues in the three months ended
March 31, 2002 were $528,000 compared to $413,000 in the three months ended
March 31, 2001, an increase of $115,000, or 28%. Over the same period production
decreased by 16,000 tons, or 8%, from 194,000 tons to 178,000 tons. This
increase in coal royalties and the decrease in production were primarily due to:
- Production on the Alabama property increased by 14,000 tons, which
resulted in increased royalty revenues of $72,000, due partially to an
increase in average sales. Additionally, approximately $68,000 was
recognized as revenue as a result of royalty recoupment.
- Production on the West Virginia property decreased by 30,000 tons, which
resulted in decreased royalty revenues of $39,000.
Net Income: Net income was $407,000 for the three months ended March 31,
2002 compared to $346,000 for the three months ended March 31, 2001, an increase
of $61,000, or 18%. This increase was primarily due to increased coal royalty
revenues.
Year ended December 31, 2001 compared with year ended December 31, 2000
Revenues: Combined revenues in 2001 were $1.7 million compared to $1.0
million in 2000, an increase of $0.7 million, or 70%. Coal royalty revenues in
2001 were $1.6 million compared to $1.0 million in 2000, an increase of $0.6
million, or 68%. Over these same periods, production increased by 362,000 tons,
or 102%, from 356,000 tons to 718,000 tons. This increase in production and coal
royalties was primarily due to:
- Production from the West Virginia property increased by 292,000 tons,
from 149,000 tons to 441,000 tons, which resulted in increased royalty
revenues of $687,000. This increase resulted from the lessee's mining
operations moving onto New Gauley Coal Corporation's property from
adjacent reserves and an increase in the royalty rate.
57
Expenses: Aggregate expenses for 2001 were $298,000 compared to $212,000
for 2000, an increase of $86,000, or 41%. This increase was due primarily to
increased depletion associated with the increased production during the period.
Net Income: Net income was $1.2 million for 2001 compared to $0.7 million
for 2000, an increase of $0.5 million, or 85%. This increase was primarily due
to increased coal royalty revenues.
Year ended December 31, 2000 compared with year ended December 31, 1999
Revenues: Combined revenues in 2000 were $1.0 million compared to $1.4
million in 1999, a decrease of $0.4 million, or 29%. Coal royalty revenues in
2000 were $1.0 million compared to $1.3 million in 1999, a decrease of $0.3
million, or 28%. Over these same periods, production decreased by 216,000 tons,
or 38%, from 572,000 tons to 356,000 tons. This decrease in production and coal
royalties was primarily due to:
- Production from the West Virginia property decreased by 100,000 tons,
from 249,000 tons to 149,000 tons, which resulted in decreased royalty
revenues of $70,000. This decrease was caused by the lessee moving its
mining operations to adjacent reserves.
- Production from the Alabama property decreased by 117,000 tons, from
323,000 tons to 206,000 tons, which resulted in decreased royalty
revenues of $150,000. This decrease resulted from the lessee's decision
to decrease sales and production due to depressed market prices.
Expenses: Aggregate expenses for 2000 were $212,000 compared to $295,000
for 1999, a decrease of $83,000, or 28%. This decrease was primarily related to
a decrease in depletion associated with reduced production during the period.
Net Income: Net income was $661,000 for 2000 compared to $993,000 for
1999, a decrease of $332,000, or 33%. This decrease was primarily due to a
reduction in coal royalties.
ARCH COAL CONTRIBUTED PROPERTIES
Three months ended March 31, 2002 compared with three months ended March 31,
2001
Revenues: Revenues in the three months ended March 31, 2002 were $5.1
million compared with $5.3 million in the three months ended March 31, 2001, a
decrease of $0.2 million, or 4%.
Coal royalty revenues in the three months ended March 31, 2002 were $4.4
million compared to $4.6 million in the three months ended March 31, 2001, a
decrease of $0.2 million or 6%. Production decreased by 0.3 million tons, or 9%,
from 2.9 million tons in the three months ended March 31, 2001 to 2.6 million
tons in the three months ended March 31, 2002. The decrease in production and
coal royalties were primarily attributable to the following:
- Southern West Virginia: Production from the Central Appalachia
properties decreased 214,000 tons, from 800,000 tons in the three months
ended March 31, 2001 to 586,000 tons in the three months ended March 31,
2002, which resulted in decreased coal royalty revenues of $390,000. The
decrease was primarily due to a reduction in production at the Campbell's
Creek and Boone/ Lincoln properties. Production on the Campbell's Creek
property decreased 80,000 tons to 274,000 tons and production on the
Boone/Lincoln property decreased 125,000 tons to 84,000 tons primarily as
a result of the weakened coal market.
Direct costs and expenses: Direct costs and expenses in each of the three
months ended March 31, 2002 and 2001 was $1.9 million. Depletion decreased $0.1
million to $1.5 million in the three months ended March 31, 2002 primarily as a
result of the reduced production during the period. This was offset by increased
override royalties due to a third party. Those royalties increased $114,000 to
$197,000 in the three months ended March 31, 2002 as a result of increased
production on the override property.
58
Year ended December 31, 2001 compared with year ended December 31, 2000
Revenues: Revenues in 2001 were $20.8 million compared with $18.3 million
in 2000, an increase of $2.5 million, or 14%.
Coal royalty revenues in 2001 were $18.4 million compared to $16.2 million
in 2000, an increase of $2.2 million, or 14%. Production increased by 1.4
million tons, or 14%, from 9.9 million tons to 11.3 million tons. The increase
in production and coal royalties were primarily attributable to the following:
- Eastern Kentucky: Production from the Central Appalachia properties
increased 1.2 million tons, from 6.2 million tons to 7.4 million tons,
which resulted in increased coal royalty revenues of $2.0 million. This
increase was due primarily to the ramp up of production at various
surface and underground mines at the Lynch property that increased
production from 2.0 million tons in 2000 to 3.1 million tons in 2001.
Production at the Lone Mountain property also increased from 2.2 million
tons in 2000 to 2.8 million tons in 2001 due to the installation of
additional equipment at the lessee's mine.
Other royalty revenues for 2001 were $1.4 million compared to $0.9 million
in 2000, an increase of $0.5 million. Other royalty revenues are primarily
attributable to override royalties associated with coal mined by lessees.
Override royalties were $1.2 million in 2001 compared to $0.8 million in 2000.
Direct costs and expenses: Direct costs and expenses in 2001 were $7.7
million compared to $6.6 million in 2000, an increase of $1.1 million, or 16%.
This increase was largely due to increased depletion resulting from the
increased production during the period. Depletion expense increased $1.0 million
to $6.4 million in 2001 from $5.4 million in 2000.
Year ended December 31, 2000 compared with year ended December 31, 1999
Revenues: Revenues in 2000 were $18.3 million compared to $15.3 million in
1999, an increase of $3.0 million, or 19%.
Coal royalty revenues in 2000 were $16.2 million compared to $13.2 million
in 1999, an increase of $3.0 million, or 22%. Production increased by 2.2
million tons, or 28%, from 7.7 million tons to 9.9 million tons. The increase in
production and coal royalty revenues was primarily attributable to the
following:
- Eastern Kentucky: Production increased on the Central Appalachia
properties by 2.3 million tons, from 3.9 million tons to 6.2 millions
tons, which resulted in an increase in coal royalty revenues of $3.8
million. This increase was due primarily to the start up of production at
various surface and underground mines at the Lynch property that
increased production from 0.1 million tons in 1999 to 2.0 million tons in
2000.
Direct Costs and Expenses: Direct costs and expenses in 2000 were $6.6
million compared to $72.0 million in 1999, a decrease of $65.4 million. This
decrease is primarily due to a $65.2 million non-cash impairment charge on
certain properties in 1999. During the fourth quarter of 1999, Arch Coal
determined that, as a result of several adverse regulatory rulings and the
continued negative pricing trends related to Central Appalachian coal production
experienced by Arch Coal at that time, an evaluation of the recoverability of
its active mining operations and coal reserves was necessary pursuant to SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The evaluation indicated that the future undiscounted
cash flows of certain coal reserves were below the carrying value of such
assets. Accordingly, Arch Coal adjusted the value of certain reserves. The
estimated fair value for the coal reserves with no future mine plans was based
upon the fair value of these properties to be derived from subleased operations.
The Arch Coal Contributed Properties affected by the write-down were written
down to approximately $47.1 million, resulting in a non-cash impairment charge
of $65.2 million. The impairment loss was recorded as a write-down of impaired
assets in the statement of revenues and direct costs and expenses.
59
Depletion expense decreased $0.2 million to $5.4 million in 2000 from $5.6
million in 1999. The decrease was a result of reduced depletion expense
corresponding to the impairment charge. The impairment charge reduced the
depletion rate on a per ton basis for 2000. The impact of the lower rates was
partially offset by increased production in 2000.
RELATED PARTY TRANSACTIONS
For a description of our related party transactions, please read "Certain
Relationships and Related Transactions."
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND CAPITAL EXPENDITURES
Historically, each of the WPP Group and the Arch Coal Contributed
Properties satisfied their working capital requirements and funded capital
expenditures, other than property acquisitions, with cash generated from
operations. Funds for property acquisitions have generally been obtained through
borrowings.
Following this offering, we believe that cash generated from operations and
our borrowing capacity under our new credit facility will be sufficient to meet
our working capital requirements and anticipated capital expenditures for the
next several years. We anticipate that we will incur less than $100,000 in
capital expenditures in the first year following the offering, consistent with
our assumption that we will not make any acquisitions during this period. If we
do make any acquisitions, we expect to fund them with borrowings under our
credit facility and proceeds from the issuance of common units. A portion of our
capital expenditures will be maintenance capital expenditures, which will be
deducted from our pro forma operating surplus for the period. Our ability to
satisfy any debt service obligations, to fund planned capital expenditures, to
make acquisitions and to pay distributions to our unitholders will depend upon
our future operating performance, which will be affected by prevailing economic
conditions in the coal industry and financial, business and other factors, some
of which are beyond our control. For a more complete discussion of factors that
will affect cash flow we generate from our operations, please read "Risk
Factors." Our capital expenditures have historically been minimal. Please read
"Cash Available for Distribution."
Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing
operating capacity of our assets and to extend their useful lives. Expansion
capital expenditures are capital expenditures made to expand the existing
operating capacity of our assets, whether through construction or acquisition.
We treat repair and maintenance expenditures that do not extend the useful life
of existing assets as plant operating expenses as we incur them.
Western Pocahontas Properties Limited Partnership
Net cash provided by operations in the three months ended March 31, 2002
was $884,000 compared to $3.8 million in the three months ended March 31, 2001,
a decrease of $2.9 million. This is partially due to a $1.1 million decrease in
timber royalty and an increase of $540,000 in accounts receivable as a result of
increased coal production as discussed in results of operations. Reversionary
interest payable decreased $900,000 from March 2001 as a result of the purchase
of the reversionary interest from CSX.
Net cash used in investing activities in the three months ended March 31,
2002 was $42.9 million compared to $20,000 in the three months ended March 31,
2001, an increase of $42.9 million. This increase reflects the purchase of the
reversionary interest from CSX in March 2002.
Cash provided by financing activities in the three months ended March 31,
2002 was $43.6 million compared to $3.8 million of cash used in financing
activities in the three months ended March 31, 2001, a change of $47.4 million.
This is largely attributable to additional debt incurred to finance the
reversionary interest purchased from CSX.
60
Net cash provided by operations was $13.1 million in 2001, $10.7 million in
2000 and $13.8 million in 1999. The decrease in 2000, as compared to 2001 and
1999, resulted from a decline in coal royalty revenues due to the idling of two
operations in Kentucky and the exhaustion of reserves on one property in West
Virginia. The two mines idled in 2000 resumed production in 2001.
Net cash provided by investing activities was $2.7 million, $4.0 million
and $0.2 million in 2001, 2000 and 1999, respectively. Net cash provided by
investing activities relates to proceeds from sales of properties partially
offset by capital expenditures. Proceeds from sales of surface land were $3.7
million, $4.0 million and $0.2 million in 2001, 2000 and 1999, respectively.
Capital expenditures in 2001 increased $8.9 million due to the acquisition of
the reversionary interest from the previous owner of the properties. A portion
of this acquisition was financed with a $7.9 million note payable to the seller
of the reversionary interest.
Cash flows from financing activities were $15.4 million in 2001, $14.6
million in 2000 and $14.6 million in 1999. This activity reflects principal
repayments on debt, distributions to partners and the placement of cash in
restricted accounts as required under the loan agreement.
Great Northern Properties Limited Partnership
Cash flows from operating activities was $1.5 million in the three months
ended March 31, 2002 compared to $1.0 million in the three months ended March
31, 2001, an increase of $500,000. As a result of the decline in coal royalties
discussed in results of operations, accounts receivable declined $600,000.
Net cash used in financing activities was approximately $1.8 million in
each of the three month periods ended March 31, 2002 and 2001. This activity
reflects debt repayments, distributions to partners and placement of cash in
restrictive amounts as required under the loan agreement.
Net cash provided by operations was $3.7 million in 2001, $5.7 million in
2000 and $3.2 million in 1999. Cash provided by operating activities in 2000
includes increased accounts receivable collections. Accounts receivable levels
declined in 2000 as a result of lower production levels.
Net cash provided by investing activities, primarily from proceeds from the
sales of surface land, was $475,000, $726,000 and $2,000 in 2001, 2000 and 1999,
respectively.
Cash flows used in financing activities were $4.6 million in 2001, $6.2
million in 2000 and $3.1 million in 1999. This activity reflects principal
repayments on debt, distributions to partners and the placement of cash in
restricted accounts as required under the loan agreement.
New Gauley Coal Corporation
Net cash provided by operations in the three months ended March 31, 2002
and 2001 was essentially the same.
Net cash flows from financing activities was $24,000 in the three months
ended March 31, 2002 compared to $23,000 in the three months ended March 31,
2001, an increase of $1,000.
Net cash provided by operations was $1,323,000, $604,000 and $900,000 for
the years 2001, 2000 and 1999, respectively. The decrease in 2000 was primarily
the result of a lessee moving onto adjacent property during 2000.
Net cash used in investing activities was $175,000, $0, and $67,000 for the
years 2001, 2000 and 1999, respectively. This reflects a $200,000 note
receivable net of proceeds from asset sales in 2001.
Net cash used in financing activities was a $1,091,000, $591,000 and
$979,000 for the years 2001, 2000 and 1999, respectively. This activity
primarily reflects dividends to stockholders.
Arch Coal Contributed Properties
The Arch Coal Contributed Properties do not maintain cash accounts. Cash
receipts and expenditures are maintained by Ark Land.
61
Direct cash flows from the Arch Coal Contributed Properties were $4.1
million in the three months ended March 31, 2002 compared to $4.7 million in the
three months ended March 31, 2001. The decrease is a result of decreased coal
royalties generated from the Arch Coal Contributed Properties during the three
months ended March 31, 2002. Direct cash flows from the Arch Coal Contributed
Properties were $19.8 million in 2001, $16.6 million in 2000 and $15.4 million
in 1999. The increase during the three years was a result of increased coal
royalties generated from the Arch Coal Contributed Properties.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Description of Credit Facility
In connection with the closing of this offering, we will enter into a three
year $100 million revolving credit facility. The credit facility includes a
$12.0 million working capital sublimit that can be used for working capital
needs and distributions. The revolving credit facility will be available for
general partnership purposes, including future acquisitions. At the closing of
this offering, we expect that all of the $100 million credit facility will be
available for borrowing.
Our obligations under the credit facility will be unsecured.
We may prepay all loans at any time without penalty. We must reduce all
borrowings under the working capital subfacility to zero for a period of at
least 15 consecutive days once during each year, beginning on the effective date
of the credit agreement.
Indebtedness under the credit facility will bear interest at LIBOR plus an
applicable margin that we expect will range from 1.25% to 1.75%. We will incur a
commitment fee on the unused portions of the revolving credit facility.
The credit facility prohibits us from making distributions to unitholders
and distributions in excess of available cash if any potential default or event
of default, as defined in the credit agreement, occurs or would result from the
distribution. In addition, the credit facility will contain various covenants
limiting our operating company's and its subsidiaries' ability to:
- incur indebtedness;
- grant certain liens;
- engage in mergers and acquisitions or change our business;
- amend material contracts;
- make loans and investments;
- repurchase limited partnership interests;
- sell assets; or
- create obligations for some lease payments.
The credit facility also will contain covenants requiring us to maintain
specified ratios of:
- EBITDA (as defined in the credit facility), pro forma for any asset
acquisition, to interest expense of not less than 4.0 to 1.0; and
- total debt to EBITDA, pro forma for any asset acquisitions, of not more
than 2.5 to 1.0.
Each of the following will be an event of default:
- failure to pay any principal when due or any interest or other amount
when due;
- breach of any representation or warranty;
- cross-default to other indebtedness;
62
- failure to perform or otherwise comply with the covenants in the credit
agreement; and
- bankruptcy or insolvency events involving us, our general partner or our
subsidiaries.
The credit facility is subject to a number of conditions, including the
negotiation, execution and delivery of definitive documentation.
Partnership Agreement
Our general partner will not receive any management fee or other
compensation for its management of Natural Resource Partners. However, in
accordance with the partnership agreement, our general partner and its
affiliates will be reimbursed for expenses incurred on our behalf. All direct
general and administrative expenses will be charged to us as incurred. Indirect
general and administrative costs, including certain legal, accounting, treasury,
information technology, insurance, administration of employee benefits and other
corporate services incurred by our general partner and its affiliates will be
reimbursed. Cost reimbursements and fees due our general partner may be
substantial and will reduce our cash available for distribution to unitholders.
For additional information, please read "Certain Relationships and Related
Transactions -- Omnibus Agreement."
INFLATION
Inflation in the United States has been relatively low in recent years and
did not have a material impact on operations for the years ended December 31,
1999, 2000 or 2001.
ENVIRONMENTAL
The operations of our lessees are subject to environmental laws and
regulations adopted by various governmental authorities in the jurisdictions in
which these operations are conducted. The terms of substantially all of our
leases impose liability for all environmental and reclamation liabilities
arising under those laws and regulations on the relevant lessees. However, if a
particular lessee is not financially capable of fulfilling those obligations,
there is a possibility that regulatory authorities could attempt to assign the
liabilities to us as the landowner. We would contest such an assignment. Please
read "Risk Factors -- Regulatory and Legal Risks" and "Business -- Regulation."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. The adoption of SFAS No. 133 on January 1, 2001 did not have a material
impact on the WPP Group's or the Arch Coal Contributed Properties' historical
financial position or results of operations.
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 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 our financial statements.
63
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 costs 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. We are evaluating the future financial effects of adopting
SFAS No. 143 and expect 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 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 on
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
will be applied in fiscal years beginning after May 15, 2002. We do not expect
the adoption of SFAS No. 145 on January 1, 2003 to have a material impact on our
financial position or results of operations.
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 therein. We estimate proved
and probable coal reserves with the assistance of third-party mining consultants
and involve the use of estimation techniques and recoverability assumptions. Our
estimates of coal reserves are updated periodically and may result in
adjustments to coal reserves and depletion rates that are recognized
prospectively. Timberlands are stated at cost less depletion. We determine the
cost of the timber harvested based on the volume of timber harvested in relation
to the amount of estimated net merchantable volume by geographic areas. We
estimate our timber inventory using statistical information and data obtained
from physical measurements and other information gathering techniques. These
estimates are updated annually and may result in adjustments of timber volumes
and depletion rates, which are recognized prospectively. Changes in these
estimates have no effect on our cash flow. During 1999, Arch Coal determined
that as a result of several adverse regulatory rulings and the continued
negative pricing trends related to Central Appalachian coal production
experienced by Arch Coal at that time, an evaluation of the recoverability of
64
its active mining operations and coal reserves was necessary pursuant to SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The evaluation indicated that the future undiscounted
cash flows of certain coal reserves were below the carrying value of such
assets. Accordingly, Arch Coal adjusted the value of certain reserves. The
estimated fair value for the coal reserves with no future mine plans was based
upon the fair value of these properties to be derived from leasing operations.
The Arch Coal Contributed Properties affected by the write-down were written
down to approximately $47.1 million, resulting in a non-cash impairment charge
of $65.2 million. As a result of this adjustment, we decreased the depletion
rates for the affected properties. Except for the impairment charge in 1999,
there have been no other adjustments to these estimates in each of the last
three years which had a material impact on the financial results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices. The principal market risks to which we are exposed are
interest rate risk and coal price risk. Debt we incur under our credit facility
will bear variable interest at either the applicable base rate or a rate based
on LIBOR. Unless interest rates increase significantly in the future, our
exposure to interest rate risk should be minimal. Please read "Coal Industry
Overview -- Coal Prices" for a discussion of coal price exposure risk.
65
COAL INDUSTRY OVERVIEW
We obtained the information provided in this Coal Industry Overview
regarding coal consumption, coal market prices and other data from the Energy
Information Administration, the independent statistical and analytical agency
within the U.S. Department of Energy, which we refer to in this prospectus as
"EIA," as well as Resource Data International, Inc., a private market research
firm, which we refer to in this prospectus as "RDI," and the National Mining
Association, the primary trade association for the coal industry, which we refer
to in this prospectus as "NMA." The EIA bases its forecasts on assumptions
about, among other things, trends in various economic sectors, including the
residential, transportation and industrial sectors, economic growth rates,
technological improvements and demand for other energy sources. Unless we
indicate otherwise below, we have obtained the information in this Coal Industry
Overview from the EIA.
INTRODUCTION
Coal is an abundant, efficient and affordable natural resource used
primarily to provide fuel for the generation of electric power. World-wide
recoverable coal reserves are estimated to be approximately 1.1 trillion tons.
The United States is the world's second largest producer of coal and has
approximately 25% of global coal reserves, representing approximately 250 years
of supply based on current usage rates. Coal reserves in the United States
represent approximately 95% of the nation's total fossil fuel reserves.
COAL MARKETS
Coal is primarily consumed by utilities to generate electricity, by steel
companies to make steel products with blast furnaces and by a variety of
industrial users to heat and power foundries, cement plants, paper mills,
chemical plants and other manufacturing and processing facilities. In general,
coal is characterized by end use as either steam coal or metallurgical coal.
Steam coal is used by electricity generators and by industrial facilities to
produce steam, electricity or both. Metallurgical coal is refined into coke,
which is used in the production of steel. Over the past quarter century, total
coal consumption in the United States has nearly doubled to approximately 1.1
billion tons in 2001. The growth in the demand for coal has coincided with an
increased demand for coal from electric power generators. Continued demand for
coal will primarily depend on coal consumption patterns of the electricity and
steel industries and the industrial sector, and the availability, location and
price of alternative fuel sources such as natural gas, oil, nuclear and
hydroelectric power.
The following table sets forth historical and projected demand trends for
U.S. coal by end use consumer through 2020.
COAL DEMAND BY END USE CONSUMER
PROJECTED ANNUAL
GROWTH 2000-
1999 2000 2001(E) 2005(F) 2010(F) 2015(F) 2020(F) 2020
----- ----- ------- -------- -------- ------- ------- ----------------
(TONS IN MILLIONS)
END USE CONSUMER:
Electricity Generation.......... 953 991 1,013 1,065 1,141 1,183 1,254 1.2%
Industrial...................... 65 65 62 80 81 83 86 1.4%
Steel Production................ 28 29 27 26 24 22 20 (1.8%)
Residential/Commercial.......... 5 5 4 5 6 6 6 0.9%
Export.......................... 58 58 49 56 54 53 55 (0.3%)
----- ----- ----- ----- ----- ----- -----
Total......................... 1,109 1,148 1,155 1,232 1,306 1,347 1,421 1.1%
===== ===== ===== ===== ===== ===== =====
---------------
(e) estimated
(f) forecasted
Source: EIA Annual Energy Outlook 2002 and EIA Monthly Energy Review, October
2001, December 2001 and March 2002.
66
Over the past ten years, coal-fired power plants have produced over 50% of the
electricity in the United States. Coal is the principal source of fuel for
electric utilities because of its relative low cost and availability throughout
the United States.
The following table sets forth the fuel sources for the generation of
electric power in the United States for the last five years.
DOMESTIC ELECTRIC POWER GENERATORS' FUEL SOURCES COMPARISON
1997 1998 1999 2000 2001(E)
---- ---- ---- ---- -------
FUEL SOURCE:
Coal............................................... 53% 52% 51% 52% 51%
Nuclear............................................ 18% 19% 20% 20% 20%
Conventional hydroelectric......................... 10% 9% 9% 7% 6%
Natural gas(1)..................................... 14% 15% 15%(e) 16%(e) 17%
Other.............................................. 5% 5% 5% 5% 6%
--- --- --- --- ---
Total.............................................. 100% 100% 100% 100% 100%
=== === === === ===
---------------
(1) Includes supplemental gaseous fuels.
(e) estimated
Source: EIA Monthly Energy Review, January 2002.
Coal's primary advantage is its relative low cost compared to other fuels
used to generate electricity. On an average cost per megawatt-hour basis,
coal-fired generation is substantially less expensive than electricity generated
utilizing natural gas, oil or nuclear power. Hydroelectric power is less
expensive but is limited geographically, and there are few suitable sites for
new hydroelectric power dams.
The following table sets forth historical delivered fuel prices to electric
utilities through 2001.
DELIVERED FUEL PRICES TO ELECTRIC UTILITIES
1997 1998 1999 2000 2001(E)
----- ------- ------- ------- -------
(DOLLARS PER MILLION BTUS)
FUEL:
Petroleum (Heavy Oil)................................. $2.79 $2.08 $2.44 $4.29 $3.91
Natural Gas........................................... 2.76 2.38 2.57 4.30 5.08
Coal.................................................. 1.27 1.25 1.22 1.20 1.24
---------------
(e) estimated
Source: EIA Monthly Energy Review, January 2002.
INDUSTRY TRENDS
In recent years, the coal industry has experienced several significant
trends including:
Significant Gains in Mining Productivity. U.S. coal production more than
doubled from 1968 to 1998 due largely to changes in work practices and the
introduction of new technologies that have greatly increased mine productivity.
According to RDI, overall coal mine productivity, measured in tons produced per
miner shift, has increased from 28.5 tons in 1990 to 55.0 tons in 2000.
Growth in Coal Consumption. Coal consumption should continue to expand as
demand for electricity continues to increase. According to RDI and EIA, between
1990 and 2000, electricity production by domestic electric power producers has
increased 27% and coal consumption by electric power producers has increased
20%. To date, the deregulation in the U.S. electric utility industry is
67
motivating power companies to utilize generating plants with the lowest fuel
cost, a trend we believe will continue to contribute to the demand for coal in
the future.
Industry Consolidation. U.S. coal producers have experienced consolidation
over the last 25 years. According to the 1977 Keystone Coal Industry Manual, in
1976, the 10 largest coal companies accounted for approximately 38% of total
domestic coal production, whereas in 2001, the 10 largest coal companies
accounted for approximately 63% of total domestic coal production. Despite the
considerable consolidation, according to RDI the industry still remains
relatively fragmented with more than 700 coal producers in the United States.
Increased Utilization of Existing Capacity of Coal-Fired Power Plants. We
believe that existing coal-fired plants will supply much of the projected
increase in the demand for electricity because they possess excess capacity that
can be utilized at low incremental costs. The average coal-fired generating
plant utilization is projected to increase to 84% in 2020 from 72% in 2000.
Restructuring of Electricity Industry. In October 1992, Congress enacted
the Energy Policy Act of 1992, which gave wholesale electricity suppliers access
to the transmission lines of U.S. utility companies. In May 1996, the Federal
Energy Regulatory Commission issued the first of a series of orders establishing
rules to promote competition in wholesale electricity markets by providing
wholesale electricity suppliers open access to electricity transmission systems.
In 1999, the Federal Energy Regulatory Commission issued a rule to encourage the
establishment of regional transmission organizations. Wholesale competition has
resulted in a substantial increase in non-utility generating capacity in the
United States.
Increasingly Stringent Air Quality Laws. The coal industry has witnessed a
shift in demand to low sulfur coal production driven by regulatory restrictions
on sulfur dioxide emissions from coal-fired power plants. In 1995, Phase I of
the Clean Air Act required high sulfur coal plants to reduce their emissions of
sulfur dioxide to 2.5 pounds or less per million Btu, and in 2000, Phase II of
the Clean Air Act tightened these sulfur dioxide restrictions further to 1.2
pounds of sulfur dioxide per million Btu. Currently, electric power generators
operating coal-fired plants can comply with these requirements by:
- burning lower sulfur coal, either exclusively or mixed with higher sulfur
coal;
- installing pollution control devices such as scrubbers, which reduce the
emissions from high sulfur coal;
- reducing electricity generating levels; or
- purchasing or trading emission credits to allow them to comply with the
sulfur dioxide emission compliance requirements.
Eventually, however, owners of these plants may have to retrofit their
operations or switch to burning Phase II compliance coal. We believe that the
Clean Air Act will increase the demand for the lower sulfur coal that our
lessees produce and sell. However, we believe demand for medium and high sulfur
coal will also remain strong in certain markets as many coal-fired power plants
continue to burn medium and high sulfur coal, either exclusively or mixed with
lower sulfur coal.
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 five-year terms. Leases often include the right
to renegotiate rents and royalties for the extended term.
Typically, lessees make payments based on the higher of a percentage of the
gross sales price or a fixed price per ton of coal sold. Therefore, 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
68
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 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.
LARGEST U.S. COAL PRODUCERS
The ten largest coal producers in the United States accounted for 63% of
total U.S. production in 2001. Our lessees include subsidiaries of seven of the
top 10 coal producing companies in the United States.
The following table sets forth the ten largest coal producers in the United
States in 2001.
TOP TEN U.S. COAL PRODUCERS
PERCENT OF TOTAL
TONS IN U.S. COAL
COMPANY THOUSANDS PRODUCTION
------- --------- -----------------------
Peabody Energy Corporation*................................. 167,402 15%
Arch Coal, Inc.*............................................ 116,377 10%
Kennecott Energy & Coal Co.................................. 110,548 10%
CONSOL Energy Inc.*......................................... 70,565 6%
RAG American Coal Holding Inc.*............................. 65,131 6%
Horizon Natural Resources, Inc.*............................ 47,802 4%
Vulcan Partners, L.P........................................ 43,049 4%
Massey Energy Company*...................................... 42,729 4%
Westmoreland Coal Company*.................................. 27,889 2%
North American Coal Corp.................................... 26,728 2%
------- --
Total..................................................... 718,220 63%
======= ==
---------------
* A subsidiary of this entity is our current lessee.
Source: RDI.
IMPORTS AND EXPORTS
Coal imports into the United States represent a very small percentage of
the total U.S. market for coal. Of the 1.1 billion tons of coal consumed in the
United States in 2001, less than 1.8% came from foreign markets. The United
States exported approximately 4.3% of 2001 total domestic production. The
majority of coal exported from the United States has historically been
metallurgical coal. Due to the increase of metallurgical coal available from
other countries and technological advances in steel manufacturing, the export
market for this coal has not been as attractive in recent years. Approximately
44.8% of U.S. coal exports in 2001 went to Europe, while the individual nations
buying the most U.S. coal in 2001 were Canada, Italy, Brazil, Belgium, the
United Kingdom and the Netherlands.
69
COAL CHARACTERISTICS
There are four types of coal: lignite, subbituminous, bituminous and
anthracite. Each has characteristics that make it more or less suitable for
different uses. Heat value and sulfur content are two of the most important coal
characteristics in determining the best consumer for particular types of coal.
Heat Value. The heat value of coal is commonly measured in Btus per pound
of coal. A Btu is the amount of heat needed to raise one pound of water one
degree Fahrenheit. Coal found in the Eastern and Midwestern regions of the
United States tends to have a heat content ranging from 10,000 to 14,000 Btus
per pound, as received. As received Btus per pound includes the weight of
moisture in the coal on an as sold basis. Most coal found in the Western United
States ranges from 8,000 to 10,000 Btus per pound, as received. Our reserves
primarily consist of subbituminous and bituminous coal. Unless otherwise stated,
all heat values in this prospectus are presented on an as received basis.
Lignite is a brownish-black coal with a heat content that generally ranges
from 5,000 to 8,300 Btus per pound. Major lignite operations are located in
Louisiana, Montana, North Dakota and Texas. Lignite is used almost exclusively
in power plants located adjacent to or near these mines because any significant
transportation costs, coupled with mining costs, would render its use
uneconomical.
Subbituminous coal is a black coal with a heat content that ranges from
8,300 to 11,500 Btus per pound. Most subbituminous reserves are located in
Alaska, Colorado, Montana, New Mexico, Washington and Wyoming. Subbituminous
coal is used almost exclusively by electricity generators and some industrial
consumers.
Bituminous coal is a soft black coal with a heat content that ranges from
10,500 to 14,000 Btus per pound. This coal is located primarily in Appalachia,
Arizona, the Midwest, Colorado and Utah, and is the type most commonly used for
electricity generation in the United States. Bituminous coal is also used for
industrial steam purposes and as metallurgical coal in steel production.
Anthracite is a hard coal with a heat content that can be as high as 14,000
Btus per pound. There are a limited number of anthracite deposits primarily
located in the Appalachian region of Pennsylvania. Anthracite is used primarily
for industrial and home heating purposes.
Sulfur Content. Sulfur content can vary from coal seam to coal seam and
sometimes within each seam. Coal combustion produces sulfur dioxide, the amount
of which varies depending on the chemical composition and the concentration of
sulfur in the coal. Low sulfur coal has a variety of definitions, but we use it
in this prospectus to refer to coal with a sulfur content of 1.0% or less by
weight. Compliance coal refers to coal that, when burned, has a sulfur dioxide
content of less than 1.2 pounds per million Btus. The strict emissions standards
of the Clean Air Act have increased demand for low sulfur coal. We expect
continued high demand for low sulfur coal as electricity generators meet the
current Phase II requirements of the Clean Air Act. Approximately 65% of our
coal reserves are 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.
Plants equipped with sulfur-reduction technology, known as scrubbers,
reduce sulfur dioxide emissions by 50% to 95% and can use higher sulfur coal.
Plants without scrubbers can use medium and high sulfur coal by purchasing
emission allowances on the open market or blending medium or high sulfur coal
with low sulfur coal. Each emission allowance permits the user to emit a ton of
sulfur dioxide. Some older coal-based plants have been retrofitted with
scrubbers. Any new coal-based generation built in the United States will likely
use clean coal technologies to remove the majority of sulfur dioxide, nitrogen
oxide and particulate matter emissions.
Other Characteristics. Ash is the inorganic residue remaining after the
combustion of coal. As with sulfur content, ash content varies from coal seam to
coal seam. Ash content is an important characteristic of coal because it
increases transportation costs and electric generating plants must handle and
dispose of ash following combustion.
70
Moisture content of coal varies by the type of coal, the region where it is
mined and the location of coal within a seam. In general, high moisture content
decreases the heat value per pound of coal, thereby increasing the delivered
cost per Btu. Moisture content in coal, as sold, can range from approximately 5%
to 30% of the coal's weight.
COAL MINING TECHNIQUES
Coal mining operations use six common techniques to extract coal from the
ground. The most appropriate technique is determined by coal seam
characteristics such as location and recoverable reserves. Data from core
samples is used initially to define the size, depth and quality of the coal
reserve area before committing to a specific mining technique. The six most
common mining techniques are: continuous, longwall, truck-and-shovel/loader,
dragline, highwall and auger.
Because coal mining techniques rely heavily on technology, technological
improvements have generally resulted in increased productivity. Coal mining
technology is continually evolving and has led to improvements in, among other
things, underground mining systems and earth-moving equipment for surface mines.
For example, longwall mining technology has increased the average recovery of
coal from large blocks of underground coal from 50% to 70%. At larger surface
mines, haul truck capacity has nearly doubled in the last decade. This increase
in capacity, along with larger shovels and draglines, has increased overall mine
productivity.
Underground Mining
Continuous Mining. Continuous mining is an underground mining method in
which main airways and transportation entries are developed and continuous
miners extract coal from "rooms," leaving "pillars" to support the roof.
Production is transported to a beltline for transportation to the surface. Seam
recovery for this method is typically up to 60% and productivity for continuous
mining averages 25 to 50 tons per miner shift.
Longwall Mining. Longwall mining is an underground mining method that uses
hydraulic jacks or shields, varying from four feet to twelve feet in height, to
support the roof of the mine while a mobile cutting shearer advances through the
coal. Chain belts then move the coal to a standard deep mine beltline system for
delivery to the surface. Continuous mining is used to develop access to long
rectangular panels of coal that are mined with longwall equipment, allowing
controlled subsidence behind the advancing machinery. Longwall mining is highly
productive, but it is effective only for large blocks of medium to thick coal
seams. High capital costs as well as the cost of moving the equipment from block
to block demand large, contiguous reserves. Seam recovery using longwall mining
is typically 70% and productivity averages 48 to 80 tons per miner shift.
Surface Mining
Truck-and-Shovel/Loader Mining. Truck-and-shovel/loader mining is a
surface mining method that uses large shovels or loaders to remove overburden,
which is used to backfill pits after coal removal. Shovels or loaders load coal
into haul trucks for transportation to a preparation plant or unit train loadout
facility. Seam recovery using the truck-and-shovel/loader mining method is
typically 90%. Productivity depends on equipment, geologic composition and the
ratio of overburden to coal. Productivity varies between 250 to 400 tons per
miner shift in the Powder River Basin to 30 to 80 tons per miner shift in the
Eastern United States.
Dragline Mining. Dragline mining is a surface mining method that uses
large capacity draglines to remove overburden to expose the coal seams. Shovels
load coal in haul trucks for transportation to a preparation plant or unit train
loadout facility. Seam recovery using the dragline method is typically 90% or
more and productivity levels are similar to those for truck-and-shovel/loader
mining.
Highwall Mining. Highwall mining is a surface mining method generally
utilized in conjunction with truck-and-shovel/loader surface mining. At the
highwall exposed by the truck-and-shovel/loader operation
71
a modified continuous miner with an attached beltline system cuts horizontal
passages from the surface into a seam. These passages can penetrate to a depth
of up to 1,000 feet. This method typically recovers 30% to 40% of the reserve
block penetrated.
Auger Mining. Auger mining is a surface mining method generally utilized
in conjunction with truck-and-shovel/loader operations. At the highwall exposed
by a truck-and-shovel/loader operation, a spiral steel auger bit is used to bore
a horizontal hole into the coal seam up to a depth of 250 feet. The auger also
conveys the coal to the surface. Seam recovery using auger mining is typically
30%.
COAL PREPARATION
Depending on coal quality and customer requirements, raw coal may be
shipped directly from the mine to the customer or processed in a coal
preparation plant. Most raw coal requires processing in a preparation plant to
meet customer specifications. Preparation plants size coal, wash it in a water
solution, remove waste materials and separate coal into grades. This processing
increases the quality and heat content of the coal, and ultimately the value, by
reducing sulfur, ash and moisture content. Coals of various qualities can be
blended at a preparation plant or loading facility to meet specific customer
requirements. Coal blending can increase profit margins by optimizing quality
specifications for individual customer contracts.
COAL REGIONS
Coal is mined from coal fields throughout the United States, with the major
production centers located in Appalachia, the Illinois Basin and the Western
United States. The quality of coal varies by region. Heat value and sulfur
content are the two most important coal characteristics in measuring quality and
determining the best end use of particular coal types. We have properties
located in all three major production centers and in all three subregions of
Appalachia.
The following table presents U.S. coal production data by region for the
five-year period 1997 through 2001.
U.S. COAL PRODUCTION
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(TONS IN MILLIONS)
AREA:
Appalachia...................................... 467.8 460.4 425.6 419.4 428.9
Interior United States(1).......................
Illinois Basin................................ 111.6 110.1 104.0 87.2 96.2
Other Interior................................ 59.3 58.3 58.5 56.3 51.5
Western United States(2)........................ 451.3 488.8 512.3 510.7 544.7
------- ------- ------- ------- -------
Total(3)...................................... 1,089.9 1,117.5 1,100.4 1,073.6 1,121.3
======= ======= ======= ======= =======
---------------
(1) Our interior coal is located in the Illinois Basin, which is the major
production center in the Interior United States.
(2) Our western coal is located in the Northern Powder River Basin in
Southeastern Montana.
Source: Coal Industry Annual 2000 and Coal Production by State,
July-December 2001, EIA.
(3) Due to rounding, totals may not equal sum of components.
Appalachia Region
- Northern Appalachia. Northern Appalachia includes Maryland, Ohio,
Pennsylvania and Northern West Virginia. Coal from this region generally
has a high heat content of between 12,000 and
72
14,000 Btus per pound. Its typical sulfur content ranges from 1.0% to
4.5%, which does not satisfy the Phase II requirements of the Clean Air
Act.
- Central Appalachia. Central Appalachia includes Eastern Kentucky,
Virginia and Southern West Virginia. Coal from this region generally has
a low sulfur content of 0.7% to 1.5% and a high heat content of between
12,000 and 14,000 Btus per pound. Some of this coal satisfies the Phase
II requirements of the Clean Air Act.
- Southern Appalachia. Southern Appalachia includes Alabama and Tennessee.
Coal from this region typically has a low sulfur content of 0.7% to 1.5%
and a high heat content of between 12,500 and 14,000 Btus per pound. Some
of this coal satisfies the Phase II requirements of the Clean Air Act.
Interior United States
- Illinois Basin. The Illinois Basin includes Illinois, Indiana and
Western Kentucky and is the major coal production center in the Interior
United States. There has been significant consolidation among coal
producers in the Illinois Basin over the past several years. Coal from
this region varies in heat content from 10,000 to 12,500 Btus per pound
and has a high sulfur content of 2.0% to 4.0%, which does not satisfy the
Phase II requirements of the Clean Air Act.
- Other Interior. Other coal-producing states in the Interior United
States include Arkansas, Kansas, Louisiana, Mississippi, Missouri,
Oklahoma and Texas. The majority of production in the Interior region
outside of the Illinois Basin consists of lignite production from Texas.
This lignite typically has a heat content of between 5,000 and 9,500 Btus
per pound and a sulfur content of between 1.0% and 2.0%, which does not
satisfy the Phase II requirements of the Clean Air Act.
Western United States
- Four Corners. The Four Corners area includes Northwestern New Mexico,
Northeastern Arizona, Southwestern Utah and Southeastern Colorado. The
coal from this region typically has a sulfur content of 0.75% to 1% and a
heat content of between 9,000 and 10,000 Btus per pound. This coal does
not satisfy the Phase II requirements of the Clean Air Act.
- Uinta Basin. The Uinta Basin includes Western Colorado and Eastern Utah.
The coal from this region typically has a sulfur content of 0.50% to 1%
and a heat content of between 10,500 and 12,500 Btus per pound. Most of
this coal satisfies the Phase II requirements of the Clean Air Act.
- Southern Powder River Basin. The Southern Powder River Basin is located
in Northeastern Wyoming. This coal has a very low sulfur content of
between 0.15% to 1.20% and a low heat content of between 7,500 and 10,000
Btus per pound. Most of this coal satisfies the Phase II requirements of
the Clean Air Act.
- Northern Powder River Basin. The Northern Powder River Basin is located
in Southeastern Montana and Northeastern Wyoming. This coal has a sulfur
content of between 0.30% to 1.0% and a heat content of between 8,400 and
10,000 Btus per pound. Most of this coal does not satisfy the Phase II
standards of the Clean Air Act.
COAL PRICES
Coal prices are influenced by a number of factors and vary dramatically by
region. The two principal components of the price of coal are the price of coal
at the mine, which is influenced by mine operating costs and coal quality, and
the cost of transporting coal from the mine to the point of use. The most
important criterion to electricity generators when purchasing coal is its
delivered cost per million Btus.
73
The following table summarizes average yearly open market steam coal prices
for electric power generation for selected areas.
AVERAGE COAL PRICES FOR SELECTED AREAS
POUNDS OF SULFUR
BTUS PER DIOXIDE PER
POUND(1) MILLION BTU(1)
------------------------------------------------ ------------------------------------------
APPALACHIA:
Central Appalachia...... greater than 12,500 less than or equal to 1.2
greater than 12,500 1.21-1.80
greater than 12,500 1.81-2.5
less than or equal to 12,500 less than or equal to 1.2
less than or equal to 12,500 1.21-1.80
less than or equal to 12,500 1.81-2.5
Southern Appalachia..... greater than 12,000 1.21-1.80
less than or equal to 12,000 less than or equal to 1.2
less than or equal to 12,000 1.21-1.80
Northern Appalachia..... greater than 12,500 less than or equal to 2.50
greater than 12,500 greater than 2.5
less than or equal to 12,500 greater than 2.5
ILLINOIS BASIN............ greater than 11,300 1.21-1.80
greater than 11,300 1.81-2.50
greater than 11,300 greater than 2.5
less than or equal to 11,300 greater than 2.5
NORTHERN POWDER RIVER
BASIN................... greater than 9,000 less than or equal to 1.2
less than or equal to 9,000 1.21-1.80
MAXIMUM
PERCENT
SULFUR
VALUE(S) AT AVERAGE PRICE PER TON OF COAL
LIMITING BTU ----------------------------------
CONTENT(2) 1998 1999 2000 2001(3)
------------------------------ ------ ------ ------ -------
APPALACHIA:
Central Appalachia...... 0.75 $27.04 $25.14 $26.17 $40.25
0.76-1.13 25.73 23.68 24.56 37.52
1.14-1.56 24.63 22.19 23.64 36.26
0.75 24.68 23.47 23.73 36.46
0.76-1.13 23.29 22.49 22.16 35.10
1.14-1.56 23.07 21.04 21.67 34.21
Southern Appalachia..... 0.73-1.13 26.76 28.03 29.83 34.62
0.72 23.93 26.84 26.88 33.39
0.73-1.13 20.87 23.33 23.39 32.64
Northern Appalachia..... 1.50 24.53 23.60 25.95 38.11
greater than 1.50 23.17 20.68 23.42 33.98
greater than 1.50 21.52 20.05 20.63 29.33
ILLINOIS BASIN............ 0.68-1.02 22.99 21.22 21.56 36.80
1.03-1.41 22.77 20.94 21.34 35.73
greater than 1.41 20.57 19.30 19.65 30.83
greater than 1.41 18.06 17.01 14.50 26.23
NORTHERN POWDER RIVER
BASIN................... 0.54 6.84 6.12 6.51 7.25
0.81 4.70 5.58 5.42 8.22
---------------
Source: RDI
(1) Average Btus per pound and pounds of sulfur dioxide per million Btus for
spot coals in each quality category over the 1997 -- 2001 period.
(2) We have calculated these amounts. The percent sulfur values are the maximum
sulfur values for the specified limiting Btu value. Where the limiting Btu
value is expressed as "greater than," the percent sulfur value may increase
only if the Btu value increases or if the sulfur dioxide value is not
limited. Where the Btu value is expressed as "less than," the percent sulfur
value is the absolute maximum unless the sulfur dioxide value is not
limited.
(3) After the rapid increase in coal prices that began in late 2000 and
prevailed through most of 2001, spot prices began to decline in late 2001 as
demand for coal fell due to unusually warm weather and the sluggish U.S.
economy.
Price at the Mine. The price of coal at the mine is influenced by geologic
characteristics such as seam thickness, overburden ratios and depth of
underground reserves. It is generally cheaper to mine coal seams that are thick
and located close to the surface than to mine thin underground seams. Typically,
coal mining operations will begin at the part of the coal seam that is easiest
and most economical to mine. As the seam is mined, it becomes more difficult and
expensive to mine because the seam either becomes thinner or extends more deeply
into the earth, requiring removal of more overburden. Underground mining is
generally more expensive than surface mining as a result of high capital costs,
including costs for
74
modern mining equipment and construction of extensive ventilation systems and
higher labor costs due to lower productivity.
In addition to the cost of mine operations, the price of coal at the mine
is also a function of quality characteristics such as heat value, sulfur, ash
and moisture content. Metallurgical coal has higher carbon and lower ash content
as well as other chemical characteristics and is generally priced higher than
steam coal produced in the same regions. Generally, our coal royalty revenues
are calculated based on price of coal at the mine.
Transportation Costs. Coal used for domestic consumption is generally sold
free on board at a loading point, and the purchaser normally pays the
transportation costs. Most electric power generators arrange long-term shipping
contracts with rail or barge companies to assure stable delivery costs.
Transportation cost can be a large component of the purchaser's cost. Although
our lessee's customers typically pay the transportation costs, access to good
transportation is still important to us because the customer may choose a
supplier based on the cost of transportation. Trucks and beltlines haul coal
over shorter distances, while railroad and barges move coal over longer
distances. According to NMA, railroads transport approximately 60% of U.S. coal
production. CSX and Norfolk Southern railroads are the dominant carriers in the
Eastern United States, and the Burlington Northern Santa Fe and Union Pacific
railroads are the dominant carriers in the Western United States.
75
BUSINESS
We are a limited partnership recently formed by the WPP Group, the largest
owner of coal reserves in the United States other than the U.S. government, and
Arch Coal, Inc., the second largest U.S. coal producer. 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, 2001, we controlled approximately
1.15 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, subject 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.
Properties contributed to us by Western Pocahontas Properties Limited
Partnership constituted approximately 45% of our reserves as of December 31,
2001. 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. Properties contributed to us by New Gauley Coal Corporation
constituted approximately 1% of our reserves as of December 31, 2001. Great
Northern Properties Limited Partnership was established with the acquisition in
1992 from Burlington Resources of properties primarily located in Montana.
Properties contributed by Great Northern Properties Limited Partnership
constituted approximately 14% of our reserves as of December 31, 2001. Arch
Coal, Inc. is one of the largest coal producers in the United States and has
been acquiring coal properties since 1969 in West Virginia, Kentucky, Illinois
and Virginia. The Arch Coal Contributed Properties constituted approximately 40%
of our reserves as of December 31, 2001.
BUSINESS STRATEGY
We intend to execute the following strategies that we believe reflect our
competitive strengths:
- Maximize royalty revenues from our existing properties. We work with our
lessees by providing technical knowledge of our reserves, including
information about title and geology. We also review mine plans to assure
efficient recovery of reserves and periodically audit our lessees to
verify that royalties have been properly paid. We regularly visit mines
to assure that the lessees are complying with the lease terms and
approved mine plans. Our employees' extensive experience with our
properties enables us to use our technical knowledge of the reserves and
our knowledge of the coal industry to identify potential lessees who are
best suited to develop and market our reserves.
- Explore new opportunities with our existing lessees. Our lessees are
generally subsidiaries of large coal producers that have long-term plans
to expand their operations. We intend to further develop our
relationships with our current lessees in order to participate in future
opportunities that our lessees may identify for acquiring or leasing new
properties.
- Add new lessees to diversify our coal mine operator base. We have
identified additional public and private coal mine operators that meet
our guidelines as qualified lessee candidates. As we expand our royalty
business, we will be seeking new lessees to mine our properties. The
addition of these new lessees will allow us to further diversify our coal
mine operator base.
- Expand and diversify our coal reserves. We intend to actively pursue
opportunities to expand and diversify our reserves by acquiring
additional coal properties that generate royalty income. We will review
potential reserve acquisitions in all coal producing regions of the
United States in order to acquire marketable reserves that we believe
will be attractive to lessees. We expect to fund any
76
acquisitions with borrowings under our credit facility and proceeds from
the issuance of our common units.
COMPETITIVE STRENGTHS
We believe the following competitive strengths will enable us to execute
our business strategies successfully:
- Our royalty structure generates stable production and cash flow. Our
leases provide for royalty rates generally equal to the higher of a
percentage of the gross sales price or a fixed price per ton of coal
mined, subject to a minimum monthly, quarterly or annual payment. This
structure generally allows our production and cash flow to be stable and
predictable in periods of low coal prices, while enabling us to benefit
during periods of higher coal prices.
- We do not directly bear operating costs and risks. Because we do not
operate any mines, we do not bear ordinary operating costs and have
limited direct exposure to environmental compliance, permitting and labor
risks. Our lessees bear the labor risks, such as health care legacy
costs, black lung benefits and workmen's compensation costs associated
with operating the mines. In addition, we are typically not ultimately
responsible for property taxes, which are paid by us but reimbursed by
the lessee pursuant to the terms of the lease.
- We primarily lease to large lessees that have a diverse customer
base. Our royalty income is primarily from leases to subsidiaries of
publicly-held coal companies. In 2001, we derived approximately 76% of
our revenues from subsidiaries of seven of the top ten coal producers in
the United States. These companies have made significant capital
investments in the infrastructure on our properties and have effective
marketing organizations. Consequently, our reserves are produced,
processed and marketed in a highly efficient manner and sold to a diverse
group of utilities, steel companies and industrial users.
- Our reserves are diverse and strategically located. Our reserves are
geographically diverse and cover a broad range of heat and sulfur
content. By offering both metallurgical and steam coal, our coal reserves
are marketable to a diverse customer base, thereby enabling our lessees
to adjust to changing markets and sustain sales volumes and prices. By
having reserves in different geographic areas and by having varied types
of coal reserves, our lessees are able to serve a broad number of markets
and take advantage of changing customer preferences.
- We are well-positioned to pursue acquisitions of coal reserves and other
minerals. The coal royalty business is highly fragmented and
characterized by numerous small entities that present potentially
attractive acquisition opportunities. We will be seeking acquisitions
that complement our existing coal reserves, allow us to enter into
additional coal regions and expand our property portfolio beyond coal to
include other minerals. In conjunction with this offering, we are
entering into a $100 million credit facility that will give us the
ability to take advantage of acquisition opportunities which, combined
with our ability to issue additional units, should provide the financial
flexibility to pursue acquisitions. Upon the closing of this offering, we
anticipate that we will have no outstanding indebtedness. We believe that
our affiliation with Arch Coal and the WPP Group will provide us with a
competitive advantage in pursuing acquisition opportunities. Both the WPP
Group and Arch Coal have proven track records of successfully completing
and integrating acquisitions.
- We have experienced, knowledgeable management. Our management team has a
successful record of managing, leasing and acquiring properties. Each
member of our management team has at least 20 years of experience in the
mining industry. We believe our management team has a comprehensive
understanding of the areas in which our lessees mine coal, the mining
environment and the mining operators who serve as our lessees.
Furthermore, we believe our management team has the necessary skills and
experience to identify and integrate future acquisitions.
77
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 79.6% 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. While our relationship with both the WPP Group
and Arch Coal should provide significant benefits to us, it is also a source of
potential conflict. In addition, the WPP Group and Arch Coal may engage in
substantial competition with us. Please read "Conflicts of Interest and
Fiduciary Responsibilities" and "Certain Relationships and Related
Transactions -- Omnibus Agreement."
COAL RESERVES AND PRODUCTION
We present the reserve information for Natural Resource Partners in this
prospectus on a pro forma basis as if the reserves had been contributed to us on
December 31, 2001. As of December 31, 2001, we controlled approximately 1.15
billion tons of proven and probable coal reserves in eight states located in
Appalachia, the Illinois Basin and the Northern Powder River Basin. Our reserves
are located on 45 separate properties and are subject to 61 leases with 31
lessees. We own 98% of our reserves and control 2% of our reserves under paid-up
leases for which we have paid royalties sufficient to allow us to mine all of
the coal reserves attributable to the property without further payment. We own
the right to mine coal on approximately 465,000 acres.
Reserves are coal tons that can be economically extracted or produced at
the time of determination considering legal, economic and technical limitations.
All of the estimates of our reserves that we present in this prospectus are of
proven and probable reserves, which we define in the glossary. Weir
International Mining Consultants has audited Arch Coal's estimates of coal
reserves contributed by it as of December 31, 2001, and Stagg Resource
Consultants, Inc. has audited the WPP Group's estimates of coal reserves
contributed by it as of December 31, 2001. The audits included reviews of
reserve maps, data from drill holes, reserve calculation methodologies and
assumptions and available quality trend maps. Please see Appendix E, "Coal
Reserve Audit Summary Report of Weir International Mining Consultants" and
Appendix F, "Coal Reserve Audit Summary Report of Stagg Resource Consultants,
Inc."
We prepare our reserve estimates from geologic data assembled and analyzed
by the staff of geologists and engineers at the WPP Group and Arch Coal. 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. In areas where geologic conditions indicate
potential inconsistencies related to coal reserves, additional drilling is
sometimes performed to ensure the continuity and mineability of the coal
reserves. Consequently, sampling in those areas involves drill holes that are
spaced closer together.
Our lessees' customers burn coal produced from our properties in power
plants located east of the Mississippi River and in Montana and Minnesota.
Additionally, our metallurgical coal is processed in coke ovens in the Eastern
United States, Europe, South America and Asia. Coal produced from our properties
is transported by beltline, rail, barge and truck. All of our properties contain
and have access to roads or highways.
78
The following table sets forth on a pro forma basis coal royalty revenues
we have received from our properties in each of the following areas: Central
Appalachia, Northern Appalachia, Southern Appalachia, the Illinois Basin and the
Northern Powder River Basin.
COAL ROYALTY REVENUES
YEAR ENDED DECEMBER 31,
---------------------------
1999 2000 2001
------- ------- -------
(IN THOUSANDS)
AREA
Appalachia
Central Appalachia
Eastern Kentucky and Virginia...................... $ 9,779 $12,365 $18,029
Southern West Virginia............................. 15,434 11,654 11,406
Northern Appalachia................................... 2,028 1,669 2,268
Southern Appalachia................................... 919 659 624
Illinois Basin.......................................... 2,074 2,345 3,155
Northern Powder River Basin............................. 11,225 7,692 6,951
------- ------- -------
Total............................................ $41,459 $36,384 $42,433
======= ======= =======
The following table sets forth production data and reserve information for
our properties in each of the following areas: Central Appalachia, Northern
Appalachia, Southern Appalachia, the Illinois Basin and the Northern Powder
River Basin.
PRODUCTION AND RESERVES
PRODUCTION PROVEN AND PROBABLE RESERVES AT
YEAR ENDED DECEMBER 31, DECEMBER 31, 2001
------------------------ ---------------------------------
1999 2000 2001 UNDERGROUND SURFACE TOTAL(1)
------ ------ ------ ----------- ------- ---------
(TONS IN THOUSANDS)
AREA
Appalachia
Central Appalachia
Eastern Kentucky and
Virginia............ 6,007 7,645 11,684 454,838 55,658 510,496
Southern West
Virginia............ 9,121 7,587 6,878 221,272 30,223 251,495
Northern Appalachia...... 862 494 809 179,315 5,346 184,661
Southern Appalachia...... 287 206 277 -- 11,929 11,929
Illinois Basin............. 1,761 1,705 2,659 -- 28,398 28,398
Northern Powder River
Basin.................... 10,080 7,098 6,683 -- 166,939 166,939
------ ------ ------ ------- ------- ---------
Total................. 28,116 24,737 28,990 855,425 298,493 1,153,918
====== ====== ====== ======= ======= =========
---------------
(1) Of the 1.2 billion tons of reserves, we control approximately 21.0 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, 2001, approximately
25% of our reserves met compliance standards for Phase II of the Clean Air Act.
Unless otherwise indicated, we present the quality of the coal throughout this
prospectus 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
79
Appalachia, and we own steam coal reserves in Northern Appalachia, the Illinois
Basin and the Northern Powder River Basin. In 2001, approximately 12% 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, 2001.
SULFUR CONTENT, TYPICAL QUALITY AND TYPE OF COAL
SULFUR CONTENT TYPICAL QUALITY
---------------------------------------------- ---------------------------
LOW MEDIUM HIGH
COMPLIANCE (LESS THAN (1.0% TO (GREATER HEAT CONTENT SULFUR
AREA COAL(1) 1.0%) 1.5%) THAN 1.5%) TOTAL (BTU PER POUND) (%)
---- ---------- ---------- -------- ---------- --------- --------------- ---------
(TONS IN THOUSANDS)
APPALACHIA
Central Appalachia
Eastern Kentucky
and Virginia... 168,683 369,630 94,618 46,248 510,496 13,177 0.99
Southern West
Virginia....... 95,185 185,370 53,570 12,555 251,495 13,179 0.90
Northern
Appalachia....... 12,735 21,029 10,986 152,646 184,661 13,224 2.28
Southern
Appalachia....... 11,929 11,929 -- -- 11,929 13,959 0.69
ILLINOIS BASIN....... -- -- 10,103 18,295 28,398 11,457 2.42
NORTHERN POWDER RIVER
BASIN.............. -- 166,939 -- -- 166,939 8,444 0.72
------- ------- ------- ------- ---------
Total............ 288,532 754,897 169,277 229,744 1,153,918
======= ======= ======= ======= =========
TYPE OF COAL
--------------------------
AREA STEAM METALLURGICAL(2)
---- ------- ----------------
(TONS IN THOUSANDS)
APPALACHIA
Central Appalachia
Eastern Kentucky
and Virginia... 487,036 23,459
Southern West
Virginia....... 120,257 131,239
Northern
Appalachia....... 184,661 --
Southern
Appalachia....... -- 11,929
ILLINOIS BASIN....... 28,398 --
NORTHERN POWDER RIVER
BASIN.............. 166,939 --
------- -------
Total............ 987,291 166,627
======= =======
---------------
(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 sub-set 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.
COAL LEASES
We earn our coal royalty revenues under long-term leases that generally
require our lessees 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 they sell, with
minimum monthly, quarterly or annual payments. We currently lease approximately
95% of our reserves to 31 lessees that operate 54 mines. In the last three
years, we have entered into eight new leases covering approximately 3% of our
reserves. A typical lease has a five to ten year base term, with the lessee
having an option to extend the lease for additional five-year terms after the
expiration of the base term. Many leases include the right to renegotiate rents
and royalties for the extended term. Of our 61 leases, we will have four leases
with Ark Land Company, an affiliate of Arch Coal, covering approximately 9% of
our reserves. Please read "Certain Relationships and Related
Transactions -- Coal Leases with Ark Land Company."
Substantially all of our leases require the lessee to pay minimum royalties
in monthly, quarterly or annual installments, even if no mining activities have
begun. Usually, for a period of three to five years from the time of payment of
a minimum royalty, the lessee may credit the payment against production
royalties. In 2001, the leases on which we received only minimum royalties
contained approximately 21% of our reserves and our lessees paid us minimum
royalties aggregating $1,073,450. If none of our lessees had produced coal
during 2001, we would have received approximately $11,943,254 in minimum royalty
payments.
80
Substantially all of our leases impose on the lessee the following
obligations:
- to obtain and maintain all necessary permits;
- to diligently mine the greatest amount of coal possible from the leased
property using current mining techniques;
- to employ a competent registered professional mining engineer to plan
mining development and to plot the development on maps for our review;
- to indemnify and hold us harmless for any damages we incur in connection
with the lessee's mining operations;
- to conduct mining operations in compliance with all applicable federal,
state and local laws and regulations, including reclamation and bonding
obligations;
- to obtain our written consent prior to subleasing or assigning the lease
or upon a change of control of the lessee;
- to maintain general liability and property damage insurance in amounts we
deem reasonable; and
- to reimburse us for ad valorem property taxes we pay on the property.
Substantially all of our leases grant us the following rights:
- to terminate the lease and take possession of the leased premises in the
event of a default by the lessee;
- to review lessee mine plans and maps;
- to enter the leased premises to examine mining operations and to conduct
both engineering and financial audits to confirm the amount of coal mined
from our properties and the sale price received for the coal by our
lessees; and
- to retain all rights to the leased premises other than the right to mine
coal, including the right to use the surface of the leased property where
we possess that right.
In addition, each lease provides that we expressly deny any warranty as to
the quality or quantity of coal on our property. Additionally, we do not ensure
that the lessees have surface access. Our lessees are responsible for all
processing and transportation of coal mined from our properties. We do not own
any coal processing or transportation facilities.
CENTRAL APPALACHIA (EASTERN KENTUCKY AND VIRGINIA)
Our Eastern Kentucky and Virginia properties are comprised of seven
properties on approximately 140,000 acres. As of December 31, 2001, these
properties contained 510 million tons of coal reserves. The typical quality of
the coal produced from these properties is 0.99% sulfur and 13,177 Btus per
pound. Production for these properties was 11.7 million tons for the year ended
December 31, 2001. As of December 31, 2001, we leased more than 90% of our
reserves on these properties to 11 lessees under 15 leases.
81
[Map showing the location of properties in Eastern Kentucky and Virginia]
The following table sets forth production data and reserve information with
respect to our properties in Eastern Kentucky and Virginia.
CENTRAL APPALACHIA PROPERTIES -- EASTERN KENTUCKY AND VIRGINIA
PRODUCTION PROVEN AND PROBABLE
YEAR ENDED DECEMBER 31, RESERVES AT DECEMBER 31, 2001
------------------------- -------------------------------
PROPERTY 1999 2000 2001 UNDERGROUND SURFACE TOTAL
-------- ------ ------ ------- ----------- ------- -------
(TONS IN THOUSANDS)
Evans-Laviers (KY)............. 1,818 1,195 3,813 63,007 43,711 106,718
Lynch (KY)..................... 163 2,075 3,138 307,679 2,401 310,080
Lone Mountain (KY)............. 2,052 2,227 2,773 49,341 -- 49,341
Pardee (KY) (VA)............... 1,635 1,560 1,344 17,125 3,672 20,797
Chesapeake Mineral (KY)........ 339 243 460 11,933 730 12,663
Johnson County (KY)............ -- 345 156 5,328 4,344 9,672
Elkhorn (KY)................... -- -- -- 425 800 1,225
----- ----- ------ ------- ------ -------
Total........................ 6,007 7,645 11,684 454,838 55,658 510,496
===== ===== ====== ======= ====== =======
82
The following is a summary of our major income producing properties in
Eastern Kentucky and Virginia.
Evans-Laviers. The Evans-Laviers property is located in Breathitt, Floyd,
Knott and Magoffin Counties, Kentucky. As of December 31, 2001, the property
included 107 million tons of medium and high sulfur coal. 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. As of December 31, 2001, this property contained 310 million tons of
reserves, 94% of which were low sulfur coal. 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.
Lone Mountain. The Lone Mountain property is located in Harlan County,
Kentucky. As of December 31, 2001, this property contained 49 million tons of
reserves, 90% of which were low sulfur coal. 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.
Pardee. The Pardee property is located in Letcher County, Kentucky and
Wise County, Virginia. As of December 31, 2001, this property contained 21
million tons of reserves, 82% of which were low sulfur coal. 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.
83
CENTRAL APPALACHIA (SOUTHERN WEST VIRGINIA)
Our Southern West Virginia properties are comprised of 17 properties on
approximately 125,000 acres. As of December 31, 2001, these properties contained
251 million tons of coal reserves. The typical quality of the coal produced from
these properties is 0.90% sulfur and 13,179 Btu per pound. Production from these
properties was 6.9 million tons for the year ended December 31, 2001. As of
December 31, 2001, we leased more than 90% of our reserves on these properties
to 12 lessees under 22 leases.
[Map showing the location of properties in Southern West Virginia]
84
The following table sets forth production data and reserve information for
our properties in Southern West Virginia.
CENTRAL APPALACHIA PROPERTIES -- SOUTHERN WEST VIRGINIA
PRODUCTION PROVEN AND PROBABLE
YEAR ENDED DECEMBER 31, RESERVES AT DECEMBER 31, 2001
------------------------ -------------------------------
PROPERTY 1999 2000 2001 UNDERGROUND SURFACE TOTAL
-------- ------ ------ ------ ----------- ------- -------
(TONS IN THOUSANDS)
Eunice.......................... 3,096 3,113 1,842 7,788 6,895 14,683
Campbell's Creek................ 1,244 1,312 1,258 10,903 -- 10,903
Y&O............................. 1,249 734 853 49,030 15,478 64,508
Kingston........................ 1,147 942 740 10,708 -- 10,708
Dorothy-Sarita.................. 915 351 652 30,068 -- 30,068
Rockhouse Fork.................. 570 470 322 10,393 -- 10,393
Boone/Lincoln................... 804 604 670 13,815 4,839 18,654
West Fork....................... -- -- 222 11,270 821 12,091
Welch/Wyoming................... -- -- 221 38,481 -- 38,481
Sharp-McMillen.................. 89 61 98 337 872 1,209
Skillet Fork.................... 7 -- -- 340 -- 340
Clay-Nicholas................... -- -- -- 17,393 -- 17,393
Hare............................ -- -- -- 2,707 500 3,207
Jones-Gibson.................... -- -- -- 1,196 -- 1,196
Newberry-Ritter................. -- -- -- 5,605 616 6,221
Wehrle-Casto.................... -- -- -- -- 202 202
Weirwood........................ -- -- -- 11,238 -- 11,238
----- ----- ----- ------- ------ -------
Total...................... 9,121 7,587 6,878 221,272 30,223 251,495
===== ===== ===== ======= ====== =======
The following is a summary of the major income-producing properties in
Southern West Virginia.
Eunice. The Eunice property is located in Raleigh and Boone Counties, West
Virginia. As of December 31, 2001, this property included 15 million tons of
reserves, 84% of which were low sulfur coal. 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.
Campbell's Creek. The Campbell's Creek property is located in Kanawha
County, West Virginia. As of December 31, 2001, this property contained 11
million tons of reserves, all of which were low sulfur coal. 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.
Y&O. The Y&O property is located in Boone County, West Virginia. As of
December 31, 2001, the property contained 65 million tons of reserves, 86% of
which were low sulfur coal. The property is subject to four coal leases. Two of
the leases are with Boone East Development and the remaining two leases are
85
with Cook Mountain Coal Company and Eastern Associated Coal Corp., subsidiaries
of publicly-held Peabody Energy Corporation. The Cook Mountain lease was
inactive during 2001 because mining occurred on adjacent property and production
from the Eastern Associated Coal lease exhausted the small reserve block being
mined. The Boone East leases cover the majority of reserves on the property.
Production during 2001 on the leases was from underground mines. Production from
the Cook Mountain lease is transported by beltline to a preparation plant owned
by Peabody Energy. Both high-volatile metallurgical and steam coal are shipped
on the CSX railroad from the plant to customers such as American Electric Power,
Carolina Power and Light, Corus and Acominas. Production from the Boone East
leases is conveyed by beltline to an off-site preparation plant, which ships
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. A subsidiary of Massey Energy controls an
on-site preparation plant with CSX rail service, although the plant is currently
inactive.
Kingston. The Kingston property is located in Fayette and Raleigh
Counties, West Virginia. As of December 31, 2001, this property contained 11
million tons of reserves, 66% of which were low sulfur coal. We lease the
property to Kingston Resources, a subsidiary of RAG American Coal Corporation.
In 2001, production came from an underground mine and a surface mine. Production
from the underground mine is transported by truck to a preparation plant on the
property, after which it is trucked to various loading points for shipment by
rail or barge, and production from the surface mine is trucked directly to the
loading facility. Most of the coal on this property is sold to metallurgical
coal customers.
Dorothy-Sarita. The Dorothy-Sarita property is located in Raleigh County,
West Virginia. As of December 31, 2001, this property included 30 million tons
of reserves, 21% of which were low sulfur coal. We lease the property to Black
King Mine Development Co., a subsidiary of Massey Energy. In 2001, production
from this property was primarily from underground mines and a surface mine.
Production from these mines is transported by beltline or truck to a preparation
plant located on an adjacent property. Both high-volatile metallurgical and
steam coal are shipped on the CSX railroad from the plant to customers such as
AK Steel, U.S. Steel, American Electric Power and Virginia Electric Power.
Rockhouse Fork. The Rockhouse Fork property is located in Raleigh County,
West Virginia. As of December 31, 2001, this property contained 10 million tons
of reserves, 92% of which were low sulfur coal. The property produces
metallurgical coal and is subject to three coal leases, two of which are with
affiliates of The Anker Coal Group, Inc. and the third of which is with White
Mountain Mining Company LLC. The White Mountain Mining lease and one of the
Anker Coal leases are producing from underground mines. The other lease to an
Anker Coal Group affiliate is inactive. The coal from the active Anker Coal
lease is processed at an on-site preparation plant and shipped on the CSX
railroad to customers such as AK Steel. The coal from the White Mountain Mining
lease is trucked to a preparation plant and shipped on either the Norfolk
Southern or CSX railroads to customers such as Citizens Gas & Coke Utility. In
June 2002, an involuntary bankruptcy petition was filed against White Mountain
Mining by four of its creditors. Although this bankruptcy may impact production
from the Rockhouse Fork property, we do not believe it will have a material
impact on our results of operations or financial condition.
Boone/Lincoln. The Boone/Lincoln property is located in Boone and Lincoln
Counties, West Virginia. As of December 31, 2001, this property contained 19
million tons of reserves, 45% of which were low sulfur coal. The property is
leased to Ark Land. Production comes from an underground mine and a surface mine
and is transported by truck and beltline to a preparation plant on adjacent
property. The coal is shipped on the CSX railroad primarily to utility customers
such as American Electric Power, Baltimore Gas & Electric and Consumers Power.
West Fork. The West Fork property is located in Boone County, West
Virginia. The property is leased to Eastern Associated Coal Corp. As of December
31, 2001, this property included 12 million tons of reserves, all of which were
low sulfur coal. Production comes from an underground (longwall) mine. During
late 2001, this longwall mine moved onto our property from adjacent property,
contributing to an increase in production. Production from this mine is conveyed
by beltline to an off-site preparation plant
86
and shipped on the CSX railroad to both metallurgical and steam customers such
as South Carolina Power and Light, Detroit Edison, Rouge Steel and U.S. Steel.
NORTHERN APPALACHIA
Our Northern Appalachian properties are comprised of 13 properties on
115,000 acres in Northern West Virginia and Maryland. As of December 31, 2001,
these properties contained 185 million tons of coal reserves. The typical
quality of the coal produced from our Northern Appalachian properties is 2.28%
sulfur and 13,224 Btus per pound. Production on these properties was 809,000
tons for the year ended December 31, 2001. As of December 31, 2001, we leased
more than 90% of our reserves on these properties to eight lessees under 16
leases.
[Map showing the location of properties in Northern West Virginia and Maryland]
87
The following table sets forth production data and reserve information for
our properties in the Northern Appalachian area.
NORTHERN APPALACHIA PROPERTIES
PRODUCTION PROVEN AND PROBABLE RESERVES AT
YEAR ENDED DECEMBER 31, DECEMBER 31, 2001
------------------------ -------------------------------------
1999 2000 2001 UNDERGROUND SURFACE TOTAL
---- ---- ---- ----------- ------------- -------
(TONS IN THOUSANDS)
New Gauley (WV)........................... 249 149 441 7,917 -- 7,917
Thomas (WV)............................... 202 159 218 -- 371 371
Stony River (WV).......................... 70 88 60 2,321 2,450 4,771
Beaver Creek (WV)......................... 106 84 55 -- 1,726 1,726
Hampshire (WV)............................ -- -- 21 -- 10 10
Mt. Storm-Elk Garden-Oakmont (WV)......... 20 12 14 20,093 76 20,169
Eastern Pocahontas (MD)................... 215 2 -- 2,311 -- 2,311
Davis Lumber (WV)......................... -- -- -- 604 -- 604
Gauley (WV)............................... -- -- -- 3,221 -- 3,221
Gaymont (WV).............................. -- -- -- 2,508 -- 2,508
Hibbs Run (WV)............................ -- -- -- 34,156 -- 34,156
Sincell (MD).............................. -- -- -- 11,637 713 12,350
Wetzel County (WV)........................ -- -- -- 94,547 -- 94,547
--- --- --- ------- ----- -------
Total................................. 862 494 809 179,315 5,346 184,661
=== === === ======= ===== =======
The following is a summary of the major income-producing properties in
Northern Appalachia.
New Gauley. The New Gauley property is located in Nicholas and Greenbrier
Counties, West Virginia. As of December 31, 2001, the property included 8
million tons of reserves, all of which were low sulfur coal. The majority of the
property is leased to Green Valley Coal Company, a subsidiary of Massey Energy.
Coal is produced from an underground mine and is trucked to a preparation plant
on adjacent property. Because of its quality, this coal is consumed in the
medium-volatile metallurgical and specialty coal markets by customers such as
Citizens Gas, Elkem and Calgon Carbon.
Stony River. The Stony River property is located in Grant and Tucker
Counties, West Virginia. As of December 31, 2001, the property contained 5
million tons of high sulfur coal. The majority of the property is leased to
Buffalo Coal Company, Inc. During 2001, coal was produced from surface mining.
Buffalo Coal leases other reserves from us in the area as well as from other
parties. A portion of the Buffalo Coal production is sold without processing,
and the balance is trucked to Buffalo Coal's off-site preparation plant. This
coal is primarily sold and delivered by truck to Virginia Electric Power.
Buffalo Coal also can ship coal by rail to utilities such as Potomac Electric
Power Company.
88
SOUTHERN APPALACHIA
Our Southern Appalachian property is comprised of 24,258 acres in Alabama.
As of December 31, 2001, this property contained 12 million tons of coal
reserves. The typical quality of the coal produced from our Southern Appalachian
property is 0.69% sulfur and 13,959 Btus per pound. Production from this
property was 277,000 tons for the year ended December 31, 2001. As of December
31, 2001, we leased all of our reserves on this property to two lessees under
two leases.
[Map showing the location of property in Alabama]
89
The following table sets forth production data and reserve information for
our property in the Southern Appalachian area.
SOUTHERN APPALACHIA PROPERTY
PRODUCTION YEAR PROVEN AND PROBABLE RESERVES AT
ENDED DECEMBER 31, DECEMBER 31, 2001
------------------ ---------------------------------
1999 2000 2001 UNDERGROUND SURFACE TOTAL
---- ---- ---- ------------ -------- -------
(TONS IN THOUSANDS)
Twin Pines/Drummond (AL)............. 287 206 277 -- 11,929 11,929
The following is a summary of the major income-producing leases in Southern
Appalachia.
Twin Pines/Drummond: The Twin Pines/Drummond property is located in
Cullman County, Alabama. As of December 31, 2001, this property contained 12
million tons of coal, all of which were low sulfur coal. The property is subject
to two coal leases. One of the leases is with Twin Pines Coal Company, Inc. and
the other is with Drummond Coal Company. In 2001 on the Twin Pines lease, coal
was produced from a surface (dragline) mine. Coal produced by Twin Pines Coal
Company is shipped by truck without processing to customers such as ABC Coke
Division -- Drummond Co., Monsanto and Alabama Power. The other lease with
Drummond Coal Company is inactive.
90
ILLINOIS BASIN
Our Illinois Basin properties are comprised of five properties on 7,570
acres in Indiana and Illinois. As of December 31, 2001, these properties
contained 28 million tons of coal reserves. The typical quality of the coal
produced from our Illinois Basin properties is 2.42% sulfur and 11,457 Btus per
pound. Production from these properties was 2.7 million tons for the year ended
December 31, 2001. As of December 31, 2001, we leased all of our reserves on
these properties to three lessees under four leases.
[Map showing the location of properties in Illinois]
91
[Map showing the location of properties in Illinois]
The following table sets forth production data and reserve information for
each of our properties in the Illinois Basin.
ILLINOIS BASIN PROPERTIES
PRODUCTION YEAR ENDED PROVEN AND PROBABLE RESERVES AT
DECEMBER 31, DECEMBER 31, 2001
--------------------- ---------------------------------
PROPERTY 1999 2000 2001 UNDERGROUND SURFACE TOTAL
-------- ----- ----- ----- ------------ -------- -------
(TONS IN THOUSANDS)
Hocking-Wolford (IN)..................... 1,105 909 1,456 -- 10,760 10,760
Sato (IL)................................ 656 796 950 -- 4,300 4,300
Trico (IL)............................... -- -- 253 -- 2,149 2,149
Cummings (IN)............................ -- -- -- -- 1,499 1,499
Peabody Mine #48 (IN).................... -- -- -- -- 9,690 9,690
----- ----- ----- ---- ------ ------
Total.......................... 1,761 1,705 2,659 -- 28,398 28,398
===== ===== ===== ==== ====== ======
92
The following is a summary of our major income producing properties in the
Illinois Basin.
Hocking-Wolford/Cummings. The Hocking-Wolford property and the Cummings
property are both located in Sullivan County, Indiana. As of December 31, 2001,
these two properties contained 12 million tons of medium and high sulfur coal.
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.
Sato. The Sato property is located in Jackson County, Illinois. As of
December 31, 2001, this property contained 4 million tons of medium sulfur coal.
We lease the property to Knight Hawk Coal, LLC. Production comes from a surface
mine and is transported by truck to the customer or to a loadout facility for
transportation by barge. Other coal is processed at a preparation plant on the
property and then trucked to the customer or to the loadout facility. Coal is
marketed mainly to utility customers such as Ameren.
Trico. The Trico property is located in Perry County, Illinois. As of
December 31, 2001, this property contained 2 million tons of high sulfur coal.
We lease the property to Knight Hawk Coal, LLC. Production comes from a surface
mine and is transported by truck to a preparation plant located on Knight Hawk's
Sato lease. The coal is trucked to the customer or to a loadout facility for
transportation by barge. Coal is marketed mainly to utility customers such as
Ameren.
NORTHERN POWDER RIVER BASIN
Our Northern Powder River Basin properties are comprised of two properties
on 52,191 acres in Rosebud and Treasure Counties, Montana. As of December 31,
2001, these properties contained 167 million tons of reserves. The typical
quality of the coal produced from our Northern Powder River Basin properties is
0.72% sulfur and 8,444 Btu per pound. Production from these properties was 6.7
million tons for the year ended December 31, 2001. As of December 31, 2001, we
leased all of our reserves on these properties to two lessees under three
leases.
These properties were part of the original land grant to the Great Northern
Railway Company in 1864, and were purchased by Great Northern Properties from
Burlington Resources in 1992. As provided in the original land grant, only the
odd-numbered sections were conveyed, giving a "checkerboard" appearance to our
ownership. The mineral rights on the intervening sections are generally owned
either by the federal government or the State of Montana and are under lease to
our lessee.
93
[Map showing the location of property in Montana]
The following table sets forth production data and reserve information for
each of our properties in the Northern Powder River Basin.
NORTHERN POWDER RIVER BASIN PROPERTIES
PRODUCTION YEAR ENDED PROVEN AND PROBABLE RESERVES AT
DECEMBER 31, DECEMBER 31, 2001
---------------------- -------------------------------
PROPERTY 1999 2000 2001 UNDERGROUND SURFACE TOTAL
-------- ------ ----- ----- ----------- ------- -------
(TONS IN THOUSANDS)
Western Energy (MT)................... 7,261 5,690 4,907 -- 163,431 163,431
Big Sky Mine (MT)..................... 2,819 1,408 1,776 -- 3,508 3,508
------ ----- ----- ---- ------- -------
Total....................... 10,080 7,098 6,683 -- 166,939 166,939
====== ===== ===== ==== ======= =======
The following is a summary of our major income producing properties in the
Northern Powder River Basin.
Western Energy. The Western Energy property is located in Rosebud and
Treasure Counties, Montana. As of December 31, 2001, this property contained 163
million tons of low sulfur reserves. 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.
Big Sky Mine. The Big Sky Mine property is located adjacent and to the
south of the Western Energy property in Rosebud County, Montana. As of December
31, 2001, this property contained 4 million tons of low sulfur reserves. The
coal mined from the Big Sky Mine is slightly lower in sulfur than coal mined
from the Western Energy mine due to selective mining techniques. The property is
leased to Big Sky Coal Company, a subsidiary of 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.
94
OTHER OPERATIONS
We will have revenue from an overriding royalty arrangement and will have a
small amount of revenue from wheelage payments, which are tolls paid for the
privilege of transporting coal across or through our property. Additionally, we
expect to have minimal revenues from royalties on oil and gas leases and coal
bed methane leases. In the aggregate, these operations accounted for less than
4% of our total revenues in 2001 on a pro forma basis.
COAL INDUSTRY SALES CONTRACTS
Our coal reserves are geographically diverse and cover a broad range of
heat and sulfur content. By offering both metallurgical and steam coal, our
lessees are able to serve a diverse customer base. This market diversity enables
our lessees to adjust to changing market conditions and sustain high sales
volumes and prices. Our larger lessees have efficient marketing abilities that
provide competitive advantages when negotiating and renewing coal sales
contracts.
The terms of coal sales contracts are typically the results of both bidding
procedures and extensive negotiations with the customers. As a result, the terms
of these contracts vary significantly in many respects, including price
adjustment features, price and contract reopener terms, permitted sources of
supply, force majeure provisions, coal qualities, quantity, flexibility and
adjustments. The contracts typically have terms of one to three years and are
subject to price adjustment provisions that permit an increase or decrease
periodically in the contract price to reflect changes in specified price indices
or items such as taxes or royalties or increases and decreases in actual
production costs. These provisions, however, may not assure that the contract
price will reflect every change in production or other costs. Failure of the
parties to agree on a price pursuant to an adjustment or a reopener provision
can lead to early termination of a contract. Some multi-year contracts also
permit the contract to be reopened to renegotiate terms and conditions in
addition to price or to terminate the contract. The contracts typically
stipulate procedures for quality control, sampling and weighing. Most contracts
require operators to deliver coal within ranges for specific coal
characteristics such as heat, sulfur, ash, moisture, volatility and other
qualities. Failure to meet these specifications can result in economic penalties
or termination of the contracts. While most of the contracts specify the
approved seams and/or approved locations from which the coal is to be mined,
some contracts allow the coal to be sourced from more than one mine or location.
Although the volume to be delivered pursuant to a contract is stipulated, the
buyers often have the option to vary the volume within specified limits.
COMPETITION
The coal industry is intensely competitive primarily as a result of the
existence of numerous producers. Our lessees compete with coal producers in
various regions of the United States for domestic sales. The industry has
undergone significant consolidation since 1976, as 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 primarily compete with both large and small producers
nationwide. Our lessees compete 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 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.
95
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 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 electric generating 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. The possibility exists that new legislation or
regulations may be adopted or that the 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 and 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. Except for the issues associated with the operations of the
subsidiaries of Massey Energy noted below, 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 has
substantially increased the cost of coal mining for all domestic coal producers.
Massey Energy Show Cause Order. As discussed in "Risk
Factors -- Regulatory and Legal Risks," the West Virginia Department of
Environmental Protection has issued "show cause" orders to Green Valley Coal
Company, our lessee, and Marfork Coal Company, both of which are subsidiaries of
Massey Energy Company, for alleged patterns of violations relating to water
quality, which could affect the Dorothy-Sarita and New Gauley properties in West
Virginia. In early 2002, the West Virginia Department of Environmental
Protection entered two orders finding a pattern of violations and suspending one
of Green
96
Valley's permits for three days and another for thirty days. Green Valley filed
appeals and obtained stays of enforcement of the orders pending resolution of
the appeals. The thirty day suspension was upheld on appeal on April 9, 2002.
Also, in January 2002, the West Virginia Department of Environmental Protection
entered an order finding a pattern of violations by Marfork Coal 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. The suspension has been temporarily blocked pending entry of the order and
an appeal by Massey Energy to the circuit court. The show cause order issued to
Marfork Coal could also have an impact on the longwall mining operations of
another subsidiary of Massey Energy, Performance Coal, that are conducted at the
Eunice property because coal mined from this part of the Eunice property is sent
to the Marfork Coal preparation plant for processing. If this show cause order
is not resolved on favorable terms, 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.
If these permits are revoked, Massey Energy and its subsidiaries could be
prohibited from obtaining additional permits. In the event of future violations
at these properties or at other properties operated by these entities, the
existence of those orders may increase the nature and gravity of any sanctions
sought in the event that the state decides to pursue any enforcement.
Recently, water from a mine operated by Marfork Coal has leaked through the
subsurface strata, resulting in a discharge of water into a nearby creek. This
discharge is from a mine that is not on our property, but it is possible that
Marfork Coal could be subject to further enforcement actions which could impact
its ability to continue mining on our property, or that this could be taken into
account in connection with the show cause order discussed above.
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 in an effort to comply with these
ambient air standards. Significant additional emissions control expenditures
will be needed in order to meet the current national ambient air standard for
ozone. In particular, coal-fired power plants will be affected by state
regulations designed to achieve attainment of the ambient air quality standard
for ozone. Ozone is produced by the combination of two precursor pollutants:
volatile organic compounds and nitrogen oxides. Nitrogen oxides are a by-product
of coal combustion. Accordingly, emissions control requirements for new and
expanded coal-fired power plants and industrial boilers will continue to become
more demanding in the years ahead.
In July 1997, the EPA adopted more stringent ambient air quality standards
for particulate matter and ozone. In a February 2001 decision, the U.S. Supreme
Court largely upheld the EPA's position, although it remanded the EPA's ozone
implementation policy for further consideration. On remand, the Court of Appeals
for the D.C. Circuit affirmed EPA's adoption of these more stringent ambient air
quality standards. As a result of the finalization of these standards, states
that are not in attainment for these standards will have to revise their State
Implementation Plans to include provisions for the control of ozone precursors
and/or particulate matter. Revised State Implementation Plans could require
electric power generators to further reduce nitrogen oxide and particulate
matter emissions. The potential need to achieve such emissions reductions could
result in reduced coal consumption by electric power generators. Thus, future
regulations regarding ozone, particulate matter and other pollutants could
restrict the market for coal and the development of new mines by our lessees.
This in turn may result in decreased production
97
by our lessees and a corresponding decrease in our coal royalty revenues.
Although we cannot predict the future scope of these ozone and particulate
matter regulations, future regulations regarding these and other ambient air
standards could restrict the market for coal, the development of new mines and
our ability to lease coal reserves. This in turn may have a material adverse
effect on our royalty revenues.
Furthermore, in October 1998, the EPA finalized a rule that will require 19
states in the Eastern United States that have ambient air quality problems to
make substantial reductions in nitrogen oxide emissions by the year 2004. To
achieve these reductions, many power plants would be required to install
additional control measures. The installation of these measures would make it
more costly to operate coal-fired power plants and, depending on the
requirements of individual state implementation plans, could make coal a less
attractive fuel. Any reduction in coal's share of the electric power generation
market could have a material adverse effect on our business, financial condition
and results of operations and the business, financial condition and results of
operations of our lessees.
Along with these regulations addressing ambient air quality, the EPA has
initiated a regional haze program designed to protect and to improve visibility
at and around National Parks, National Wilderness Areas and International Parks.
This program restricts the construction of new coal-fired power plants whose
operation may impair visibility at and around federally protected areas.
Moreover, this program may require certain existing coal-fired power plants to
install additional control measures designed to limit haze-causing emissions,
such as sulfur dioxide, nitrogen oxides and particulate matter. By imposing
limitations upon the placement and construction of new coal-fired power plants,
the EPA's regional haze program could affect the future market for coal from our
leases. Furthermore, the imposition of additional control requirements upon our
lessees' customers could adversely affect our financial condition or results of
operations.
Additionally, the U.S. Department of Justice, on behalf of the EPA, has
filed lawsuits against several investor-owned electric utilities and brought an
administrative action against one government-owned electric utility for alleged
violations of the Clean Air Act. The EPA claims that these utilities have failed
to obtain permits required under the Clean Air Act for alleged major
modifications to their power plants. Our lessees supply coal to some of the
currently affected utilities, and it is possible that other of our lessees'
customers will be sued. These lawsuits could require the utilities to pay
penalties and install pollution control equipment or undertake other emission
reduction measures, which could adversely impact their demand for coal. Any
outcome that adversely affects our lessees' customers and their demand for coal
could adversely affect our financial condition or results of operations.
Other Clean Air Act programs are also applicable to power plants that use
our coal. For example, the acid rain control provisions of Title IV of the Clean
Air Act require a reduction of sulfur dioxide emissions from power plants.
Because sulfur is a natural component of coal, required sulfur dioxide
reductions can affect coal mining operations. Title IV imposes a two phase
approach to the implementation of required sulfur dioxide emissions reductions.
Phase I, which became effective in 1995, regulated the sulfur dioxide emissions
levels from 261 generating units at 110 power plants and targeted the highest
sulfur dioxide emitters. Phase II, implemented January 1, 2000, made the
regulations more stringent and extended them to additional power plants,
including all power plants of greater than 25 megawatt capacity. Affected
electric utilities can comply with these requirements by:
- burning lower sulfur coal, either exclusively or mixed with higher sulfur
coal;
- installing pollution control devices such as scrubbers, which reduce the
emissions from high sulfur coal;
- reducing electricity generating levels; or
- purchasing or trading emission credits.
Specific emissions sources receive these credits that electric utilities
and industrial concerns can trade or sell to allow other units to emit higher
levels of sulfur dioxide. Each credit allows its holder to emit one ton of
sulfur dioxide.
98
In addition to emissions control requirements designed to control acid rain
and to attain the national ambient air quality standards, the Clean Air Act also
imposes standards on sources of hazardous air pollutants. Although these
standards have not yet been extended to coal mining operations, the EPA recently
announced that it will regulate hazardous air pollutants from coal-fired power
plants. Under the Clean Air Act, coal-fired power plants will be required to
control hazardous air pollution emissions by no later than 2009. These controls
are likely to require significant new improvements in controls by power plant
owners. The most prominently targeted pollutant is mercury, although other
by-products of coal combustion may be covered by future hazardous air pollutant
standards for coal combustion sources.
Other proposed initiatives may have an effect upon coal operations. One
such proposal is the Bush Administration's recently announced Clear Skies
Initiative. As proposed, this initiative is designed to reduce emissions of
sulfur dioxide, nitrogen oxides, and mercury from power plants. Other so-called
multi-pollutant bills, which could regulate additional air pollutants, have been
proposed by various members of Congress. While the details of all of these
proposed initiatives vary, there appears to be a movement towards increased
regulation of a number of air pollutants. Were such initiatives enacted into
law, power plants could choose to shift away from coal as a fuel source to meet
these requirements.
In summary, the effect that a variety of Clean Air Act regulations 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.
West Virginia Mountaintop Mining/Valley Fill Litigation. A lawsuit, Bragg
v. Robertson, was filed in federal court by the West Virginia Highlands
Conservancy and several citizens in July 1998, and generally targeted
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.
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.
99
Mine Health and Safety Laws. Stringent safety and health standards have
been imposed 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 a miner who dies 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.
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 equivalent state and local laws. These
obligations include reclaiming and restoring the mined areas by grading,
shaping, preparing the soil for seeding and by seeding with grasses or planting
trees for use as pasture or timberland, as specified in the approved reclamation
plan. Because the regulatory requirements imposed by SMCRA on reclamation and
closure are comprehensive and ongoing in nature, non-compliance cannot be
eliminated completely.
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 has
been achieved. Federal law and some states impose on mine operators the
responsibility for repairing the property or compensating the property owners
for damage occurring on the surface of the property as a result of mine
subsidence, a consequence of longwall mining and possibly other mining
operations. 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. The maximum tax is $0.35 per ton of coal
produced from surface mines and $0.15 per ton of coal produced from underground
mines. Since our lessees are responsible for these obligations and any related
liabilities, we do not accrue for the estimated costs of reclamation and 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, according to
the regulations, 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. Except as disclosed herein regarding the Marfork and
Green Valley matters, we believe our lessees are generally in compliance with
all operation, 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, within a variety of federally protected lands,
within national forests and within a certain proximity of occupied dwellings.
The lawsuit, Citizens Coal Council v. Norton, was filed in February 2000 to
challenge regulations issued by the Department of Interior providing, 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.
100
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, sought a stay of the order pending appeal to the U.S. Court of
Appeals for the District of Columbia Circuit and the stay was granted. 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.
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.
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, which 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. Section 402 discharge permits are
generally not suitable for authorizing the construction of fills in navigable
waters. 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.
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, if it is not overturned by an appellate court or
subsequent legislation, will be to make mountaintop mining uneconomical in those
areas subject to the injunction. We would be materially affected by this
injunction because any mountaintop mining valley fill permits required to be
obtained by our lessees would need to be issued by the Huntington, West Virginia
office of the U.S. Army Corps of Engineers.
101
The court's injunction also prohibits the issuance of permits authorizing
fill activities associated with types of mining activities other than
mountaintop mining where the primary purpose or use of those fill activities is
the disposal of waste. Such activities might include those associated with
slurry impoundments and coal refuse disposal areas. If the injunction is not
overturned by an appellate court or subsequent legislation, our lessees may not
be able to obtain permits in many cases to use these common fill activities,
which could render these operations uneconomical. Any consequent reduction or
cessation of their operations would reduce mining on our properties and our
royalty revenue.
Following the issuance of the court's May 8, 2002 order, the plaintiff in
the Kentuckians case filed a motion for further injunctive relief requesting
that the court require the Huntington, West Virginia office of the U.S. Army
Corps of Engineers to revoke the Section 404 valley fill permit identified in
the plaintiff's complaint. In addition, various defendants and intervenors filed
motions seeking a clarification of the court's order, a stay pending appeal, and
a dismissal for failure to join a necessary party.
On June 17, 2002, the court ruled on all of the parties' motions. In
response to the defendants' motion for clarification, the court decided that its
injunction applies to any fill activity that does not have a "constructive
primary purpose," citing as an example fills used solely for the disposal of
waste. The court noted that such fills could include not only valley fills, but
also other mining activities such as refuse impoundments, fills from standard
contour or surface mines, or fills related to mine sites with "approximate
original contour" waivers. The court noted, however, that determining whether a
particular fill has a "constructive primary purpose" is up to the technical
expertise of the U.S. Army Corps of Engineers. It also appears that the court
would allow the U.S. Army Corps of Engineers to take into consideration
post-mining land uses when applying the "constructive primary purpose" test to a
particular fill activity. This ruling creates additional uncertainty about how
the U.S. Army Corps of Engineers is to apply the "constructive primary purpose"
test.
Following its discussion of the motion for clarification, the court
addressed and denied both the defendants' motion for stay pending appeal and
their motion for dismissal. We understand that the defendants are planning an
appeal of each ruling on an expedited basis.
Along with its denials of the defendants' various motions, the court denied
the plaintiff's motion for further injunctive relief. Accordingly, the court did
not require the U.S. Army Corps of Engineers to revoke the challenged Section
404 permit. The court based its decision on the grounds that it did not have
sufficient factual information to determine whether the particular fill at issue
had a "constructive primary purpose." The court suggested further that a show
cause hearing would be necessary in order for it to make such a determination
regarding the validity of an existing permit. In ruling this way, the court left
open the possibility that case-by-case challenges to existing permits, including
our lessees' permits, could be filed on the basis that the fill activities
previously permitted did not have a "constructive primary purpose." If lawsuits
challenging our lessees' permits were successful, our lessees would most likely
be required to suspend or cease their surface mining on our properties. If the
decision is not overturned on appeal or by new legislation, we would suffer a
material decrease in our royalty revenue.
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 this lawsuit, 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 and/or Section 404
permit holders that are exempt from antidegradation review under these
provisions. Revoking this exemption and subjecting our lessees to the
antidegradation
102
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 if 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.
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 that we or our lessees currently own or have
previously owned or operated, 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.
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 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. Please read "Risk Factors -- Regulatory and Legal
Risks."
In order to obtain mining permits and approvals from state regulatory
authorities, mine operators, including our lessees, must submit a reclamation
plan for restoring, upon the completion of mining operations, the mined property
to its prior condition, productive use or other permitted condition. 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.
Future legislation and administrative regulations may emphasize the
protection of the environment and, as a consequence, 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.
103
West Virginia Cumulative Hydrologic Impact Analysis Litigation. In a
lawsuit unrelated to the Bragg case, two environmental groups sued the West
Virginia Department of Environmental Protection in January 2000 in federal
court, alleging various violations of the Clean Water Act and SMCRA. The lawsuit
was amended in September 2001 to name Gale Norton, Secretary of the Interior, as
a defendant. The U.S. Office of Surface Mining is a division within the
Department of Interior. The lawsuit, Ohio River 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
Environmental Protection failed to conduct SMCRA-required cumulative hydrologic
impacts 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 for
lack of jurisdiction under Bragg 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 is awaiting briefing under an extended schedule in this case. 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 are 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
adversely impact 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 SMCRA Bond Lawsuit. In November 2000, the West Virginia
Highlands Conservancy filed a lawsuit in federal district court against the U.S.
Department of Interior, the U.S. Office of Surface Mining and the West Virginia
Department of Environmental Protection. The lawsuit, West Virginia Highlands
Conservancy v. Norton, which seeks declaratory and injunctive relief, generally
challenges the adequacy of the two-tier West Virginia alternative reclamation
bond program. The first tier requires mine operators to post a bond of up to
$5,000 per acre mined. The second tier creates a special reclamation fund which
is funded by an assessment on mine operators of three cents per ton of coal. The
West Virginia Highlands Conservancy claims that, individually and collectively,
the alternative bond reclamation program has inadequate funds to cover the
state's cost of conducting mining site reclamation for those sites where the
mine operator has defaulted, or might default, on its reclamation obligations.
Based upon the alleged inadequacy of the alternative bonding program, the
lawsuit claims that the Department of the Interior and the Office of Surface
Mining violated their obligations under SMCRA by either (1) not asserting
federal control over the West Virginia SMCRA bonding program or (2) not revoking
federal approval of the West Virginia SMCRA program and assuming control under
SMCRA. The lawsuit also alleges that the West Virginia Department of
Environmental Protection (1) failed to ensure that the state bonding program met
certain minimum requirements and (2) improperly issued SMCRA permits without
requiring mine operators to post sufficient reclamation bonds.
In May 2001, the district court dismissed all claims against the West
Virginia Department of Environment Protection based upon the principles of
sovereign immunity articulated by the Fourth Circuit in the Bragg case. Please
read "-- West Virginia Mountaintop Mining/Valley Fill Litigation." The Office of
Surface Mining, in June 2001, initiated formal administrative action against the
West Virginia Department of Environmental Protection regarding the alleged
deficiencies in the state bonding program.
104
The remaining claims in this lawsuit against the federal defendants were
the subject of an August 2001 order by the district court. The court denied the
federal defendants' motion to dismiss the suit and granted partial summary
judgment for the plaintiffs. The court allowed the Office of Surface Mining to
continue its administrative action. That action required the West Virginia
Department of Environmental Protection to submit proposed new regulatory
initiatives to the state legislature's rulemaking committee and, within 45 days
of the close of the 2002 legislative session, the state was required to provide
final, enacted legislation, signed by the Governor of West Virginia, that
addressed all problems with the current state bonding system. The West Virginia
Legislature passed, and the Governor of West Virginia signed, an amended
alternative bond program, called the 7-Up Plan.
The plaintiffs filed a motion in January 2002 asking the court to compel
the Office of Surface Mining to perform its non-discretionary duties and find
that the new alternative bonding program promulgated by West Virginia still
fails to meet the requirements of the federal SMCRA. In March 2002, the court
denied the plaintiffs' motion, based in part upon representations by the Office
of Surface Mining that it would make a final determination regarding the
adequacy of the 7-Up Plan by no later than May 28, 2002.
On May 29, 2002, the Office of Surface Mining issued a final rule that
approved amendments to the West Virginia alternative bonding scheme adopted by
the West Virginia Department of Environmental Protection and enacted by the
state legislature. These amendments require, among other things, eliminating the
current deficit and restoring the Special Reclamation Fund to solvency, removing
spending limitations on the expenditure of funds for water treatment, creating a
special advisory council to advise on structural reforms to the bonding program
to avoid deficits in the future and annual reporting to the state legislature on
the adequacy of the funds in the alternative bonding scheme.
The current deficit will be eliminated through special reclamation taxes on
clean coal totaling fourteen cents per ton, of which seven cents is an
additional temporary tax that will terminate in 39 months. The Office of Surface
Mining has projected that these taxes will eliminate the deficit. These taxes
and whatever other requirements may be adopted in the future by the advisory
council will likely result in increases in the funds that mine operators,
including our lessees, are required to post in order to obtain permits and could
result in further additional costs or fees related to the operation of a coal
mine or the sale of coal. Any changes to the state reclamation bonding program
could also complicate and protract the process of applying for and obtaining
necessary permits.
On June 25, 2002, the West Virginia Highlands Conservancy filed an amended
complaint challenging the Office of Surface Mining's approval of the amendments
to the West Virginia alternative bonding program.
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 may not receive protected status under the Endangered Species Act or
that currently protected species may 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, for
example, 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.
105
TITLE TO PROPERTY
Of the 1.15 billion tons of proven and probable coal reserves to which we
had rights as of December 31, 2001, we owned approximately 1.13 billion, or 98%,
of the reserves in fee. We lease approximately 20 million tons, or 2%, 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. Some of the leases,
easements, rights-of-way, and licenses transferred or to be transferred to us
require the consent of the grantor to transfer these rights, although the leases
that represent the largest portion of the 20 million tons cited above do not
require consent for transfer. We believe that we have obtained or will obtain
the third-party consents and authorizations sufficient for the transfer to us of
the properties necessary for us to operate our business in all material respects
as described in the prospectus. With respect to any consents or authorizations
that have not yet been obtained, we believe that those consents or
authorizations will be obtained, or that the failure to obtain those consents or
authorizations will have no material adverse effect on the operation 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
To carry out our operations, our general partner and its affiliates employ
approximately 14 employees who directly support our operations. None of our
general partner's employees are subject to a collective bargaining agreement.
Some of the employees of our lessees and sublessees are subject to collective
bargaining agreements.
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. See "Business -- Regulation" above for a more complete
discussion of our material environmental obligations.
106
MANAGEMENT
GP NATURAL RESOURCE PARTNERS LLC WILL MANAGE US
Because our general partner is a limited partnership, its general partner,
GP Natural Resource Partners LLC, will manage our operations and activities. Our
general partner is not elected by our unitholders and will not be subject to
re-election on a regular basis in the future. Unitholders will not, directly or
indirectly, participate in our management or operation. Our general partner and
GP Natural Resource Partners LLC owe a fiduciary duty to our unitholders. Our
general partner will be liable, as general partner, for all of our debts (to the
extent not paid from our assets), except for indebtedness or other obligations
that are made specifically nonrecourse to it. Whenever possible, our general
partner intends to incur indebtedness or other obligations on a non-recourse
basis.
At least two members of the board of directors of GP Natural Resource
Partners LLC will serve on a conflicts committee to review specific matters that
the board believes may involve conflicts of interest. The conflicts committee
will determine if the resolution of the conflict of interest is fair and
reasonable to us. The members of the conflicts committee may not be officers or
employees of our general partner or GP Natural Resource Partners LLC or
directors, officers or employees of their affiliates and must meet the
independence and experience standards to serve on an audit committee of a board
of directors established by the NYSE. Any matters approved by the conflicts
committee will be conclusively deemed to be fair and reasonable to us, approved
by all of our partners and not a breach by our general partner of any duties it
may owe us or our unitholders. In addition, we will have an audit committee that
will consist of independent directors and will review our external financial
reporting, recommend engagement of our independent auditors and review
procedures for internal auditing and the adequacy of our internal accounting
controls. Our compensation committee will oversee compensation decisions for the
officers of the general partner as well as the compensation plans described
below.
In compliance with the rules of the NYSE, the members of the board of
directors named below will appoint two independent members within three months
of the listing of the common units on the NYSE and one additional independent
member within 12 months of that listing. The three newly appointed members will
serve as the initial members of the conflicts, audit and compensation
committees.
GP Natural Resource Partners LLC was formed in April 2002. We are managed
and operated by the directors and officers of GP Natural Resource Partners LLC,
and our management has served in their current capacities since our formation.
We expect that most of our operational personnel will be employees of Western
Pocahontas Properties Limited Partnership.
The officers of GP Natural Resource Partners LLC will spend most of their
time managing our business and affairs. These officers may face a conflict,
however, regarding the allocation of their time between our business and the
other business interests of the WPP Group. GP Natural Resource Partners LLC
intends to cause its officers to devote as much time to the management of our
business and affairs as is necessary for the proper conduct of our business and
affairs. The board of directors of GP Natural Resource Partners LLC is presently
composed of five directors and will be expanded to eight directors upon the
appointment of three additional independent directors following the closing of
the offering.
107
DIRECTORS AND EXECUTIVE OFFICERS OF GP NATURAL RESOURCE PARTNERS LLC
The following table shows information for the directors and executive
officers of GP Natural Resource Partners LLC. Executive officers and directors
are elected for one-year terms.
ESTIMATED
PERCENTAGE OF
TIME DEVOTED
POSITION WITH TO NATURAL
NAME AGE GP NATURAL RESOURCE PARTNERS LLC RESOURCE PARTNERS
---- --- -------------------------------- -----------------
Corbin J. Robertson, Jr. ....... 54 Chief Executive Officer and 50%
Chairman of the Board
Nick Carter..................... 56 President and Chief Operating 90%
Officer
Dwight L. Dunlap................ 49 Chief Financial Officer, 90%
Secretary and Treasurer
Kevin Wall...................... 45 Vice President and Chief 90%
Engineer
Kenneth Hudson.................. 47 Controller 90%
Steven F. Leer.................. 49 Director
S. Reed Morian.................. 56 Director
David B. Peugh.................. 47 Director
W. W. Scott, Jr. ............... 57 Director
Corbin J. Robertson, Jr. is the Chief Executive Officer and the Chairman of
the Board of Directors of GP Natural Resource Partners LLC. Mr. Robertson has
served as the Chief Executive Officer and Chairman of the Board of the general
partners of Western Pocahontas Properties Limited Partnership since 1986, Great
Northern Properties Limited Partnership since 1992 and Quintana Minerals
Corporation since 1978 and as Chairman of the Board of Directors of New Gauley
Coal Corporation since 1986. He also serves as Chairman of the Board of the
Baylor College of Medicine and of the Cullen Trust for Higher Education and on
the boards of the American Petroleum Institute, the National Petroleum Council,
the Texas Medical Center and the World Health and Golf Association.
Nick Carter is the President and Chief Operating Officer of GP Natural
Resource Partners LLC. He has also served as President of the general partner of
Western Pocahontas Properties Limited Partnership and New Gauley Coal
Corporation since 1990 and as President of the general partner of Great Northern
Properties Limited Partnership from 1992 to 1998. Prior to 1990, Mr. Carter held
various positions with MAPCO Coal Corporation and was engaged in the private
practice of law. He serves as President of the National Council of Coal Lessors,
as Chair of the West Virginia Chamber of Commerce and as a board member of the
Kentucky Coal Association.
Dwight L. Dunlap is the Chief Financial Officer, Secretary and Treasurer of
GP Natural Resource Partners LLC. Mr. Dunlap has served as Vice
President-Treasurer of Quintana Minerals Corporation and as Chief Financial
Officer, Treasurer and Secretary of the general partner of Western Pocahontas
Properties Limited Partnership and Great Northern Properties Limited Partnership
since 2000. Mr. Dunlap has worked for Quintana Minerals since 1982 and has
served as Vice President and Treasurer since 1987. Mr. Dunlap is a Certified
Public Accountant with over 25 years of experience in financial management,
accounting and reporting including six years of audit experience with a Big Five
international public accounting firm.
Kevin Wall is a Vice President and Chief Engineer of GP Natural Resource
Partners LLC. Mr. Wall has served as Vice President -- Engineering for the
general partner of Western Pocahontas Properties Limited Partnership since 1998
and the general partner of Great Northern Properties Limited Partnership since
1992. He has also served as the Vice President -- Engineering of New Gauley Coal
Corporation since 1998. He has performed duties in the land management,
planning, project evaluation, acquisition and engineering areas since 1981. He
is a Registered Professional Engineer in West Virginia and is a member of the
American Institute of Mining, Metallurgical, and Petroleum Engineers and of the
National Society
108
of Professional Engineers. Mr. Wall also serves on the Board of Directors of
Leadership Tri-State and is the immediate past president of the West Virginia
Society of Professional Engineers.
Kenneth Hudson is the Controller of GP Natural Resource Partners LLC. He
has served as Controller of the general partner of Western Pocahontas Properties
Limited Partnership and of New Gauley Coal Corporation since 1988 and of the
general partner of Great Northern Properties Limited Partnership since 1992. He
was also Controller of Blackhawk Mining Co., Quintana Coal Co. and other related
operations from 1985 to 1988. Prior to that time, Mr. Hudson worked in public
accounting.
Steven F. Leer is a member of the Board of Directors of GP Natural Resource
Partners LLC. Mr. Leer has also served as President, Chief Executive Officer and
a director of Arch Coal, Inc. since 1992. He is also a Director of the Norfolk
Southern Corporation, Chairman of the Center for Energy and Economic Development
and Chairman of the National Coal Council.
S. Reed Morian is a member of the Board of Directors of GP Natural Resource
Partners LLC. Mr. Morian has served as a member of the Board of Directors of the
general partner of Western Pocahontas Properties Limited Partnership and New
Gauley Coal Corporation since 1986 and has served as a member of the Board of
Directors of the general partner of Great Northern Properties Limited
Partnership since 1992. Mr. Morian has worked for Dixie Chemical Company since
1971 and has served as its Chairman and Chief Executive Officer since 1989. He
has also worked for DX Holding Company since 1971, and has served as Chairman,
Chief Executive Officer and President since 1989.
David B. Peugh is a member of the Board of Directors of GP Natural Resource
Partners LLC. Mr. Peugh has also served as Vice President -- Business
Development of Arch Coal, Inc. since 1993. He is also a director of ZECA
Corporation, a company developing an emission-free process of producing
electricity from coal.
W. W. Scott, Jr. is a member of the Board of Directors of GP Natural
Resource Partners LLC. Mr. Scott was Executive Vice President and Chief
Financial Officer of Quintana Minerals Corporation from 1985 to 1999. He served
as Executive Vice President and Chief Financial Officer of the general partner
of Western Pocahontas Properties Limited Partnership and New Gauley Coal
Corporation from 1986 to 1999. He served as Executive Vice President and Chief
Financial Officer of the general partner of Great Northern Properties Limited
Partnership from 1992 to 1999. Since 1999, he has continued to serve as a
director of the general partner of Western Pocahontas Properties Limited
Partnership and Quintana Minerals Corporation.
REIMBURSEMENT OF EXPENSES OF OUR GENERAL PARTNER
Our general partner will not receive any management fee or other
compensation for its management of our partnership. Our general partner and its
affiliates will, however, be reimbursed for all expenses incurred on our behalf.
These expenses include the costs of employee, officer and director compensation
and benefits properly allocable to us and all other expenses necessary or
appropriate to the conduct of our business and allocable to us. The partnership
agreement provides that our general partner will determine the expenses that are
allocable to us in any reasonable manner determined by our general partner in
its sole discretion.
EXECUTIVE COMPENSATION
Our general partner and GP Natural Resource Partners LLC were formed in
April 2002. Accordingly, GP Natural Resource Partners LLC paid no compensation
to its directors and officers in 2001. We have not accrued any obligations with
respect to management incentive or retirement benefits for the directors and
officers for 2001. Officers and employees of GP Natural Resource Partners LLC
may participate in employee benefit plans and arrangements sponsored by GP
Natural Resource Partners LLC or its affiliates, including plans that may be
established by the general partner or its affiliates in the future.
109
COMPENSATION OF DIRECTORS
No additional remuneration will be paid to officers or employees of GP
Natural Resource Partners LLC who also serve as directors. GP Natural Resource
Partners LLC anticipates that each director will receive compensation for
attending meetings of the board of directors and committee meetings. The amount
of compensation to be paid to directors has not yet been determined. The
directors who are appointed by Arch Coal, other than the independent director
appointed by Arch Coal, will assign any compensation and benefits they receive
in their capacity as directors to Arch Coal. In addition, each director will be
reimbursed for his out-of-pocket expenses in connection with attending meetings
of the board of directors or committees. Each director will be fully indemnified
by us for his actions associated with being a director to the fullest extent
permitted under Delaware law.
LONG-TERM INCENTIVE PLAN
GP Natural Resource Partners LLC has adopted the Natural Resource Partners
Long-Term Incentive Plan for employees and directors of GP Natural Resource
Partners LLC and employees of its affiliates who perform services for us. The
long-term incentive plan consists of two components: restricted units and unit
options. The long-term incentive plan currently permits the grant of awards
covering a number of common units equal to three percent of the number of common
units outstanding immediately following the initial public offering of common
units. The plan is administered by the compensation committee of GP Natural
Resource Partners LLC's board of directors.
GP Natural Resource Partners LLC's board of directors in its discretion may
terminate or amend the long-term incentive plan at any time with respect to any
units for which a grant has not yet been made. GP Natural Resource Partners
LLC's board of directors also has the right to alter or amend the long-term
incentive plan or any part of the plan from time to time, including increasing
the number of units that may be granted subject to unitholder approval as
required by the exchange upon which the common units are listed at that time. No
change in any outstanding grant may be made, however, that would materially
impair the rights of the participant without the consent of the participant.
Restricted Units. A restricted unit is a "phantom" unit that entitles the
grantee to receive a common unit upon the vesting of the phantom unit or, in the
discretion of the compensation committee, cash equivalent to the value of a
common unit. The compensation committee may make grants under the plan to
employees and directors containing such terms as the compensation committee
shall determine under the plan. The compensation committee will determine the
period over which restricted units granted to employees and directors will vest.
The committee may base its determination upon the achievement of specified
financial objectives. In addition, the restricted units will vest upon a change
of control of Natural Resource Partners, our general partner, or GP Natural
Resource Partners LLC.
If a grantee's employment or membership on the board of directors
terminates for any reason, the grantee's restricted units will be automatically
forfeited unless, and to the extent, the compensation committee provides
otherwise. Common units to be delivered upon the vesting of restricted units may
be common units acquired by GP Natural Resource Partners LLC in the open market,
common units already owned by the general partner, common units acquired by GP
Natural Resource Partners LLC directly from us or any other person or any
combination of the foregoing. GP Natural Resource Partners LLC will be entitled
to reimbursement by us for the cost incurred in acquiring common units. If we
issue new common units upon vesting of the restricted units, the total number of
common units outstanding will increase.
We intend the issuance of the common units upon vesting of the restricted
units under the plan to serve as a means of incentive compensation for
performance and not primarily as an opportunity to participate in the equity
appreciation of the common units. Therefore, plan participants will not pay any
consideration for the common units they receive, and we will receive no
remuneration for the units.
Unit Options. The long-term incentive plan currently permits the grant of
options covering common units. The compensation committee may determine to make
grants under the plan to employees and
110
directors containing such terms as the committee shall determine. Unit options
will have an exercise price that, in the discretion of the committee, may not be
less than the fair market value of the units on the date of grant. In general,
unit options granted will become exercisable over a period determined by the
compensation committee. In addition, the unit options will become exercisable
upon a change in control.
Upon exercise of a unit option, the general partner will acquire common
units in the open market or directly from us or any other person or use common
units already owned by GP Natural Resource Partners LLC, or any combination of
the foregoing. The general partner will be entitled to reimbursement by us for
the difference between the cost incurred by GP Natural Resource Partners LLC in
acquiring these common units and the proceeds received by GP Natural Resource
Partners LLC from an optionee at the time of exercise. Thus, the cost of the
unit options will be borne by us. If we issue new common units upon exercise of
the unit options, the total number of common units outstanding will increase,
and GP Natural Resource Partners LLC will pay us the proceeds it received from
the optionee upon exercise of the unit option. The unit option plan has been
designed to furnish additional compensation to employees and directors and to
align their economic interests with those of common unitholders.
ANNUAL INCENTIVE PLAN
The general partner has adopted the Natural Resource Partners Annual
Incentive Compensation Plan. The annual incentive plan is designed to enhance
the performance of GP Natural Resource Partners LLC's and its affiliates' key
employees by rewarding them with cash awards for achieving annual financial and
operational performance objectives. The compensation committee in its discretion
may determine individual participants and payments, if any, for each fiscal
year. The board of directors of GP Natural Resource Partners LLC may amend or
change the annual incentive plan at any time. We will reimburse GP Natural
Resource Partners LLC for payments and costs incurred under the plan.
111
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units of Natural
Resource Partners that will be issued upon the consummation of this offering and
the related transactions and held by beneficial owners of 5% or more of the
units, by directors of GP Natural Resource Partners LLC and by all directors and
executive officers of GP Natural Resource Partners LLC as a group. The address
of Western Pocahontas Properties Limited Partnership, Great Northern Properties
Limited Partnership and New Gauley Coal Corporation is 601 Jefferson Street,
Suite 3600, Houston, Texas 77002. The address of Ark Land Company is One
CityPlace Drive, Suite 300, St. Louis, Missouri, 63141.
PERCENTAGE OF PERCENTAGE OF
COMMON UNITS COMMON SUBORDINATED SUBORDINATED PERCENTAGE OF
TO BE UNITS TO BE UNITS TO BE UNITS TO BE TOTAL UNITS TO
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BE BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
------------------------ ------------ ------------- ------------ ------------- ---------------
Western Pocahontas Properties
Limited Partnership.............. 3,458,304 28.8% 5,531,904 46.1% 37.4%
Great Northern Properties Limited
Partnership...................... 737,742 6.1% 1,180,092 9.8% 8.0%
New Gauley Coal Corporation........ 138,092 1.2% 220,892 1.8% 1.5%
Arch Coal, Inc.(1)(2).............. 3,170,862 26.4% 5,072,112 42.3% 34.3%
Ark Land Company(1)(2)............. 3,170,862 26.4% 5,072,112 42.3% 34.3%
Corbin J. Robertson, Jr.(3)........ 3,596,396 30.0% 5,752,796 47.9% 38.9%
Nick Carter........................ -- --% -- --% --%
Dwight L. Dunlap................... -- --% -- --% --%
Kevin Wall......................... -- --% -- --% --%
Kenneth Hudson..................... -- --% -- --% --%
Steven F. Leer..................... -- --% -- --% --%
S. Reed Morian..................... -- --% -- --% --%
David B. Peugh..................... -- --% -- --% --%
W.W. Scott, Jr. ................... -- --% -- --% --%
All directors and executive
officers as a group (9
persons)......................... 3,596,396 30.0% 5,752,796 47.9% 38.9%
---------------
(1) Arch Coal, Inc. is the parent company of Ark Land Company and, as such, Arch
Coal, Inc. may be deemed to beneficially own the units held by Ark Land
Company
(2) In the event the underwriters exercise the over-allotment option in full,
Ark Land Company will sell 285,187 common units to the underwriters, thereby
reducing Arch Coal, Inc.'s and Ark Land Company's beneficial ownership of
common units to 2,885,675.
(3) Mr. Robertson may be deemed to beneficially own the units held by Western
Pocahontas Properties Limited Partnership and New Gauley Coal Corporation.
112
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2001, Arch Coal contacted the WPP Group regarding its interest in
forming a limited partnership to hold and lease coal properties and to conduct a
public offering of its securities. The WPP Group expressed interest in pursuing
the formation of such a partnership and the parties began negotiations and due
diligence on the properties to be contributed. In December 2001, the WPP Group
and Arch Coal reached preliminary agreement on the structure of the partnership,
the properties each party would contribute to the partnership and their relative
values and resulting ownership of the general partner and the partnership and
agreed to the lead underwriters for the initial public offering of our common
units. Arch Coal and the WPP Group continued negotiations on the value of the
properties each would contribute to the Partnership and due diligence with
respect to these properties and reached final agreement in March 2002.
After this offering, affiliates of our general partner will own 7,505,000
common units and 12,005,000 subordinated units representing a 79.6% limited
partner interest in us. In addition, our general partner will own the 2% general
partner interest in us.
Quintana Minerals Corporation, a company controlled by the owner of the
general partner of Western Pocahontas Properties Limited Partnership, provided
certain administrative services to Western Pocahontas Properties Limited
Partnership and charged Western Pocahontas Properties Limited Partnership for
direct costs related to the administrative services. The total expenses charged
to Western Pocahontas Properties Limited Partnership under this arrangement were
approximately $500,000 for each of the years ended December 31, 1999, 2000 and
2001.
Western Pocahontas Properties Limited Partnership has a management contract
to provide certain management, engineering and accounting services to Great
Northern Properties Limited Partnership. The contract provides for, and Great
Northern Properties Limited Partnership paid, a $250,000 annual fee, in each of
the three years ended December 31, 1999, 2000 and 2001, which is intended to
reimburse Western Pocahontas Properties Limited Partnership for its expense. The
contract may be canceled upon 90 days advance notice by Great Northern
Properties Limited Partnership.
Some of the Arch Coal Contributed Properties are leased to affiliates of
Arch Coal that mine on the properties. Contracted royalty rates from these
affiliates for the three years ended December 31, 2001 were 6.5% of the gross
sales price of coal sold from the property using underground mining methods and
7.5% of the gross sales price of coal sold from the property using surface
mining methods. Affiliate royalties amounted to $10.5 million, $10.2 million and
$10.3 million during the years ended December 31, 2001, 2000 and 1999,
respectively. Please read "-- Coal Leases with Ark Land Company" for a
discussion of the leases between the Partnership and Ark Land Company.
We believe that the terms for each of the above transactions are at least
as favorable to us as we would have obtained in transactions negotiated with
unaffiliated third parties.
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following table summarizes the distributions and payments to be made by
us to our general partner and its affiliates in connection with the formation,
ongoing operation and any liquidation of Natural Resource Partners. These
distributions and payments were determined by and among affiliated entities and,
consequently, are not the result of arm's-length negotiations.
FORMATION STAGE
The consideration received by
our general partner and its
affiliates for the
contribution of the assets and
liabilities to us............. - 7,505,000 common units;
- 12,005,000 subordinated units;
113
- 2% general partner interest in Natural
Resource Partners;
- the incentive distribution rights; and
- the assumption of $46.6 million of
indebtedness of the WPP Group.
OPERATIONAL STAGE
Distributions of available
cash to our general partner
and its affiliates............ We will generally make cash distributions 98%
to the unitholders, including affiliates of our
general partner, as holders of all of the
subordinated units, and 2% to the general
partner. In addition, if distributions exceed
the target distribution levels, the holders of
the incentive distribution rights, including
our general partner, will be entitled to
increasing percentages of the distributions, up
to an aggregate of 48% of the distributions
above the highest target level.
Assuming we have sufficient available cash to
pay the full minimum quarterly distribution on
all of our outstanding units for four quarters,
our general partner would receive distributions
of approximately $1.0 million on its 2% general
partner interest and our affiliates would
receive distributions of approximately $15.0
million on their common units and $24.0 million
on their subordinated units.
Payments to our general
partner and its affiliates.... Our general partner and its affiliates will not
receive any management fee or other
compensation for the management of our
partnership. Our general partner and its
affiliates will be reimbursed, however, for all
direct and indirect expenses incurred on our
behalf. Our general partner has the sole
discretion in determining the amount of these
expenses.
Withdrawal or removal of our
general partner............... If our general partner withdraws or is removed,
its general partner interest and its incentive
distribution rights will either be sold to the
new general partner for cash or converted into
common units, in each case for an amount equal
to the fair market value of those interests.
See "The Partnership Agreement -- Withdrawal or
Removal of the General Partner."
LIQUIDATION STAGE
Liquidation................... Upon our liquidation, the partners, including
our general partner, will be entitled to
receive liquidating distributions according to
their particular capital account balances.
AGREEMENTS GOVERNING THE TRANSACTIONS
We and other related parties have entered into the various documents and
agreements that will effect the transactions, including the vesting of assets
in, and the assumption of liabilities by, our subsidiaries, and the application
of the proceeds of this offering. These agreements will not be the result of
arm's-length negotiations, and we cannot assure you that they, or that any of
the transactions which they provide for, will be effected on terms at least as
favorable to the parties to these agreements as they could have been
114
obtained from unaffiliated third parties. All of the transaction expenses
incurred in connection with these transactions, including the expenses
associated with transferring assets into our subsidiaries, will be paid from the
proceeds of this offering.
OMNIBUS AGREEMENT
Non-competition Provisions
As part of the omnibus agreement to be entered into among Natural Resource
Partners, our general partner, the WPP Group, Arch Coal, Ark Land Company and
Corbin J. Robertson, Jr. concurrently with the closing of this offering, the WPP
Group, any entity controlled by Corbin J. Robertson, Jr. and Arch Coal, which we
refer to in this section as the GP affiliates, have each agreed that neither
they nor their affiliates will, directly or indirectly, engage or invest in
entities that engage in the following activities (each, a "restricted business")
in the specific circumstances described below:
- the entering into or holding of leases with a party other than an
affiliate of the GP affiliate for any GP affiliate owned fee coal
reserves within the United States; and
- the entering into or holding of subleases with a party other than an
affiliate of the GP affiliate for coal reserves within the United States
controlled by a paid-up lease owned by any GP affiliate or its affiliate.
"Affiliate" means, with respect to any GP affiliate or, any other entity in
which such GP affiliate owns, through one or more intermediaries, 50% or more of
the then outstanding voting securities or other ownership interests of such
entity. Except as described below, the WPP Group, Arch Coal and their respective
controlled affiliates will not be prohibited from engaging in activities in
which they compete directly with us. Please see "Risk Factors -- The WPP Group
and Arch Coal may engage in substantial competition with us."
A GP affiliate may, directly or indirectly, engage in a restricted business
if:
- the GP affiliate was engaged in the restricted business at the closing of
the offering; provided that if the fair market value of the asset or
group of related assets of the restricted business subsequently exceeds
$10 million, the GP affiliate must offer the restricted business to
Natural Resource Partners under the offer procedures described below.
- the asset or group of related assets of the restricted business have a
fair market value of $10 million or less; provided that if the fair
market value of the assets of the restricted business subsequently
exceeds $10 million, the GP affiliate must offer the restricted business
to Natural Resource Partners under the offer procedures described below.
- the asset or group of related assets of the restricted business have a
fair market value of more than $10 million and the general partner (with
the approval of the conflicts committee) has elected not to cause Natural
Resource Partners to purchase these assets under the procedures described
below.
- its ownership in the restricted business consists solely of a
noncontrolling equity interest.
For purposes of this paragraph, "fair market value" means the fair market value
as determined in good faith by the relevant GP affiliate.
The total fair market value in the good faith opinion of the WPP Group of
all restricted businesses engaged in by the WPP Group, other than those engaged
in by the WPP Group at closing of the offering, may not exceed $75 million. For
purposes of this restriction, the fair market value of any entity engaging in a
restricted business purchased by the WPP Group will be determined based on the
fair market value of the entity as a whole, without regard for any lesser
ownership interest to be acquired. Arch Coal is not subject to a similar
restriction on the total fair market value of restricted businesses it may own.
If the WPP Group desires to acquire a restricted business or an entity that
engages in a restricted business with a fair market value in excess of $10
million and the restricted business constitutes greater
115
than 50% of the value of the business to be acquired, then the WPP Group must
first offer Natural Resource Partners the opportunity to purchase the restricted
business. If (1) Arch Coal desires to acquire a restricted business or an entity
that engages in a restricted business with a fair market value in excess of $10
million or (2) the WPP Group desires to acquire a restricted business or an
entity that engages in a restricted business with a value in excess of $10
million and the restricted business constitutes 50% or less of the value of the
business to be acquired, then the GP affiliate may purchase the restricted
business first and then offer Natural Resource Partners the opportunity to
purchase the restricted business within six months of acquisition. For purposes
of this paragraph, "restricted business" excludes a general partner interest or
managing member interest, which is addressed in a separate restriction
summarized below. For purposes of this paragraph only, "fair market value" means
the fair market value as determined in good faith by the relevant GP affiliate.
If Natural Resource Partners wants to purchase the restricted business and
the GP affiliate and the general partner, with the approval of the conflicts
committee, agree on the fair market value and other terms of the offer within 60
days after the general partner receives the offer from the GP affiliate, Natural
Resource Partners will purchase the restricted business as soon as commercially
practicable. If the GP affiliate and the general partner, with the approval of
the conflicts committee, are unable to agree in good faith on the fair market
value and other terms of the offer within 60 days after the general partner
receives the offer, then the GP affiliate may sell the restricted business to a
third party within two years for no less than the purchase price and on terms no
less favorable to the GP affiliate than last offered by Natural Resource
Partners. During this two year period, the GP affiliate may operate the
restricted business in competition with Natural Resource Partners, subject to
the restriction on total fair market value of restricted businesses owned in the
case of the WPP Group.
If, at the end of the two year period, the restricted business has not been
sold to a third party and the restricted business retains a value, in the good
faith opinion of the relevant GP affiliate, in excess of $10 million, then the
GP affiliate must reoffer the restricted business to the general partner. If the
GP affiliate and the general partner, with the approval of the conflicts
committee, agree on the fair market value and other terms of the offer within 60
days after the general partner receives the second offer from the GP affiliate,
Natural Resource Partners will purchase the restricted business as soon as
commercially practicable. If the GP Affiliate and the general partner, with the
concurrence of the conflicts committee, again fail to agree after negotiation in
good faith on the fair market value of the restricted business, then the GP
affiliate will be under no further obligation to Natural Resource Partners with
respect to the restricted business, subject to the restriction on total fair
market value of restricted businesses owned in the case of the WPP Group.
In addition, if during the two year period described above, a change occurs
in the restricted business that, in the good faith opinion of the GP affiliate,
affects the fair market value of the restricted business by more than 10 percent
and the fair market value of the restricted business remains, in the good faith
opinion of the relevant GP affiliate, in excess of $10 million, the GP affiliate
will be obligated to reoffer the restricted business to the general partner at
the new fair market value, and the offer procedures described above will
recommence.
If the restricted business to be acquired is in the form of a general
partner interest in a publicly-held partnership or a managing member interest in
a publicly-held limited liability company, the WPP Group may not acquire such
restricted business even if we decline to purchase the restricted business. If
the restricted business to be acquired is in the form of a general partner
interest in a non publicly-held partnership or a managing member of a
non-publicly-held limited liability company, the WPP Group may acquire such
restricted business subject to the restriction on total fair market value of
restricted businesses owned and the offer procedures described above. If the
restricted business to be acquired is in the form of a general partner interest
in a partnership or a managing member interest in a limited liability company,
Arch Coal may acquire such restricted business as part of a larger transaction
so long as (1) it sells the interest to us or a third party within six months of
the acquisition or (2) the general partner, with the approval of the conflicts
committee, agrees that the restricted business will be subject to the offer
procedures described in the preceding paragraphs without reference again to this
paragraph. If, following
116
the six month period, Arch Coal has made a good faith, reasonable attempt to
divest the interest, but is unable to do so, it may request an extension from
the conflicts committee for such time as is reasonably necessary to divest the
interest. The conflicts committee, in its discretion, may grant an extension to
Arch Coal to either (1) complete the divestiture of the restricted business or
(2) divest Arch Coal's participation in the control of our general partner. If
the conflicts committee declines to grant an extension to Arch Coal, Arch Coal
will immediately remove its representatives from participation in the governance
and decision-making of Natural Resource Partners and from having access to
confidential information concerning our affairs until such time as either (1)
Arch Coal has completed the divestiture of the restricted business or (2) Arch
Coal no longer participates in the control of our general partner.
Indemnification
Under the omnibus agreement, the WPP Group and Arch Coal, jointly and
severally, will indemnify us for (1) three years after the closing of this
offering against environmental liabilities associated with the properties
contributed to us and occurring before the closing date of this offering and (2)
all tax liabilities attributable to the ownership or operation of the
partnership assets prior to the closing of this offering. The environmental
indemnity will be limited to a maximum amount of $10.0 million. Liabilities
resulting from a change in law after the closing of the offering are excluded
from the environmental indemnity.
The omnibus agreement may be amended at any time subsequent to the offering
by the general partner, with the concurrence of the conflicts committee. The
respective obligations of the WPP Group and Arch Coal under the omnibus
agreement terminate when the WPP Group and its affiliates, or Arch Coal and its
affiliates, as the case may be, cease to participate in the control of the
general partner.
COAL LEASES WITH ARK LAND COMPANY
Concurrently with the closing of the offering of common units, we will
enter into four coal mining leases with Ark Land Company, a subsidiary of Arch
Coal. The Arch leases grant Arch Coal the right to mine our coal on the
following properties:
- Lone Mountain located in Kentucky, which contained 49.3 million tons of
proven and probable reserves as of December 31, 2001;
- Pardee located in Kentucky and Virginia, which contained 20.7 million
tons of proven and probable reserves as of December 31, 2001;
- Boone/Lincoln located in West Virginia, which contained 18.7 million tons
of proven and probable reserves as of December 31, 2001; and
- Campbell's Creek located in West Virginia, which contained 10.9 million
tons of proven and probable reserves as of December 31, 2001.
Coal royalty revenues payable under these leases based on 2001 actual
production were $10.5 million, representing 24.8% of our total pro forma coal
royalty revenues for the year ended December 31, 2001. If no production had
taken place in 2001, minimum royalties of $5.75 million would have been payable
under the leases.
The Arch leases have an initial term of either eight or ten years, each
with an automatic year-to-year extension until the earlier to occur of (1)
delivery of notice by Ark Land that it will not renew the lease or (2) all
mineable and merchantable coal has been mined. The leases provide for payments
to us based on the higher of a percentage of the gross sales price or a fixed
minimum per ton of coal Ark Land sells from our properties, with minimum annual
royalty payments. Under the Arch leases, minimum royalty payments are credited
against future production royalties.
117
The Arch leases are intended to retain some of the legal rights Ark Land
possessed when it owned the properties. For this reason, the leases contain some
terms and provisions that are different from our third-party coal leases
negotiated at arm's length. Some of the more significant differences include:
- Ark Land has the ability to sublease the leased property without our
prior approval, although Ark Land is still responsible for sublessee
performance;
- minimum royalty payments from Ark Land continue to be payable during the
initial lease term even if all mineable and merchantable coal has been
mined from the property;
- royalties for coal sold by Ark Land to any of its affiliates may be based
on a gross selling price below the market value of the coal;
- the indemnities provided by Ark Land to us do not survive the termination
of the leases;
- we only have a limited ability to terminate the leases;
- Arch Coal has royalty-free wheelage rights on the leased properties; and
- the leases do not impose a legal duty to diligently mine the maximum
amount of coal possible from the leased property.
We believe that the production and minimum royalty rates contained in the
Arch leases are consistent with current market royalty rates.
118
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Conflicts of interest exist and may arise in the future as a result of the
relationships between our general partner and its affiliates (including the WPP
Group and Arch Coal) on the one hand, and our partnership and our limited
partners, on the other hand. The directors and officers of GP Natural Resource
Partners LLC have fiduciary duties to manage GP Natural Resource Partners LLC
and our general partner in a manner beneficial to its owners. At the same time,
our general partner has a fiduciary duty to manage our partnership in a manner
beneficial to us and our unitholders.
Whenever a conflict arises between our general partner or its affiliates,
on the one hand, and our partnership or any other partner, on the other, our
general partner will resolve that conflict. Our general partner may, but is not
required to, seek the approval of the conflicts committee of the board of
directors of our general partner of such resolution. The partnership agreement
contains provisions that allow our general partner to take into account the
interests of other parties in addition to our interests when resolving conflicts
of interest. In effect, these provisions limit our general partner's fiduciary
duties to our unitholders. The partnership agreement also restricts the remedies
available to unitholders for actions taken by our general partner that might,
without those limitations, constitute breaches of fiduciary duty.
Our general partner will not be in breach of its obligations under the
partnership agreement or its duties to us or our unitholders if the resolution
of the conflict is considered to be fair and reasonable to us. Any resolution is
considered to be fair and reasonable to us if that resolution is:
- approved by the conflicts committee, although our general partner is not
obligated to seek such approval and our general partner may adopt a
resolution or course of action that has not received approval;
- on terms no less favorable to us than those generally being provided to
or available from unrelated third parties; or
- fair to us, taking into account the totality of the relationships between
the parties involved, including other transactions that may be
particularly favorable or advantageous to us.
In resolving a conflict, our general partner, including its conflicts
committee, may, unless the resolution is specifically provided for in the
partnership agreement, consider:
- the relative interests of any party to such conflict and the benefits and
burdens relating to such interest;
- any customary or accepted industry practices or historical dealings with
a particular person or entity;
- generally accepted accounting practices or principles; and
- such additional factors it determines in its sole discretion to be
relevant, reasonable or appropriate under the circumstances.
Conflicts of interest could arise in the situations described below, among
others.
ACTIONS TAKEN BY OUR GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH AVAILABLE
FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE RIGHT TO CONVERT
SUBORDINATED UNITS.
The amount of cash that is available for distribution to unitholders is
affected by decisions of our general partner regarding such matters as:
- amount and timing of asset purchases and sales;
- cash expenditures;
- borrowings;
119
- the issuance of additional units; and
- the creation, reduction or increase of reserves in any quarter.
In addition, borrowings by us and our affiliates do not constitute a breach
of any duty owed by our general partner to the unitholders, including borrowings
that have the purpose or effect of:
- enabling our general partner to receive distributions on any subordinated
units held by our general partner or the incentive distribution rights;
or
- hastening the expiration of the subordination period.
For example, in the event we have not generated sufficient cash from our
operations to pay the minimum quarterly distribution on our common units and
subordinated units, our partnership agreement permits us to borrow funds which
may enable us to make this distribution on all outstanding units. Please read
"Cash Distribution Policy -- Subordination Period."
The partnership agreement provides that we and our subsidiaries may borrow
funds from our general partner and its affiliates. Our general partner and its
affiliates may not borrow funds from us or our subsidiaries.
WE DO NOT HAVE ANY OFFICERS OR EMPLOYEES AND RELY SOLELY ON OFFICERS AND
EMPLOYEES OF GP NATURAL RESOURCE PARTNERS LLC AND ITS AFFILIATES.
We will not have any officers or employees and will rely solely on officers
and employees of GP Natural Resource Partners LLC, its affiliates and the
employees of our subsidiaries. Affiliates of GP Natural Resource Partners LLC
will conduct businesses and activities of their own in which we will have no
economic interest. If these separate activities are significantly greater than
our activities, there could be material competition for the time and effort of
the officers and employees who provide services to our general partner. The
officers of GP Natural Resource Partners LLC will not be required to work full
time on our affairs. These officers will devote significant time to the affairs
of the WPP Group or its affiliates and will be compensated by these affiliates
for the services rendered to them.
WE WILL REIMBURSE OUR GENERAL PARTNER AND ITS AFFILIATES FOR EXPENSES.
We will reimburse our general partner and its affiliates for costs incurred
in managing and operating us, including costs incurred in rendering corporate
staff and support services to us. The partnership agreement provides that our
general partner will determine the expenses that are allocable to us in any
reasonable manner determined by our general partner in its sole discretion.
OUR GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY REGARDING OUR OBLIGATIONS.
Our general partner intends to limit its liability under contractual
arrangements so that the other party has recourse only to our assets, and not
against our general partner or its assets. The partnership agreement provides
that any action taken by our general partner to limit its liability or our
liability is not a breach of our general partner's fiduciary duties, even if we
could have obtained more favorable terms without the limitation on liability.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF OUR GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH US.
Any agreements between us on the one hand, and our general partner and its
affiliates, on the other, will not grant to the unitholders, separate and apart
from us, the right to enforce the obligations of our general partner and its
affiliates in our favor.
120
CONTRACTS BETWEEN US, ON THE ONE HAND, AND OUR GENERAL PARTNER AND ITS
AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS.
The partnership agreement allows our general partner to pay itself or its
affiliates for any services rendered to us, provided these services are rendered
on terms that are fair and reasonable. Our general partner may also enter into
additional contractual arrangements with any of its affiliates on our behalf.
Neither the partnership agreement nor any of the other agreements, contracts and
arrangements between us, on the one hand, and our general partner and its
affiliates, on the other, are or will be the result of arm's-length
negotiations.
All of these transactions entered into after the sale of the common units
offered in this offering are to be on terms that are fair and reasonable to us.
Our general partner and its affiliates will have no obligation to permit us
to use any facilities or assets of our general partner and its affiliates,
except as may be provided in contracts entered into specifically dealing with
that use. There will not be any obligation of our general partner and its
affiliates to enter into any contracts of this kind.
COMMON UNITS ARE SUBJECT TO OUR GENERAL PARTNER'S LIMITED CALL RIGHT.
Our general partner may exercise its right to call and purchase common
units as provided in the partnership agreement or assign this right to one of
its affiliates or to us. Our general partner may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise this right. As a
result, a common unitholder may have his common units purchased from him at an
undesirable time or price. If we do not issue any equity securities prior to the
expiration of the subordination period, upon the conversion of subordinated
units into common units at the end of the subordination period, our general
partner and its affiliates will own 81.3% of our outstanding common units and
will be able to exercise this call right. For a description of this right,
please read "The Partnership Agreement -- Limited Call Right."
WE MAY NOT CHOOSE TO RETAIN SEPARATE COUNSEL FOR OURSELVES OR FOR THE HOLDERS
OF COMMON UNITS.
The attorneys, independent auditors and others who have performed services
for us regarding the offering have been retained by our general partner, its
affiliates and us and may continue to be retained by our general partner, its
affiliates and us after the offering. Attorneys, independent auditors and others
who will perform services for us in the future will be selected by our general
partner or the conflicts committee and may also perform services for our general
partner and its affiliates. We may retain separate counsel for ourselves or the
holders of common units in the event of a conflict of interest arising between
our general partner and its affiliates, on the one hand, and us or the holders
of common units, on the other, after the sale of the common units offered in
this prospectus, depending on the nature of the conflict. We do not intend to do
so in most cases. Delaware case law has not definitively established the limits
on the ability of a partnership agreement to restrict such fiduciary duties.
OUR GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH US.
The partnership agreement provides that our general partner will be
restricted from engaging in any business activities other than those incidental
to its ownership of interests in us. Except as provided in our partnership
agreement and in the omnibus agreement, affiliates of our general partner will
not be prohibited from engaging in activities in which they compete directly
with us. Please read "Certain Relationships and Related Transactions -- Omnibus
Agreement."
FIDUCIARY RESPONSIBILITIES
Our general partner is accountable to us and our unitholders as a
fiduciary. Fiduciary duties owed to unitholders by our general partner are
prescribed by law and the partnership agreement. The Delaware Revised Uniform
Limited Partnership Act, which we refer to in this prospectus as the Delaware
Act,
121
provides that Delaware limited partnerships may, in their partnership
agreements, restrict or expand the fiduciary duties owed by a general partner to
limited partners and the partnership.
In order to induce our general partner to manage our business, the
partnership agreement contains various provisions restricting the fiduciary
duties that might otherwise be owed by our general partner. We have adopted
these restrictions to allow our general partner to take into account the
interests of parties in addition to our interests when resolving conflicts of
interest. We believe this is appropriate and necessary because GP Natural
Resource Partners LLC's directors have fiduciary duties to manage our general
partner in a manner beneficial both to its owners as well as to you. Without
these modifications, the general partner's ability to make decisions involving
conflicts of interest would be restricted. The modifications to the fiduciary
standards benefit the general partner by enabling it to take into consideration
all parties involved in the proposed action, so long as the resolution is fair
and reasonable to us as described above. These modifications represent a
detriment to the common unitholders because they restrict the remedies available
to unitholders for actions that, without those limitations, might constitute
breaches of fiduciary duty, as described below. The following is a summary of
the material restrictions of the fiduciary duties owed by our general partner to
the limited partners:
State-law fiduciary duty
standards..................... Fiduciary duties are generally considered to
include an obligation to act with due care and
loyalty. The duty of care, in the absence of a
provision in a partnership agreement providing
otherwise, would generally require a general
partner to act for the partnership in the same
manner as a prudent person would act on his own
behalf. The duty of loyalty, in the absence of
a provision in a partnership agreement
providing otherwise, would generally prohibit a
general partner of a Delaware limited
partnership from taking any action or engaging
in any transaction where a conflict of interest
is present.
The Delaware Act generally provides that a
limited partner may institute legal action on
behalf of the limited partnership to recover
damages from a third party where a general
partner has refused to institute the action or
where an effort to cause a general partner to
do so is not likely to succeed. In addition,
the statutory or case law of some jurisdictions
may permit a limited partner to institute legal
action on behalf of himself and all other
similarly situated limited partners to recover
damages from a general partner for violations
of its fiduciary duties to the limited
partners.
Partnership agreement modified
standards..................... The partnership agreement contains provisions
that waive or consent to conduct by our general
partner and its affiliates that might otherwise
raise issues as to compliance with fiduciary
duties or applicable law. For example, the
partnership agreement permits our general
partner to make a number of decisions in its
"sole discretion." This entitles our general
partner to consider only the interests and
factors that it desires and it has no duty or
obligation to give any consideration to any
interest of, or factors affecting, us, our
affiliates or any limited partner. Other
provisions of the partnership agreement provide
that our general partner's actions must be made
in its reasonable discretion. These standards
reduce the obligations to which our general
partner would otherwise be held.
122
The partnership agreement generally provides
that affiliated transactions and resolutions of
conflicts of interest not involving a required
vote of unitholders must be "fair and
reasonable" to us under the factors previously
set forth. In determining whether a transaction
or resolution is "fair and reasonable" our
general partner may consider the interests of
all parties involved, including its own. Unless
our general partner has acted in bad faith, the
action taken by our general partner will not
constitute a breach of its fiduciary duty.
These standards reduce the obligations to which
our general partner would otherwise be held.
In addition to the other more specific
provisions limiting the obligations of our
general partner, the partnership agreement
further provides that our general partner and
its officers and directors will not be liable
for monetary damages to us, our limited
partners or assignees for errors of judgment or
for any acts or omissions if our general
partner and those other persons acted in good
faith.
Rights and remedies of
unitholders................... The Delaware Act generally provides that a
limited partner may institute legal action on
behalf of the partnership to recover damages
from a third party where a general partner has
refused to institute the action or where an
effort to cause a general partner to do so is
not likely to succeed. These actions could
include actions against a general partner for
breach of its fiduciary duties or of the
partnership agreement. In addition, the
statutory or case law of some jurisdictions may
permit a limited partner to institute legal
action on behalf of himself and all other
similarly situated limited partners to recover
damages from a general partner for violations
of its fiduciary duties to the limited
partners.
In order to become a limited partner of our partnership, a common
unitholder is required to agree to be bound by the provisions in the partnership
agreement, including the provisions discussed above. This is in accordance with
the policy of the Delaware Act favoring the principle of freedom of contract and
the enforceability of partnership agreements. The failure of a limited partner
or assignee to sign a partnership agreement does not render the partnership
agreement unenforceable against that person.
We are required to indemnify our general partner and its officers,
directors, employees, affiliates, partners, members, agents and trustees, to the
fullest extent permitted by law, against liabilities, costs and expenses
incurred by our general partner or these other persons. This indemnification is
required if our general partner or any of these persons acted in good faith and
in a manner they reasonably believed to be in, or (in the case of a person other
than our general partner) not opposed to, our best interests. Indemnification is
also required for criminal proceedings if our general partner or these other
persons had no reasonable cause to believe their conduct was unlawful. Thus, our
general partner could be indemnified for its negligent acts if it met these
requirements concerning good faith and our best interests. To the extent that
these provisions purport to include indemnification for liabilities arising
under the Securities Act, in the opinion of the SEC, such indemnification is
contrary to public policy and therefore unenforceable. If you have questions
regarding the fiduciary duties of our general partner, you should consult with
your own counsel. Please read "The Partnership Agreement -- Indemnification."
123
SELLING UNITHOLDER
Arch Coal is selling 1,901,250 common units in the initial public offering.
Arch Coal will sell an additional 285,187 common units if the underwriters
exercise the over-allotment option in full. Please read "-- Security Ownership
of Certain Beneficial Owners and Management."
124
DESCRIPTION OF THE COMMON UNITS
THE UNITS
The common units and the subordinated units represent limited partner
interests in us. The holders of units are entitled to participate in partnership
distributions and exercise the rights or privileges available to limited
partners under our partnership agreement. For a description of the relative
rights and preferences of holders of common units and subordinated units in and
to partnership distributions, please read this section, "Cash Distribution
Policy" and "Description of Subordinated Units." For a description of the rights
and privileges of limited partners under our partnership agreement, including
voting rights, please read "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
Duties. American Stock Transfer & Trust Company will serve as registrar
and transfer agent for the common units. We will pay all fees charged by the
transfer agent for transfers of common units except the following fees that will
be paid by unitholders:
- surety bond premiums to replace lost or stolen certificates, taxes and
other governmental charges;
- special charges for services requested by a holder of a common unit; and
- other similar fees or charges.
There will be no charge to holders for disbursements of our cash
distributions. We will indemnify the transfer agent, its agents and each of
their shareholders, directors, officers and employees against all claims and
losses that may arise out of acts performed or omitted for its activities in
that capacity, except for any liability due to any gross negligence or
intentional misconduct of the indemnified person or entity.
Resignation or Removal. The transfer agent may at any time resign, by
notice to us, or be removed by us. The resignation or removal of the transfer
agent will become effective upon our appointment of a successor transfer agent
and registrar and its acceptance of the appointment. If no successor has been
appointed and accepted the appointment within 30 days after notice of the
resignation or removal, our general partner is authorized to act as the transfer
agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
The transfer of the common units to persons who purchase directly from the
underwriters will be accomplished through the completion, execution and delivery
of a transfer application by the investor. Any later transfers of a common unit
will not be recorded by the transfer agent or recognized by us unless the
transferee executes and delivers a transfer application. The form of transfer
application is set forth as Appendix B to this prospectus and is also set forth
on the reverse side of the certificates representing units. By executing and
delivering a transfer application, the transferee of common units:
- becomes the record holder of the common units and is an assignee until
admitted into our partnership as a substituted limited partner;
- automatically requests admission as a substituted limited partner in our
partnership;
- agrees to be bound by the terms and conditions of, and is deemed to have
executed, our partnership agreement;
- represents that the transferee has the capacity, power and authority to
enter into the partnership agreement;
- grants powers of attorney to officers of the general partner and any
liquidator of our partnership as specified in the partnership agreement;
and
- makes the consents and waivers contained in the partnership agreement.
125
An assignee will become a substituted limited partner of our partnership
for the transferred common units upon the consent of our general partner and the
recording of the name of the assignee on our books and records. The general
partner may withhold its consent in its sole discretion.
Transfer applications may be completed, executed and delivered by a
transferee's broker, agent or nominee. We are entitled to treat the nominee
holder of a common unit as the absolute owner. In that case, the beneficial
holders' rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in our partnership for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only:
- the right to assign the common unit to a purchaser or other transferee;
and
- the right to transfer the right to seek admission as a substituted
limited partner in our partnership for the transferred common units.
Thus, a purchaser or transferee of common units who does not execute and
deliver a transfer application:
- will not receive cash distributions or federal income tax allocations,
unless the common units are held in a nominee or "street name" account
and the nominee or broker has executed and delivered a transfer
application; and
- may not receive some federal income tax information or reports furnished
to record holders of common units.
The transferor of common units will have a duty to provide the transferee
with all information that may be necessary to transfer the common units. The
transferor will not have a duty to insure the execution of the transfer
application by the transferee and will have no liability or responsibility if
the transferee neglects or chooses not to execute and forward the transfer
application to the transfer agent. Please read "The Partnership
Agreement -- Status as Limited Partner or Assignee."
Until a common unit has been transferred on our books, we and the transfer
agent, notwithstanding any notice to the contrary, may treat the record holder
of the unit as the absolute owner for all purposes, except as otherwise required
by law or stock exchange regulations.
126
DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of limited partner interests in
our partnership, and the rights of holders of subordinated units to participate
in distributions to partners differ from, and are subordinated to, the rights of
the holders of common units. For any given quarter, any available cash will
first be distributed to our general partner and to the holders of common units,
until the holders of common units have received the minimum quarterly
distribution plus any arrearages, and then, to the extent there is available
cash remaining, will be distributed to the holders of subordinated units. Please
read "Cash Distribution Policy."
CONVERSION OF SUBORDINATED UNITS
The subordination period will generally extend from the closing of this
offering until the first day of any quarter beginning after June 30, 2007 in
which each of the following events occur:
- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
Before the end of the subordination period, 25% of the subordinated units
will convert early into common units on a one-for-one basis immediately after
the distribution of available cash to the partners in respect of any quarter
ending on or after June 30, 2005 and 25% of the subordinated units will convert
early into common units on a one-for-one basis immediately after the
distribution of available cash to the partners in respect of any quarter ending
on or after June 30, 2006 if at the end of the applicable quarter each of the
following three events occurs:
- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
provided, however, that the early conversion of the second 25% of the
subordinated units may not occur until at least one year following the early
conversion of the first 25% of the subordinated units.
Upon expiration of the subordination period, all remaining subordinated
units will convert into common units on a one-for-one basis and will then
participate, pro rata, with the other common units in distributions of available
cash. In addition, if NRP (GP) LP is removed as our general partner under
circumstances where cause does not exist and units held by the general partner
and its affiliates are not voted in favor of that removal:
- the subordination period will end and each outstanding subordinated unit
will immediately convert into one common unit;
127
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- our general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
LIMITED VOTING RIGHTS
Holders of subordinated units will sometimes vote as a single class
together with the holders of common units and sometimes vote as a class separate
from the holders of common units and, as in the case of holders of common units,
will have very limited voting rights. During the subordination period, common
units and subordinated units each vote separately as a class on the following
matters:
- a sale or exchange of all or substantially all of our assets;
- the election of a successor general partner in connection with the
removal of our general partner;
- a dissolution or reconstitution of our partnership;
- a merger of our partnership;
- issuance of limited partner interests in some circumstances; and
- some amendments to the partnership agreement, including any amendment
that would cause us to be treated as an association taxable as a
corporation.
The subordinated units are not entitled to vote on approval of the
withdrawal of our general partner or the transfer by our general partner of its
general partner interest or incentive distribution rights under some
circumstances. Removal of our general partner requires:
- the affirmative vote of 66 2/3% of all outstanding units voting as a
single class; and
- the election of a successor general partner by the holders of a majority
of the outstanding common units and subordinated units, voting as
separate classes.
Under the partnership agreement, our general partner generally will be
permitted to effect amendments to the partnership agreement that do not
materially and adversely affect unitholders without the approval of any
unitholders.
DISTRIBUTIONS UPON LIQUIDATION
If we liquidate during the subordination period, in some circumstances
holders of outstanding common units will be entitled to receive more per unit in
liquidating distributions than holders of outstanding subordinated units. The
per-unit difference will be dependent upon the amount of gain or loss recognized
by us in liquidating our assets. Following conversion of the subordinated units
into common units, all units will be treated the same upon liquidation of our
partnership.
128
THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. The form of the partnership agreement is included in this prospectus
as Appendix A. The form of limited liability company agreement of the operating
company is included as an exhibit to the registration statement of which this
prospectus constitutes a part. We will provide prospective investors with a copy
of the forms of these agreements upon request at no charge.
We summarize the following provisions of our partnership agreement
elsewhere in this prospectus:
- with regard to distributions of available cash, please read "Cash
Distribution Policy."
- with regard to the transfer of common units, please read "Description of
the Common Units -- Transfer of Common Units."
- with regard to allocations of taxable income and taxable loss, please
read "Material Tax Consequences."
ORGANIZATION
Our partnership was formed on April 9, 2002 and will have a perpetual
existence.
PURPOSE
Our purpose under our partnership agreement is limited to serving as a
member of the operating company and engaging in any business activities that may
be engaged in by the operating company or its subsidiaries or that are approved
by our general partner. The limited liability company agreement of the operating
company provides that the operating company may, directly or indirectly, engage
in:
- its operations as conducted immediately before our initial public
offering;
- any other activity approved by our general partner but only to the extent
that our general partner reasonably determines that, as of the date of
the acquisition or commencement of the activity, the activity generates
"qualifying income" as this term is defined in Section 7704 of the
Internal Revenue Code; or
- any activity that enhances the operations of an activity that is
described in either of the preceding two clauses.
Although our general partner has the ability to cause us and the operating
company or its subsidiaries to engage in activities other than the ownership of
coal and mineral reserves and the leasing of those reserves to mine operators in
exchange for royalties from the sale of coal or other minerals mined from our
reserves, our general partner has no current plans to do so. Our general partner
is authorized in general to perform all acts deemed necessary to carry out our
purposes and to conduct our business.
POWER OF ATTORNEY
Each limited partner and each person who acquires a unit from a unitholder
and executes and delivers a transfer application grants to our general partner
(and, if appointed, a liquidator), a power of attorney to, among other things,
execute and file documents required for our qualification, continuance or
dissolution. The power of attorney also grants our general partner the authority
to amend, and to make consents and waivers under, our partnership agreement.
CAPITAL CONTRIBUTIONS
Unitholders are not obligated to make additional capital contributions,
except as described below under "-- Limited Liability."
129
LIMITED LIABILITY
Participation in the Control of Our Partnership. Assuming that a limited
partner does not participate in the control of our business within the meaning
of the Delaware Act and that it otherwise acts in conformity with the provisions
of our partnership agreement, its liability under the Delaware Act will be
limited, subject to possible exceptions, to the amount of capital it is
obligated to contribute to us for its common units plus his share of any
undistributed profits and assets. If it were determined, however, that the right
or exercise of the right by the limited partners as a group:
- to remove or replace the general partner;
- to approve some amendments to our partnership agreement; or
- to take other action under our partnership agreement;
constituted "participation in the control" of our business for the purposes of
the Delaware Act, then the limited partners could be held personally liable for
our obligations under Delaware law to the same extent as the general partner.
This liability would extend to persons who transact business with us and who
reasonably believe that the limited partner is a general partner. Neither our
partnership agreement nor the Delaware Act specifically provides for legal
recourse against our general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this does not mean
that a limited partner could not seek legal recourse, we have found no precedent
for this type of a claim in Delaware case law.
Unlawful Partnership Distributions. Under the Delaware Act, a limited
partnership may not make a distribution to a partner if, after the distribution,
all liabilities of the limited partnership, other than liabilities to partners
on account of their partnership interests and liabilities for which the recourse
of creditors is limited to specific property of the partnership, would exceed
the fair value of the assets of the limited partnership. For the purpose of
determining the fair value of the assets of a limited partnership, the Delaware
Act provides that the fair value of property subject to liability for which
recourse of creditors is limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds the
nonrecourse liability. The Delaware Act provides that a limited partner who
receives a distribution and knew at the time of the distribution that the
distribution was in violation of the Delaware Act shall be liable to the limited
partnership for the amount of the distribution for three years. Under the
Delaware Act, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of his assignor to make contributions
to the partnership, except the assignee is not obligated for liabilities unknown
to him at the time he became a limited partner and that could not be ascertained
from the partnership agreement.
Failure to Comply with the Limited Liability Provisions of Jurisdictions in
Which We Do Business. Our subsidiaries will initially conduct business in eight
states. Maintenance of limited liability for Natural Resource Partners, as the
sole member of the operating company, may require compliance with legal
requirements in the jurisdictions in which the operating company conducts
business, including qualifying our subsidiaries to do business there.
Limitations on the liability of members for the obligations of a limited
liability company have not been clearly established in many jurisdictions. If it
were determined that we were, by virtue of our member interest in the operating
company or otherwise, conducting business in any state without compliance with
the applicable limited partnership or limited liability company statute, or that
the right or exercise of the right by the limited partners as a group to remove
or replace our general partner, to approve some amendments to our partnership
agreement, or to take other action under our partnership agreement constituted
"participation in the control" of our business for purposes of the statutes of
any relevant jurisdiction, then the limited partners could be held personally
liable for our obligations under the law of that jurisdiction to the same extent
as the general partner under the circumstances. We will operate in a manner that
our general partner considers reasonable and necessary or appropriate to
preserve the limited liability of the limited partners.
130
VOTING RIGHTS
The following matters require the unitholder vote specified below:
Issuance of additional common
units or units of equal rank
with the common units during
the subordination period...... Unit majority, with certain exceptions
described under "-- Issuance of Additional
Securities."
Issuance of units senior to
the common units during the
subordination period.......... Unit majority.
Issuance of units junior to
the common units during the
subordination period.......... No approval right.
Issuance of additional units
after the subordination
period........................ No approval right.
Amendment of the partnership
agreement..................... Certain amendments may be made by the general
partner without the approval of the
unitholders. Other amendments generally require
the approval of a unit majority. Please read
"-- Amendment of the Partnership Agreement."
Merger of our partnership or
the sale of all or
substantially all of our
assets........................ Unit majority. Please read "-- Merger, Sale or
Other Disposition of Assets."
Dissolution of our
partnership................... Unit majority. Please read "-- Termination and
Dissolution."
Reconstitution of our
partnership upon
dissolution................... Approval of a majority of the common units and
subordinated units, voting as separate classes.
Withdrawal of the general
partner....................... The approval of a majority of the common units,
excluding common units held by the general
partners and its affiliates, is required for
the withdrawal of the general partner prior to
June 30, 2012 in a manner which would cause a
dissolution of our partnership. Please read
"-- Withdrawal or Removal of the General
Partner."
Removal of the general
partner....................... Not less than 66 2/3% of the outstanding units,
including units held by our general partner and
its affiliates. Please read "-- Withdrawal or
Removal of the General Partner."
Transfer of the general
partner interest.............. We may transfer the general partner interest
without a vote of our unitholders in connection
with the general partner's merger or
consolidation with or into, or sale of all or
substantially all of its assets to such person.
The approval of a majority of the common units,
excluding common units held by the general
partner and its affiliates, is required in
other circumstances for a transfer of the
general partner interest to a third party prior
to June 30, 2012. Please read "-- Transfer of
General Partner Interest."
131
Transfer of incentive
distribution rights........... Except for transfers to an affiliate (other
than an individual) or another person (other
than an individual) as part of the general
partner's merger or consolidation with or into,
or sale of all or substantially all of its
assets to such person, the approval of a
majority of the common units, excluding common
units held by the general partner and its
affiliates, is required in most circumstances
for a transfer of the incentive distribution
rights to a third party prior to June 30, 2012.
Please read "-- Transfer of Incentive
Distribution Rights.
Transfer of ownership
interests in the general
partner....................... No approval required at any time. Please read
"-- Transfer of Ownership Interests in the
General Partner."
Matters requiring the approval of a "unit majority" require:
- during the subordination period, the approval of a majority of the common
units, excluding those common units held by our general partner and its
affiliates, and a majority of the subordinated units, voting as separate
classes; and
- after the subordination period, the approval of a majority of the common
units.
ISSUANCE OF ADDITIONAL SECURITIES
Our partnership agreement authorizes us to issue an unlimited number of
additional partnership securities and rights to buy partnership securities for
the consideration and on the terms and conditions established by our general
partner in its sole discretion without the approval of any limited partners.
During the subordination period, however, except as we discuss in the following
paragraph, we may not issue equity securities ranking senior to the common units
or an aggregate of more than 6,002,500 additional common units or units on a
parity with the common units, in each case, without the approval of the holders
of a majority of the outstanding common units and subordinated units, voting as
separate classes.
During the subordination period or thereafter, we may issue an unlimited
number of common units without the approval of the unitholders as follows:
- upon exercise of the underwriters' overallotment option;
- upon conversion of the subordinated units;
- under employee benefit plans;
- upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of our general partner;
- upon conversion of units of equal rank with the common units into common
units under some circumstances;
- in the event of a combination or subdivision of common units;
- in connection with an acquisition or a capital improvement that the
general partner determines would increase cash flow from operations per
unit on a pro forma basis; or
- if the proceeds of the issuance are used exclusively to repay up to $25.0
million of our indebtedness.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash. In addition, the
issuance
132
of additional partnership common units or other equity securities may dilute the
value of the interests of the then-existing holders of common units in our net
assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of our general partner, may have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, other than upon
exercise of the underwriters' over-allotment option, our general partner will be
required to make additional capital contributions to the extent necessary to
maintain its 2% general partner interest in us. Moreover, our general partner
will have the right, which it may from time to time assign in whole or in part
to any of its affiliates, to purchase common units, subordinated units or other
equity securities whenever, and on the same terms that, we issue those
securities to persons other than our general partner and its affiliates, to the
extent necessary to maintain the percentage interest of the general partner and
its affiliates, including such interest represented by common units and
subordinated units, that existed immediately prior to each issuance. The holders
of common units will not have preemptive rights to acquire additional common
units or other partnership securities.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
General. Amendments to our partnership agreement may be proposed only by
or with the consent of our general partner, which consent may be given or
withheld in its sole discretion. In order to adopt a proposed amendment, other
than the amendments discussed below, our general partner is required to seek
written approval of the holders of the number of units required to approve the
amendment or call a meeting of the limited partners to consider and vote upon
the proposed amendment. Except as described below, an amendment must be approved
by a unit majority.
Prohibited Amendments. No amendment may be made that would:
- enlarge the obligations of any limited partner without its consent,
unless approved by at least a majority of the type or class of limited
partner interests so affected;
- enlarge the obligations of, restrict in any way any action by or rights
of, or reduce in any way the amounts distributable, reimbursable or
otherwise payable by us to our general partner or any of its affiliates
without the consent of our general partner, which may be given or
withheld in its sole discretion;
- change the duration of our partnership;
- provide that we are not dissolved upon an election to dissolve our
partnership by our general partner that is approved by a unit majority;
or
- give any person the right to dissolve our partnership other than our
general partner's right to dissolve our partnership with the approval of
a unit majority.
The provision of our partnership agreement preventing the amendments having
the effects described in any of the clauses above can be amended upon the
approval of the holders of at least 90% of the outstanding units, voting
together as a single class (including units owned by the general partner and its
affiliates). Upon completion of the offering, our general partner and its
affiliates will own approximately 81.3% of the outstanding units.
No Unitholder Approval. Our general partner may generally make amendments
to our partnership agreement without the approval of any limited partner or
assignee to reflect:
- a change in our name, the location of our principal place of our
business, our registered agent or our registered office;
- the admission, substitution, withdrawal or removal of partners in
accordance with our partnership agreement;
133
- a change that, in the sole discretion of our general partner, is
necessary or advisable for us to qualify or continue our qualification as
a limited partnership or a partnership in which the limited partners have
limited liability under the laws of any state or to ensure that neither
we, the operating company nor any of its subsidiaries will be treated as
an association taxable as a corporation or otherwise taxed as an entity
for federal income tax purposes;
- an amendment that is necessary, in the opinion of our counsel, to prevent
us or our general partner or its directors, officers, agents or trustees
from in any manner being subjected to the provisions of the Investment
Company Act of 1940, the Investment Advisors Act of 1940, or "plan asset"
regulations adopted under the Employee Retirement Income Security Act of
1974, or ERISA, whether or not substantially similar to plan asset
regulations currently applied or proposed;
- subject to the limitations on the issuance of additional partnership
securities described above, an amendment that in the discretion of our
general partner is necessary or advisable for the authorization of
additional partnership securities or rights to acquire partnership
securities;
- any amendment expressly permitted in our partnership agreement to be made
by our general partner acting alone;
- an amendment effected, necessitated or contemplated by a merger agreement
that has been approved under the terms of our partnership agreement;
- any amendment that, in the discretion of our general partner, is
necessary or advisable for the formation by us of, or our investment in,
any corporation, partnership or other entity, as otherwise permitted by
our partnership agreement;
- a change in our fiscal year or taxable year and related changes; and
- any other amendments substantially similar to any of the matters
described in the clauses above.
In addition, our general partner may make amendments to our partnership
agreement without the approval of any limited partner or assignee if those
amendments, in the discretion of our general partner:
- do not adversely affect the limited partners (or any particular class of
limited partners as compared to other classes of limited partners) in any
material respect;
- are necessary or advisable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute;
- are necessary or advisable to facilitate the trading of limited partner
interests or to comply with any rule, regulation, guideline or
requirement of any securities exchange on which the limited partner
interests are or will be listed for trading, compliance with any of which
our general partner deems to be in the best interests of us and our
limited partners;
- are necessary or advisable for any action taken by our general partner
relating to splits or combinations of units under the provisions of our
partnership agreement; or
- are required to effect the intent expressed in this prospectus or the
intent of the provisions of our partnership agreement or are otherwise
contemplated by our partnership agreement.
Opinion of Counsel and Unitholder Approval. Our general partner will not
be required to obtain an opinion of counsel that an amendment will not result in
a loss of limited liability to the limited partners or result in our being
treated as an entity for federal income tax purposes if one of the amendments
described above under "-- No Unitholder Approval" should occur. No other
amendments to our partnership agreement will become effective without the
approval of holders of at least 90% of the units unless we obtain an opinion of
counsel to the effect that the amendment will not affect the limited liability
under applicable law of any limited partner in our partnership.
134
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of at least a majority of the type or
class of units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners whose aggregate outstanding units constitute not less than
the voting requirement sought to be reduced.
ACTIONS RELATING TO OPERATING COMPANY
Without the approval of a unit majority, our general partner is prohibited
from consenting on our behalf as the sole member of the operating company to any
amendment to the limited liability company agreement of our operating company or
taking any action on our behalf permitted to be taken by a member of our
operating company, in each case that would adversely affect our limited partners
(or any particular class of limited partners as compared to other classes of
limited partners) in any material respect.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
Our general partner is generally prohibited, without the prior approval of
the holders of a unit majority, from causing us to, among other things, sell,
exchange or otherwise dispose of all or substantially all of our assets in a
single transaction or a series of related transactions, including by way of
merger, consolidation or other combination, or approving on our behalf the sale,
exchange or other disposition of all or substantially all of the assets of our
subsidiaries; provided that our general partner may mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of our
assets without that approval. Our general partner may also sell all or
substantially all of our assets under a foreclosure or other realization upon
the encumbrances above without that approval.
If the conditions specified in the partnership agreement are satisfied, our
general partner may merge our partnership or any of its subsidiaries into, or
convey all of our assets to, a newly formed entity if the sole purpose of that
merger or conveyance is to effect a mere change in our legal form into another
limited liability entity. The unitholders are not entitled to dissenters' rights
of appraisal under the partnership agreement or applicable Delaware law in the
event of a merger or consolidation, a sale of all or substantially all of our
assets or any other transaction or event.
TERMINATION AND DISSOLUTION
We will continue as a limited partnership until terminated under our
partnership agreement. We will dissolve upon:
- the election of our general partner to dissolve us, if approved by the
holders of a unit majority;
- the sale, exchange or other disposition of all or substantially all of
the assets and properties of our partnership and the subsidiaries;
- the entry of a decree of judicial dissolution of our partnership; or
- the withdrawal or removal of our general partner or any other event that
results in its ceasing to be our general partner other than by reason of
a transfer of its general partner interest in accordance with our
partnership agreement or withdrawal or removal following approval and
admission of a successor.
Upon a dissolution under the last clause above, the holders of a majority
of the outstanding common units and subordinated units, voting as separate
classes, may also elect, within specific time limitations, to reconstitute our
partnership and continue its business on the same terms and conditions described
in our partnership agreement by forming a new limited partnership on terms
identical to those in our partnership
135
agreement and having as general partner an entity approved by a unit majority,
subject to our receipt of an opinion of counsel to the effect that:
- the action would not result in the loss of limited liability of any
limited partner; and
- neither our partnership, the reconstituted limited partnership, our
operating company nor any of our other subsidiaries would be treated as
an association taxable as a corporation or otherwise be taxable as an
entity for federal income tax purposes upon the exercise of that right to
continue.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the liquidator authorized to wind up our affairs will,
acting with all of the powers of our general partner that the liquidator deems
necessary or desirable in its judgment, liquidate our assets and apply the
proceeds of the liquidation as provided in "Cash Distribution
Policy -- Distributions of Cash upon Liquidation." The liquidator may defer
liquidation or distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to our partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Except as described below, our general partner has agreed not to withdraw
voluntarily as general partner of our partnership prior to June 30, 2012 without
obtaining the approval of the holders of at least a majority of the outstanding
common units, excluding common units held by the general partner and its
affiliates, and furnishing an opinion of counsel regarding limited liability and
tax matters. On or after June 30, 2012, our general partner may withdraw as
general partner without first obtaining approval of any unitholder by giving 90
days' written notice, and that withdrawal will not constitute a violation of our
partnership agreement. Notwithstanding the information above, our general
partner may withdraw without unitholder approval upon 90 days' notice to the
limited partners if at least 50% of the outstanding common units are held or
controlled by one person and its affiliates other than our general partner and
its affiliates. In addition, our partnership agreement permits our general
partner in some instances to sell or otherwise transfer all of its general
partner interests in our partnership without the approval of the unitholders.
See "-- Transfer of General Partner Interest."
Upon the withdrawal of our general partner under any circumstances, other
than as a result of a transfer by our general partner of all or a part of its
general partner interest in us, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is not elected, or
is elected but an opinion of counsel regarding limited liability and tax matters
cannot be obtained, we will be dissolved, wound up and liquidated, unless within
180 days after that withdrawal, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, agree in
writing to continue the business of Natural Resource Partners and to appoint a
successor general partner. See "-- Termination and Dissolution."
Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
voting together as a single class, including units held by our general partner
and its affiliates, and we receive an opinion of counsel regarding limited
liability and tax matters. Any removal of our general partner is also subject to
the approval of a successor general partner by the vote of the holders of a
majority of the outstanding common units and subordinated units, voting as
separate classes. The ownership of more than 33 1/3% of the outstanding units by
our general partner and its affiliates would give them the practical ability to
prevent our general partner's removal. At the closing of this offering,
affiliates of our general partner will own 81.3% of the outstanding units.
136
Our partnership agreement also provides that if NRP (GP) LP is removed as
our general partner under circumstances where cause does not exist and units
held by the general partner and its affiliates are not voted in favor of that
removal:
- the subordination period will end and each outstanding subordinated unit
will immediately convert into one common unit;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- the general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests based on the fair market
value of those interests at the time.
In the event of removal of a general partner under circumstances where
cause exists or withdrawal of a general partner where that withdrawal violates
our partnership agreement, a successor general partner will have the option to
purchase the general partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where a general partner withdraws
or is removed by the limited partners, the departing general partner will have
the option to require the successor general partner to purchase the general
partner interest of the departing general partner and its incentive distribution
rights for fair market value. In each case, this fair market value will be
determined by agreement between the departing general partner and the successor
general partner. If no agreement is reached, an independent investment banking
firm or other independent expert selected by the departing general partner and
the successor general partner will determine the fair market value. Or, if the
departing general partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts selected by each of
them will determine the fair market value.
If the above-described option is not exercised by either the departing
general partner or the successor general partner, the departing general
partner's general partner interest and its incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
In addition, we will be required to reimburse the departing general partner
for all amounts due to the departing general partner, including, without
limitation, all employee-related liabilities, including severance liabilities,
incurred for the termination of any employees employed by the departing general
partner or its affiliates for our benefit.
TRANSFER OF GENERAL PARTNER INTEREST
Except for transfer by our general partner of all, but not less than all,
of its general partner interest in our partnership to:
- an affiliate of our general partner (other than an individual); or
- another entity as part of the merger or consolidation of our general
partner with or into another entity or the transfer by our general
partner of all or substantially all of its assets to another entity,
our general partner may not transfer all or any part of its general partner
interest in our partnership to another person prior to June 30, 2012 without the
approval of the holders of at least a majority of the outstanding common units,
excluding common units held by our general partner and its affiliates. As a
condition of this transfer, the transferee must, among other things, assume the
rights and duties of our general partner, agree to be bound by the provisions of
the partnership agreement, and furnish an opinion of counsel regarding limited
liability and tax matters. Our general partner and its affiliates may at any
time, however, transfer units to one or more persons without unitholder
approval, except that they may not transfer subordinated units to us.
137
TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS
The WPP Group and Arch Coal may freely transfer their incentive
distribution rights at any time. Our general partner or a later holder of the
general partner's incentive distribution rights may transfer its incentive
distribution rights to an affiliate of the holder (other than an individual) or
to another entity as part of the merger or consolidation of such holder with or
into such other entity or the transfer by such holder or its affiliates, of all
or substantially all of its assets to another entity, without the prior approval
of the unitholders; provided that the transferee agrees to be bound by the
provisions of the partnership agreement. Prior to June 30, 2012, other transfers
of incentive distribution rights will require the affirmative vote of holders of
a majority of the outstanding common units, excluding common units held by the
general partner or its affiliates. On or after June 30, 2012, all of the
incentive distribution rights will be freely transferable.
TRANSFER OF OWNERSHIP INTERESTS IN THE GENERAL PARTNER
At any time, the partners of our general partner may sell or transfer all
or part of their partnership interests in our general partner without the
approval of the unitholders.
CHANGE OF MANAGEMENT PROVISIONS
Our partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove NRP (GP) LP as our
general partner or otherwise change our management. If any person or group other
than our general partner and its affiliates acquires beneficial ownership of 20%
or more of any class of units, that person or group loses voting rights on all
of its units. This loss of voting rights does not apply to any person or group
that acquires the units from our general partner or its affiliates and any
transferees of that person or group approved by our general partner or to any
person or group who acquires the units with the prior approval of the board of
directors of our general partner.
Our partnership agreement also provides that if our general partner is
removed under circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of that removal:
- the subordination period will end and each outstanding subordinated unit
will immediately convert into one common unit;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- our general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
LIMITED CALL RIGHT
If at any time our general partner and its affiliates own more than 80% of
the then-issued and outstanding limited partner interests of any class, our
general partner will have the right, which it may assign in whole or in part to
any of its affiliates or to us, to acquire all, but not less than all, of the
remaining limited partner interests of the class held by unaffiliated persons as
of a record date to be selected by our general partner, on at least 10 but not
more than 60 days' notice. If we do not issue any equity securities prior to the
expiration of the subordination period, upon the conversion of subordinated
units into common units at the end of the subordination period, our general
partner and its affiliates will own 81.3% of our outstanding common units and
will be able to exercise this call right. The purchase price in the event of
this purchase is the greater of:
- the highest cash price paid by either of our general partner or any of
its affiliates for any limited partner interests of the class purchased
within the 90 days preceding the date on which our general partner first
mails notice of its election to purchase those limited partner interests;
and
138
- the current market price as of the date three days before the date the
notice is mailed.
As a result of our general partner's right to purchase outstanding limited
partner interests, a holder of limited partner interests may have his limited
partner interests purchased at an undesirable time or price. The tax
consequences to a unitholder of the exercise of this call right are the same as
a sale by that unitholder of his common units in the market. See "Material Tax
Consequences -- Disposition of Common Units."
MEETINGS; VOTING
Except as described below regarding a person or group owning 20% or more of
any class of units then outstanding, unitholders or assignees who are record
holders of units on the record date will be entitled to notice of, and to vote
at, meetings of our limited partners and to act upon matters for which approvals
may be solicited. Common units that are owned by an assignee who is a record
holder, but who has not yet been admitted as a limited partner, shall be voted
by our general partner at the written direction of the record holder. Absent
direction of this kind, the common units will not be voted, except that, in the
case of common units held by our general partner on behalf of non-citizen
assignees, our general partner shall distribute the votes on those common units
in the same ratios as the votes of limited partners on other units are cast.
Our general partner does not anticipate that any meeting of unitholders
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the unitholders may be taken either at a meeting of the
unitholders or without a meeting if consents in writing describing the action so
taken are signed by holders of the number of units as would be necessary to
authorize or take that action at a meeting. Meetings of the unitholders may be
called by our general partner or by unitholders owning at least 20% of the
outstanding units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum unless any action by
the unitholders requires approval by holders of a greater percentage of the
units, in which case the quorum shall be the greater percentage.
Each record holder of a unit has a vote according to his percentage
interest in us, although additional limited partner interests having special
voting rights could be issued. See "-- Issuance of Additional Securities."
However, if at any time any person or group, other than our general partner and
its affiliates, or a direct or subsequently approved transferee of our general
partner or its affiliates or a person or group who acquires the units with the
prior approval of the board of directors, acquires, in the aggregate, beneficial
ownership of 20% or more of any class of units then outstanding, the person or
group will lose voting rights on all of its units and the units may not be voted
on any matter and will not be considered to be outstanding when sending notices
of a meeting of unitholders, calculating required votes, determining the
presence of a quorum or for other similar purposes. Common units held in nominee
or street name accounts will be voted by the broker or other nominee in
accordance with the instruction of the beneficial owner unless the arrangement
between the beneficial owner and its nominee provides otherwise. Except as
otherwise provided in the partnership agreement, subordinated units will vote
together with common units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of common units under our partnership
agreement will be delivered to the record holder by us or by the transfer agent.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the common units
will be fully paid, and unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner
139
for the right to share in allocations and distributions from us, including
liquidating distributions. Our general partner will vote and exercise other
powers attributable to common units owned by an assignee who has not become a
substitute limited partner at the written direction of the assignee. See
"-- Meetings; Voting." Transferees who do not execute and deliver a transfer
application will be treated neither as assignees nor as record holders of common
units, and will not receive cash distributions, federal income tax allocations
or reports furnished to holders of common units. See "Description of the Common
Units -- Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of our general partner, create a
substantial risk of cancellation or forfeiture of any property that we have an
interest in because of the nationality, citizenship or other related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their current market price. In order to avoid any
cancellation or forfeiture, our general partner may require each limited partner
or assignee to furnish information about his nationality, citizenship or related
status. If a limited partner or assignee fails to furnish information about his
nationality, citizenship or other related status within 30 days after a request
for the information or our general partner determines after receipt of the
information that the limited partner or assignee is not an eligible citizen, the
limited partner or assignee may be treated as a non-citizen assignee. In
addition to other limitations on the rights of an assignee who is not a
substituted limited partner, a non-citizen assignee does not have the right to
direct the voting of his units and may not receive distributions in kind upon
our liquidation.
INDEMNIFICATION
Under our partnership agreement, in most circumstances, we will indemnify
the following persons, to the fullest extent permitted by law, from and against
all losses, claims, damages or similar events:
- our general partner;
- any departing general partner;
- any person who is or was an affiliate of a general partner or any
departing general partner;
- any person who is or was a member, partner, officer, director, employee,
agent or trustee of a general partner or any departing general partner or
any affiliate of a general partner or any departing general partner; or
- any person who is or was serving at the request of a general partner or
any departing general partner or any affiliate of a general partner or
any departing general partner as an officer, director, employee, member,
partner, agent or trustee of another person.
Any indemnification under these provisions will only be out of our assets.
Unless it otherwise agrees in its sole discretion, our general partner will not
be personally liable for, or have any obligation to contribute or loan funds or
assets to us to enable us to effectuate indemnification. We are authorized to
purchase insurance against liabilities asserted against and expenses incurred by
persons for our activities, regardless of whether we would have the power to
indemnify the person against liabilities under our partnership agreement.
BOOKS AND REPORTS
Our general partner is required to keep appropriate books of our business
at our principal offices. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. For tax and fiscal reporting
purposes, our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial
140
statements by our independent public accountants. Except for our fourth quarter,
we will also furnish or make available summary financial information within 90
days after the close of each quarter.
We will furnish each record holder of a unit with information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. This information is expected to be furnished in summary form so
that some complex calculations normally required of partners can be avoided. Our
ability to furnish this summary information to unitholders will depend on the
cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
RIGHT TO INSPECT OUR BOOKS AND RECORDS
Our partnership agreement provides that a limited partner can, for a
purpose reasonably related to his interest as a limited partner, upon reasonable
demand and at his own expense, have furnished to him:
- a current list of the name and last known address of each partner;
- a copy of our tax returns;
- information as to the amount of cash, and a description and statement of
the agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each became a partner;
- copies of our partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of attorney
under which they have been executed;
- information regarding the status of our business and financial condition;
and
- any other information regarding our affairs as is just and reasonable.
Our general partner may, and intends to, keep confidential from the limited
partners trade secrets or other information the disclosure of which our general
partner believes in good faith is not in our best interests or which we are
required by law or by agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Under our partnership agreement, we have agreed to register for resale
under the Securities Act and applicable state securities laws any common units,
subordinated units or other partnership securities proposed to be sold by our
general partner or any of its affiliates or their assignees if an exemption from
the registration requirements is not otherwise available. These registration
rights continue for two years following any withdrawal or removal of our general
partner. We are obligated to pay all expenses incidental to the registration,
excluding underwriting discounts and commissions. See "Units Eligible for Future
Sale."
141
UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered hereby, and assuming that the
over-allotment option is not exercised, affiliates of the WPP Group and Arch
Coal will hold an aggregate of 7,505,000 common units and 12,005,000
subordinated units. All of the subordinated units will convert into common units
at the end of the subordination period and some may convert earlier. The sale of
these units could have an adverse impact on the price of the common units or on
any trading market that may develop.
The common units sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any common units owned by an "affiliate" of ours may not be resold publicly
except in compliance with the registration requirements of the Securities Act or
under an exemption under Rule 144 or otherwise. Rule 144 permits securities
acquired by an affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three-month period, the greater of:
- 1% of the total number of the securities outstanding; or
- the average weekly reported trading volume of the common units for the
four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of sale
provisions, notice requirements and the availability of current public
information about us. A person who is not deemed to have been an affiliate of
ours at any time during the three months preceding a sale, and who has
beneficially owned his common units for at least two years, would be entitled to
sell common units under Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions and notice
requirements of Rule 144.
Prior to the end of the subordination period, we may not issue equity
securities of the partnership ranking prior or senior to the common units or an
aggregate of more than 6,002,500 additional common units or an equivalent amount
of securities ranking on a parity with the common units, without the approval of
the holders of a majority of the outstanding common units and subordinated
units, voting as separate classes, subject to certain exceptions described under
"The Partnership Agreement -- Issuance of Additional Securities."
Our partnership agreement provides that, after the subordination period, we
may issue an unlimited number of limited partner interests of any type without a
vote of the unitholders. Our partnership agreement does not restrict our ability
to issue equity securities ranking junior to the common units at any time. Any
issuance of additional common units or other equity securities would result in a
corresponding decrease in the proportionate ownership interest in us represented
by, and could adversely affect the cash distributions to and market price of,
common units then outstanding. See "The Partnership Agreement -- Issuance of
Additional Securities."
Under our partnership agreement, our general partner and its affiliates
have the right to cause us to register under the Securities Act and state laws
the offer and sale of any units that they hold. Subject to the terms and
conditions of our partnership agreement, these registration rights allow our
general partner and its affiliates or their assignees holding any units to
require registration of any of these units and to include any of these units in
a registration by us of other units, including units offered by us or by any
unitholder. Our general partner will continue to have these registration rights
for two years following its withdrawal or removal as our general partner. In
connection with any registration of this kind, we will indemnify each unitholder
participating in the registration and its officers, directors and controlling
persons from and against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or prospectus. We will
bear all costs and expenses incidental to any registration, excluding any
underwriting discounts and commissions. Except as described below, our general
partner and its affiliates may sell their units in private transactions at any
time, subject to compliance with applicable laws.
142
The WPP Group, Arch Coal and their affiliates, including our partnership,
our operating company, our general partner and the directors and executive
officers of our general partner, have agreed not to sell any common units they
beneficially own for a period of 180 days from the date of this prospectus.
Please read "Underwriting" for a description of these lock-up provisions.
143
MATERIAL TAX CONSEQUENCES
This section addresses all of the material tax consequences that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, unless otherwise noted in this section, is the opinion of
Vinson & Elkins L.L.P., special counsel to our general partner and us, insofar
as it relates to legal conclusions with respect to United States federal income
tax matters. This section is based upon current provisions of the Internal
Revenue Code, existing and proposed regulations and current administrative
rulings and court decisions, all of which may be changed. Later changes in these
authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to "us" or "we" are references to Natural Resource Partners and
the operating company.
No attempt has been made in this section to comment on all federal income
tax matters affecting us or the unitholders. Moreover, this section focuses on
unitholders who are individual citizens or residents of the United States and
has only limited application to corporations, estates, trusts, non-resident
aliens or other unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement accounts (IRAs),
real estate investment trusts (REITs) or mutual funds. Accordingly, we urge each
prospective unitholder to consult, and depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences to him of the
ownership or disposition of common units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section are the opinion of Vinson & Elkins
L.L.P., unless otherwise noted, and are based upon the accuracy of
representations made by us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or our unitholders. An opinion of counsel represents only that
counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the price at
which the common units trade. In addition, the costs of any contest with the IRS
will be borne indirectly by the unitholders and the general partner.
Furthermore, the treatment of Natural Resource Partners, or an investment in
Natural Resource Partners, may be significantly modified by future legislative
or administrative changes or court decisions. Any modifications may or may not
be retroactively applied.
For the reasons described below, Vinson & Elkins L.L.P. has not rendered an
opinion with respect to the following specific federal income tax issues:
- the treatment of a unitholder whose common units are loaned to a short
seller to cover a short sale of common units (please read "-- Tax
Consequences of Unit Ownership -- Treatment of Short Sales"); and
- whether our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (please read
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, even if no cash
distributions are made to him by the partnership. Distributions by a partnership
to a partner generally are not taxable unless the amount of cash distributed is
in excess of the partner's adjusted basis in his partnership interest.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly-traded partnerships whose gross income for every taxable year
144
consists of at least 90% "qualifying income." Qualifying income includes income
and gains derived from the marketing of coal. Other types of qualifying income
include interest (from other than a financial business), dividends, gains from
the sale or lease of real property and gains from the sale or other disposition
of capital assets held for the production of income that otherwise constitutes
qualifying income. We estimate that less than % of our current income is not
qualifying income; however, this estimate could change from time to time. Based
upon and subject to this estimate, the factual representations made by us and
the general partner and a review of the applicable legal authorities, Vinson &
Elkins L.L.P. is of the opinion that more than 90% of our gross income
constitutes qualifying income.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to the status of Natural Resource Partners or the operating
company for federal income tax purposes. Instead, we will rely on the opinion of
Vinson & Elkins L.L.P. that, based upon the Internal Revenue Code, applicable
regulations, published revenue rulings and court decisions and the
representations described below, Natural Resource Partners will be treated as a
partnership and the operating company will be disregarded as an entity separate
from Natural Resource Partners for federal income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has relied on factual
representations made by us and our general partner. The representations made by
us and our general partner upon which Vinson & Elkins L.L.P. has relied are:
- Neither Natural Resource Partners nor the operating company will elect to
be treated as an association or corporation; and
- For each taxable year, more than 90% of our gross income will be income
that Vinson & Elkins L.L.P. has opined or will opine is "qualifying
income" within the meaning of Section 7704(d) of the Internal Revenue
Code.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and Natural Resource Partners so
long as we, at that time, do not have liabilities in excess of the tax basis of
our assets. Thereafter, we would be treated as a corporation for federal income
tax purposes.
If we were treated as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his common units, or taxable capital gain, after the unitholder's
tax basis in his common units is reduced to zero. Accordingly, treatment of us
as a corporation would result in a material reduction in a unitholder's cash
flow and after-tax return and thus would likely result in a substantial
reduction of the value of the units.
The remainder of this section is based on Vinson & Elkins L.L.P.'s opinion
that we will be treated as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of Natural Resource Partners
will be treated as partners of Natural Resource Partners for federal income tax
purposes. Also:
- assignees who have executed and delivered transfer applications, and are
awaiting admission as limited partners, and
145
- unitholders whose common units are held in street name or by a nominee
and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units
will be treated as partners of Natural Resource Partners for federal income tax
purposes.
As there is no direct authority addressing assignees of common units who
are entitled to execute and deliver transfer applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, the opinion of Vinson & Elkins L.L.P. does not
extend to these persons. Furthermore, a purchaser or other transferee of common
units who does not execute and deliver a transfer application may not receive
some federal income tax information or reports furnished to record holders of
common units unless the common units are held in a nominee or street name
account and the nominee or broker has executed and delivered a transfer
application for those common units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to these units for federal income tax purposes. Please read
"-- Tax Consequences of Unit Ownership -- Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
are urged to consult their own tax advisors with respect to their status as
partners in Natural Resource Partners for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-Through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
share of our income, gains, losses and deductions without regard to whether cash
distributions are received by him. Consequently, we may allocate income to a
unitholder even if he has not received a cash distribution from us. Each
unitholder will be required to include in income his share of income, gain, loss
and deduction for our taxable year ending with or within his taxable year.
Treatment of Distributions. Our distributions to a unitholder generally
will not be taxable to him for federal income tax purposes to the extent of his
tax basis in his common units immediately before the distribution. Our cash
distributions in excess of a unitholder's tax basis generally will be considered
to be gain from the sale or exchange of the common units, taxable in accordance
with the rules described under "-- Disposition of Common Units" below. To the
extent our distributions cause a unitholder's "at risk" amount to be less than
zero at the end of any taxable year, he must recapture any losses deducted in
previous years. Please read "-- Limitations on Deductibility of Losses."
Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. A decrease in a unitholder's percentage interest in us because of
our issuance of additional common units will decrease his share of our
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax basis in his
common units, if the distribution reduces his share of our "unrealized
receivables," including depreciation recapture, and/or substantially appreciated
"inventory items," both as defined in the Internal Revenue Code, and
collectively, "Section 751 assets." To that extent, he will be treated as having
received his proportionate share of our Section 751 assets and having exchanged
those assets with us in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will generally result in
the unitholder's realization of ordinary income. That income will equal the
excess of (1) the non-pro rata portion of that distribution over (2) the
unitholder's tax basis for the share of Section 751 assets deemed relinquished
in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a purchaser of
common units in the offering who holds those common units from the date of
closing of the offering through June 30, 2005, will
146
be allocated an amount of federal taxable income for that period that will be
less than % of the cash distributed with respect to that period. A substantial
portion of the income that will be allocated to a unitholder is expected to be
long-term capital gain which for individuals is subject to a significantly lower
maximum federal income tax rate (currently 20%) than ordinary income (currently
taxable at a maximum rate of 38.6%). If a unitholder is an individual taxable at
the maximum rate of 38.6% on ordinary income, the effect of this lower capital
gains rate is to produce an after tax return to the unitholder which is the same
as if the amount of ordinary taxable income allocated to the unitholder for that
period were less than % of the cash distributed to him for that period. These
estimates are based upon the assumption that gross income from operations will
approximate the amount required to make the minimum quarterly distribution on
all units and other assumptions with respect to capital expenditures, cash flow
and anticipated cash distributions. These estimates and assumptions are subject
to, among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond our control. Further, the estimates are based on
current tax law and tax reporting positions that we intend to adopt and with
which the IRS could disagree. Accordingly, these estimates may prove to be
incorrect. The actual percentage of distributions that will constitute taxable
income could be higher or lower, and any differences could be material and could
materially affect the value of the common units.
Basis of Common Units. A unitholder's initial tax basis for his common
units generally will be the amount he paid for the common units plus his share
of our nonrecourse liabilities. That basis generally will be increased by his
share of our income and by any increases in his share of our nonrecourse
liabilities. That basis generally will be decreased, but not below zero, by our
distributions to him, by his share of our losses, by any decreases in his share
of our nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized. A
unitholder generally will have no share of our debt that is recourse to the
general partner, but will have a share of our nonrecourse liabilities, generally
based on his share of our profits. Please read "-- Disposition of Common
Units -- Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder of
his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of its stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations, to the amount for which the
unitholder is considered to be "at risk" with respect to our activities, if that
is less than his tax basis. A unitholder must recapture losses deducted in
previous years to the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a unitholder
or recaptured as a result of these limitations will carry forward and will be
allowable to the extent that his tax basis or at risk amount, whichever is the
limiting factor, is subsequently increased. Upon the taxable disposition of a
unit, any gain recognized by a unitholder can be offset by losses that were
previously suspended by the at risk limitation but may not be offset by losses
suspended by the basis limitation. Any excess loss above that gain previously
suspended by the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally corporate or
partnership activities in which the taxpayer does not materially participate,
only to the extent of the taxpayer's income from those passive activities. The
passive loss limitations are applied separately with respect to each
publicly-traded partnership. Consequently, any losses we generate will only be
available to offset our passive income generated in the future and will not be
available to offset income from other passive activities or investments,
including our investments or investments in other publicly-traded partnerships,
or salary or active business income. Passive losses that are not deductible
because they
147
exceed a unitholder's share of our income may be deducted in full when he
disposes of his entire investment in us in a fully taxable transaction with an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions, including the at risk rules and the basis
limitation.
A unitholder's share of our net income may be offset by our passive losses,
but it may not be offset by any other current or carryover losses from other
passive activities, including those attributable to other publicly-traded
partnerships.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." Investment interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- our interest expense attributed to portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit.
Net investment income includes gross income from property held for
investment and amounts treated as portfolio income under the passive loss rules,
less deductible expenses, other than interest, directly connected with the
production of investment income, but generally does not include gains
attributable to the disposition of property held for investment. The IRS has
indicated that the net passive income earned by a publicly-traded partnership
will be treated as investment income to its unitholders. In addition, a
unitholder's share of our portfolio income will be treated as investment income.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, foreign, state or local income tax on behalf of any
unitholder or the general partner or any former unitholder, we are authorized to
pay those taxes from our funds. That payment, if made, will be treated as a
distribution of cash to the unitholder on whose behalf the payment was made. If
the payment is made on behalf of a unitholder whose identity cannot be
determined, we are authorized to treat the payment as a distribution to all
current unitholders. We are authorized to amend the partnership agreement in the
manner necessary to maintain uniformity of intrinsic tax characteristics of
units and to adjust later distributions, so that after giving effect to these
distributions, the priority and characterization of distributions otherwise
applicable under the partnership agreement is maintained as nearly as is
practicable. Payments by us as described above could give rise to an overpayment
of tax on behalf of a unitholder in which event the unitholder would be required
to file a claim in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units and not to the subordinated units, or incentive distributions are
made to the general partner, gross income will be allocated to the recipients to
the extent of these distributions. If we have a net loss for the entire year,
the amount of that loss will be allocated first to the general partner and the
unitholders in accordance with their percentage interests in us to the extent of
their positive capital accounts and, second, to the general partner.
Specified items of our income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and certain limited partners
referred to in this discussion as "Contributed Property." The effect of these
allocations to a unitholder will be essentially the same as if the tax basis of
the Contributed Property were equal to its fair market value at the time of
contribution. In addition, recapture income will be allocated to the extent
possible to the unitholder who was allocated the deduction giving rise to the
treatment of that gain as recapture income in order to minimize the recognition
of ordinary income by other unitholders. Finally, although we do not expect that
our operations will result in the creation of negative capital
148
accounts, if negative capital accounts nevertheless result, items of our income
and gain will be allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
Vinson & Elkins L.L.P. is of the opinion that, with the exception of the
issues described in "-- Tax Consequences of Unit Ownership -- Section 754
Election" and "-- Disposition of Common Units -- Allocations Between Transferors
and Transferees," allocations under our partnership agreement will be given
effect for federal income tax purposes in determining a unitholder's
distributive share of an item of income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
ownership of those units. If so, he would no longer be a partner for tax
purposes with respect to those units during the period of the loan and may
recognize gain or loss from the disposition. As a result, during this period:
- any of our income, gain, loss or deduction with respect to those units
would not be reportable by him;
- any cash distributions received by him for those units would be fully
taxable; and
- all of these distributions would appear to be treated as ordinary income.
Vinson & Elkins L.L.P. has not rendered an opinion regarding the treatment
of a unitholder whose common units are loaned to a short seller. Therefore,
unitholders desiring to assure their status as partners and avoid the risk of
gain recognition are urged to modify any applicable brokerage account agreements
to prohibit their brokers from loaning their units. The IRS has announced that
it is studying issues relating to the tax treatment of short sales of
partnership interests. Please read also "-- Disposition of Common
Units -- Recognition of Gain or Loss."
Alternative Minimum Tax. Although it is not expected that we will generate
significant tax preference items or adjustments, each unitholder will be
required to take into account his share of any items of our income, gain, loss
or deduction for purposes of the alternative minimum tax. The minimum tax rate
for noncorporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective unitholders are urged to consult
with their tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Tax Rates. In general the highest effective United States federal income
tax rate for individuals for 2002 is 38.6% and the maximum United States federal
income tax rate for net capital gains of an individual for 2002 is 20% if the
asset disposed of was held for more than 12 months at the time of disposition.
Section 754 Election. We will make the election permitted by Section 754
of the Internal Revenue Code. That election is irrevocable without the consent
of the IRS. The election will generally permit us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") to reflect his purchase
price. This election does not apply to a person who purchases common units
directly from us. Instead, allocations as to contributed property will be made
generally with the same effect. The Section 743(b) adjustment belongs to the
purchaser and not to other unitholders.
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have a higher tax basis in his share of our assets for
purposes of calculating, among other items, his depletion deductions and his
share of any gain or loss on a sale of our assets. Conversely, a Section 754
election is disadvantageous if the transferee's tax basis in his units is lower
than those units' share of the aggregate tax basis of our assets immediately
prior to the transfer. Thus, the fair market value of the units may be affected
either favorably or unfavorably by the election.
The calculations involved in the Section 754 election are complex and we
will make them on the basis of assumptions as to the value of our assets and
other matters. For example, the allocation of the
149
Section 743(b) adjustment among our assets must be made in accordance with the
Internal Revenue Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible assets to goodwill
instead. Goodwill, as an intangible asset, is generally amortizable over a
longer period of time or under a less accelerated method than tangible assets.
We cannot assure you that the determinations made by us will not be successfully
challenged by the IRS and the deductions resulting from them may not be reduced
or disallowed altogether. Should the IRS require a different basis adjustment to
be made, and should, in our opinion, the expense of compliance exceed the
benefit of the election, we may seek permission from the IRS to revoke our
Section 754 election. If permission is granted, a subsequent purchaser of units
may be allocated more income than he would have been allocated had the election
not been revoked.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We will use the year ending December
31 as our taxable year and we will adopt the accrual method of accounting for
federal income tax purposes. Each unitholder will be required to include in
income his share of our income, gain, loss and deduction for our taxable year
ending within or with his taxable year. In addition, a unitholder who has a
taxable year ending on a date other than December 31 and who disposes of all of
his units following the close of our taxable year but before the close of his
taxable year must include his allocable share of our income, gain, loss and
deduction in income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of more than one
year of our income, gain, loss and deduction. See "-- Disposition of Common
Units -- Allocations Between Transferors and Transferees."
Initial Tax Basis, Depletion and Amortization. The tax basis of our assets
will be used for purposes of computing depletion deductions and, ultimately,
gain or loss on the disposition of these assets. The federal income tax burden
associated with the difference between the fair market value of property
contributed to us and the tax basis established for that property will be borne
by the partner that contributed the property to us. Please read "-- Tax
Consequences of Unit Ownership -- Allocation of Income, Gain, Loss and
Deduction."
We will not be entitled to any amortization deductions with respect to any
goodwill conveyed to us on formation. Property we subsequently acquire or
construct may be depreciated using accelerated methods permitted by the Internal
Revenue Code.
If we dispose of depletable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of depletion
previously deducted will be subject to the recapture rules and taxed as ordinary
income rather than capital gain. Similarly, a unitholder who has taken depletion
deductions with respect to property owned by us may be required to recapture
those deductions as ordinary income upon a sale of his units in us. Please read
"-- Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss and
Deduction" and "-- Disposition of Common Units -- Recognition of Gain or Loss."
The costs incurred in selling our units (known as syndication expenses)
must be capitalized and cannot be deducted currently, ratably or upon
termination of Natural Resource Partners. There are uncertainties regarding the
classification of costs as organization expenses, which may be amortized, and as
syndication expenses, which may not be amortized. The underwriting discounts and
commissions we incur will be treated as syndication expenses.
Coal Income. Section 631 of the Internal Revenue Code provides special
rules by which gains or losses on the sale of coal may be treated, in whole or
in part, as gains or losses from the sale of property used in a trade or
business under Section 1231 of the Internal Revenue Code. Specifically, Section
631(c) of the Internal Revenue Code provides that if the owner of coal held for
more than one year disposes of that coal under a contract by virtue of which the
owner retains an economic interest in the coal, the gain or loss realized will
be treated under Section 1231 of the Internal Revenue Code as gain or loss from
property used in a trade or business. Section 1231 gains and losses may be
treated as capital gains and losses. Please read "-- Sales of Coal Reserves." In
computing such gain or loss, the amount realized is
150
reduced by the adjusted depletion basis in the coal, determined as described in
"-- Coal Depletion." For purposes of Section 631(c) of the Internal Revenue
Code, the coal generally is deemed to be disposed of on the day on which the
coal is mined.
Our royalties from coal leases generally will be treated as proceeds from
sales of coal to which Section 631 of the Internal Revenue Code applies.
Accordingly, the difference between the royalties paid to us by the lessees and
the adjusted depletion basis in the extracted coal generally will be treated as
gain from the sale of property used in a trade or business, which may be treated
as capital gain under Section 1231 of the Internal Revenue Code. Please read
"-- Sales of Coal Reserves." Our royalties that do not qualify under Section
631(c)of the Internal Revenue Code generally will be taxable as ordinary income
in the year of receipt.
Coal Depletion. In general, we are entitled to depletion deductions with
respect to coal mined from the underlying mineral property. We generally are
entitled to the greater of cost depletion limited to the basis of the property
or percentage depletion. The percentage depletion rate for coal is 10%. If
Section 631(c) of the Internal Revenue Code applies to the disposition of the
coal, however, we are not eligible for percentage depletion. Please read
"-- Coal Income."
Depletion deductions we claim generally will reduce the tax basis of the
underlying mineral property. Depletion deductions can, however, exceed the total
tax basis of the mineral property. The excess of our percentage depletion
deductions over the adjusted tax basis of the property at the end of the taxable
year is subject to tax preference treatment in computing the alternative minimum
tax. Please read "-- Tax Consequences of Unit Ownership -- Alternative Minimum
Tax." In addition, a corporate unitholder's allocable share of the amount
allowable as a percentage depletion deduction for any property will be reduced
by 20% of the excess, if any, of that partner's allocable share of the amount of
the percentage depletion deductions for the taxable year over the adjusted tax
basis of the mineral property as of the close of the taxable year.
Sales of Coal Reserves. If any coal reserves are sold or otherwise
disposed of in a taxable transaction, we will recognize gain or loss measured by
the difference between the amount realized (including the amount of any
indebtedness assumed by the purchaser upon such disposition or to which such
property is subject) and the adjusted tax basis of the property sold. Generally,
the character of any gain or loss recognized upon that disposition will depend
upon whether our coal reserves are held:
- for sale to customers in the ordinary course of business (i.e., we are a
"dealer" with respect to that property),
- for use in a trade or business within the meaning of Section 1231 of the
Internal Revenue Code or
- as capital assets within the meaning of Section 1221 of the Internal
Revenue Code.
In determining dealer status with respect to coal reserves and other types
of real estate, the courts have identified a number of factors for
distinguishing between a particular property held for sale in the ordinary
course of business and one held for investment. Any determination must be based
on all the facts and circumstances surrounding the particular property and sale
in question.
We intend to hold our coal reserves for the purposes of generating cash
flow from coal royalties and achieving long-term capital appreciation. Although
our general partner may consider strategic sales of coal reserves consistent
with achieving long-term capital appreciation, our general partner does not
anticipate frequent sales, nor significant marketing, improvement or subdivision
activity in connection with any strategic sales. In light of the factual nature
of this question, however, there is no assurance that our purposes for holding
our properties will not change and that our future activities will not cause us
to be a "dealer" in coal reserves.
If we are not a dealer with respect to our coal reserves and we have held
the disposed property for more than one year period primarily for use in our
trade or business, the character of any gain or loss realized from a disposition
of the property will be determined under Section 1231 of the Internal Revenue
151
Code. If we have not held the property for more than one year at the time of the
sale, gain or loss from the sale will be taxable as ordinary income.
A unitholder's distributive share of any Section 1231 gain or loss
generated by us will be aggregated with any other gains and losses realized by
that unitholder from the disposition of property used in the trade or business,
as defined in Section 1231(b) of the Internal Revenue Code, and from the
involuntary conversion of such properties and of capital assets held in
connection with a trade or business or a transaction entered into for profit for
the requisite holding period. If a net gain results, all such gains and losses
will be long-term capital gains and losses; if a net loss results, all such
gains and losses will be ordinary income and losses. Net Section 1231 gains will
be treated as ordinary income to the extent of prior net Section 1231 losses of
the taxpayer or predecessor taxpayer for the five most recent prior taxable
years to the extent such losses have not previously been offset against Section
1231 gains. Losses are deemed recaptured in the chronological order in which
they arose.
If we are not a dealer with respect to our coal reserves, and that property
is not used in a trade or business, the property will be a "capital asset"
within the meaning of Section 1221 of the Internal Revenue Code. Gain or loss
recognized from the disposition of that property will be taxable as capital gain
or loss, and the character of such capital gain or loss as long-term or
short-term will be based upon our holding period in such property at the time of
its sale. The requisite holding period for long-term capital gain is more than
one year.
Upon a disposition of coal reserves, a portion of the gain, if any, equal
to the lesser of (i) the depletion deductions that reduced the tax basis of the
disposed mineral property plus deductible development and mining exploration
expenses, or (ii) the amount of gain recognized on the disposition, will be
treated as ordinary income to us.
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and determinations of the
initial tax bases, of our assets. Although we may from time to time consult with
professional appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are later found to be incorrect, the character and amount of items of
income, gain, loss or deductions previously reported by unitholders might
change, and unitholders might be required to adjust their tax liability for
prior years and incur interest and penalties with respect to those adjustments.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received plus his
share of our non-recourse liabilities. Because the amount realized includes a
unitholder's share of our non-recourse liabilities, the gain recognized on the
sale of units could result in a tax liability in excess of any cash received
from the sale.
Prior distributions from us in excess of cumulative net taxable income for
a common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than his tax basis in that common unit, even if the price is less than his
original cost.
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally be
taxed a maximum rate of 20%. A portion of this gain or loss, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Internal Revenue Code to the extent attributable to assets giving rise to
depletion recapture or other "unrealized receivables" or to "inventory
152
items" owned by us. The term "unrealized receivables" includes potential
recapture items, including depletion recapture. Ordinary income attributable to
unrealized receivables, inventory items and depletion recapture may exceed net
taxable gain realized upon the sale of the unit and may be recognized even if
there is a net taxable loss realized on the sale of the unit. Thus, a unitholder
may recognize both ordinary income and a capital loss upon a disposition of
units. Net capital loss may offset no more than $3,000 of ordinary income in the
case of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Treasury
regulations under Section 1223 of the Internal Revenue Code allow a selling
unitholder who can identify common units transferred with an ascertainable
holding period to elect to use the actual holding period of the common units
transferred provided that he consistently uses that method for all subsequent
unit transactions. Thus, according to the ruling, a common unitholder will be
unable to select high or low basis common units to sell as would be the case
with corporate stock but, under the Treasury regulations, can designate specific
common units sold for purposes of determining the holding period of the units
sold. A unitholder considering the purchase of additional units or a sale of
common units purchased in separate transactions is urged to consult his tax
advisor as to the possible consequences of this ruling and application of the
regulations.
Provisions of the Internal Revenue Code affect the taxation of some
financial products and securities, including partnership interests such as our
units, by treating a taxpayer as having sold an "appreciated" partnership
interest, one in which gain would be recognized if it were sold, assigned or
terminated at its fair market value, if the taxpayer or related persons enter(s)
into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the NYSE on
the first business day of the month (the "Allocation Date"). However, gain or
loss realized on a sale or other disposition of our assets other than in the
ordinary course of business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is recognized. As a
result, a unitholder transferring units in the open market may be allocated
income, gain, loss and deduction realized after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Vinson & Elkins L.L.P. is unable to opine on the
validity of this method of allocating income and deductions between the
transferors and the transferees of units. If this method is not allowed under
the Treasury Regulations, or only applies to transfers of less than all of the
unitholder's interest, our taxable income or losses might be reallocated among
the unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among unitholders whose interests
otherwise vary during a taxable period, to conform to a method permitted under
future Treasury Regulations.
153
A unitholder who owns units at any time during a quarter and who disposes
of those units prior to the record date set for a cash distribution for that
quarter will be allocated items of our income, gain, loss and deductions
attributable to that quarter but will not be entitled to receive that cash
distribution.
Notification Requirements. A person who purchases units from a unitholder
is required to notify us in writing of that purchase within 30 days after the
purchase. We are required to notify the IRS of that transaction and to furnish
specified information to the transferor and transferee. However, these reporting
requirements do not apply to a sale by an individual who is a citizen of the
United States and who effects the sale or exchange through a broker. Failure to
notify us of a purchase may lead to the imposition of substantial penalties.
Constructive Termination. We will be considered to have been terminated
for tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A termination of
us will result in the closing of our taxable year for all unitholders. In the
case of a unitholder reporting on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may result in more than 12 months'
of our taxable income or loss being includable in his taxable income for the
year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of any deductions for
depreciation. A termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject
to federal income tax on unrelated business taxable income. Some of our income
allocated to a unitholder which is a tax-exempt organization will be unrelated
business taxable income and will be taxable to the unitholder.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States on
account of ownership of units. As a consequence they will be required to file
federal tax returns for their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on any net income or gain. Under rules
applicable to publicly traded partnerships, we will withhold at the highest
marginal tax rate applicable to individuals from actual cash distributions made
quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our transfer agent
on a Form W-8 BEN or applicable substitute form in order to obtain credit for
the taxes withheld. A change in applicable law may require us to change these
procedures.
Because a foreign corporation that owns units will be treated as engaged in
a United States trade or business, that corporation may be subject to United
States branch profits tax a rate of 30%, in addition to regular federal income
tax, on its share of our income and gain, as adjusted for changes in the foreign
corporation's "U.S. net equity," which are effectively connected with the
conduct of a United States trade or business. That tax may be reduced or
eliminated by an income tax treaty between the United States and the country in
which the foreign corporate unitholder is a "qualified resident." In addition,
this type of unitholder is subject to special information reporting requirements
under Section 6038C of the Internal Revenue Code.
154
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
disposition of that unit to the extent that this gain is effectively connected
with a United States trade or business of the foreign unitholder. Apart from the
ruling, a foreign unitholder will not be taxed or subject to withholding upon
the disposition of a unit if he has owned less than 5% in value of the units
during the five-year period ending on the date of the disposition and if the
units are regularly traded on an established securities market at the time of
the disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes each unitholder's share
of our income, gain, loss and deduction for our preceding taxable year. In
preparing this information, which will generally not be reviewed by counsel, we
will use various accounting and reporting conventions, some of which have been
mentioned earlier, to determine the unitholder's share of income, gain, loss and
deduction. We cannot assure you that any of those conventions will yield a
result that conforms to the requirements of the Internal Revenue Code,
regulations or administrative interpretations of the IRS. Neither we nor counsel
can assure prospective unitholders that the IRS will not successfully contend in
court that those accounting and reporting conventions are impermissible. Any
challenge by the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any audit of this kind may require each unitholder to adjust a
prior year's tax liability, and possibly may result in an audit of that
unitholder's own return. Any audit of a unitholder's return could result in
adjustments not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code provides
for one partner to be designated as the "Tax Matters Partner" for these
purposes. The partnership agreement appoints the general partner as the Tax
Matters Partner of Natural Resource Partners.
The Tax Matters Partner will make some elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review, by which all the unitholders are bound, of a final partnership
administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, judicial review may be sought by any unitholder having at least a 1%
interest in profits or by any group of unitholders having in the aggregate at
least a 5% interest in profits. However, only one action for judicial review
will go forward, and each unitholder with an interest in the outcome may
participate. However, if we elect to be treated as a large partnership, a
unitholder will not have the right to participate in settlement conferences with
the IRS or to seek a refund.
A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
155
Nominee Reporting. Persons who hold an interest in our partnership as a
nominee for another person are required to furnish to us:
- the name, address and taxpayer identification number of the beneficial
owner and the nominee;
- whether the beneficial owner is a person that is not a United States
person, a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing, or a
tax-exempt entity;
- the amount and description of units held, acquired or transferred for the
beneficial owner; and
- specific information including the dates of acquisitions and transfers,
means of acquisitions and transfers, and acquisition cost for purchases,
as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that
"tax shelters" be registered with the Secretary of the Treasury. The temporary
Treasury Regulations interpreting the tax shelter registration provisions of the
Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not constitute
a tax shelter. However, the general partner, as the principal organizer of us,
has applied to register us as a tax shelter with the Secretary of Treasury in
the absence of assurance that we will not be subject to tax shelter registration
and in light of the substantial penalties which might be imposed if registration
is required and not undertaken.
We will supply our tax shelter registration number to you when one has been
assigned to us. A unitholder who sells or otherwise transfers a unit in a later
transaction must furnish this registration number to the transferee. The penalty
for failure of the transferor of a unit to furnish the registration number to
the transferee is $100 for each failure. In addition, unitholders must disclose
our tax shelter registration number on Form 8271 to be attached to the tax
return on which any deduction, loss or other benefit generated by us is claimed
or on which any of our income is included. A unitholder who fails to disclose
the tax shelter registration number on his return, without reasonable cause for
that failure, will be subject to a $250 penalty for each failure. Any penalties
discussed are not deductible for federal income tax purposes.
ISSUANCE OF THIS REGISTRATION NUMBER DOES NOT INDICATE THAT INVESTMENT IN US
OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
IRS.
Accuracy-related Penalties. An additional tax equal to 20% of the amount
of any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
- for which there is, or was, "substantial authority"; or
- as to which there is a reasonable basis and the pertinent facts of that
position are disclosed on the return.
156
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other taxes,
including foreign, state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property. Although an analysis of
those various taxes is not presented here, each prospective unitholder is urged
to consider their potential impact on his investment in us. We will initially
own property or do business in Alabama, Illinois, Indiana, Kentucky, Maryland,
Montana, Virginia, and West Virginia. A unitholder will likely be required to
file state income tax returns and to pay state income taxes in these states and
may be subject to penalties for failure to comply with those requirements. In
some states, tax losses may not produce a tax benefit in the year incurred and
also may not be available to offset income in subsequent taxable years. Some of
the states may require us, or we may elect, to withhold a percentage of income
from amounts to be distributed to a unitholder who is not a resident of the
state. Withholding, the amount of which may be greater or less than a particular
unitholder's income tax liability to the state, generally does not relieve a
nonresident unitholder from the obligation to file an income tax return. Amounts
withheld may be treated as if distributed to unitholders for purposes of
determining the amounts distributed by us. Please read "-- Tax Consequences of
Unit Ownership -- Entity-Level Collections." Based on current law and our
estimate of our future operations, the general partner anticipates that any
amounts required to be withheld will not be material. We may also own property
or do business in other states or in foreign jurisdictions in the future.
It is the responsibility of each unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities, of his
investment in us. Accordingly, we strongly recommend that each prospective
unitholder consult, and depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each unitholder to
file all foreign, state and local, as well as United States federal tax returns
that may be required of him. Vinson & Elkins L.L.P. has not rendered an opinion
on the foreign, state or local tax consequences of an investment in us.
157
INVESTMENT IN NATURAL RESOURCE PARTNERS BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to additional
considerations because the investments of these plans are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA, and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to:
- whether the investment is prudent under Section 404(a)(1)(B) of ERISA;
- whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA; and
- whether the investment will result in recognition of unrelated business
taxable income by the plan and, if so, the potential after-tax investment
return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing instrument and is a
proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit
employee benefit plans, and also IRAs that are not considered part of an
employee benefit plan, from engaging in specified transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that the general partner also would be a
fiduciary of the plan and our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under some circumstances. Under these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things,
(a) the equity interests acquired by employee benefit plans are
publicly offered securities -- i.e., the equity interests are widely held
by 100 or more investors independent of the issuer and each other, freely
transferable and registered under some provisions of the federal securities
laws,
(b) the entity is an "operating company," -- i.e., it is primarily
engaged in the production or sale of a product or service other than the
investment of capital either directly or through a majority-owned
subsidiary or subsidiaries, or
(c) there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each class of
equity interest, disregarding some interests held by the general partner,
its affiliates, and some other persons, is held by the employee benefit
plans referred to above, IRAs and other employee benefit plans not subject
to ERISA, including governmental plans.
Our assets should not be considered "plan assets" under these regulations
because it is expected that the investment will satisfy the requirements in (a)
above.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
158
UNDERWRITING
Salomon Smith Barney Inc. and Lehman Brothers Inc. are acting as
representatives of the underwriters named below. Subject to the terms and
conditions stated in the underwriting agreement dated the date of this
prospectus, each underwriter named below has agreed to purchase from us, and we
and Arch Coal have agreed to sell to the underwriters, the number of common
units set forth opposite the underwriter's name.
NUMBER OF
UNDERWRITERS COMMON UNITS
------------ ------------
Salomon Smith Barney Inc....................................
Lehman Brothers Inc.........................................
A.G. Edwards & Sons, Inc. ..................................
Friedman Billings Ramsey....................................
RBC Dain Rauscher Inc. .....................................
---------
Total..................................................... 4,500,000
=========
The underwriting agreement provides that the obligations of the
underwriters to purchase the common units included in this offering are subject
to approval of legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all the common units offered (other than
those covered by the over-allotment option described below) if they purchase any
of the common units.
The underwriters propose to offer some of the common units directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the common units to dealers at the public offering price
less a concession not to exceed $ per common unit. The underwriters may
allow, and dealers may reallow, a concession not to exceed $ per common
unit on sales to other dealers. If all of the units are not sold at the initial
public offering price, the representatives may change the public offering price
and the other selling terms. The representatives have advised us that they do
not intend to confirm any sales to any accounts over which they exercise
discretionary authority.
Of the common units offered by this prospectus, Arch Coal, as the selling
unitholder, is offering 1,901,250 common units for its own account. Arch Coal
may be deemed to be an underwriter within the meaning of the Securities Act of
1933 in connection with the sale of these common units.
We and Arch Coal have granted to the underwriters an option, exercisable
for 30 days from the date of this prospectus, to purchase up to an aggregate of
675,000 additional common units at the public offering price less the
underwriting discount. We will sell 57.75% of the over-allotment units and Arch
Coal will sell 42.25% of the over-allotment units. We will not receive any of
the proceeds from sales of common units by Arch Coal. The underwriters may
exercise this option solely for the purpose of covering over-allotments, if any,
in connection with this offering. To the extent this option is exercised, each
underwriter will be obligated, subject to conditions, to purchase a number of
additional common units approximately proportionate to the underwriter's initial
purchase commitment. If the underwriters do not exercise this option, New Gauley
Coal Corporation and Great Northern Properties Limited Partnership together will
purchase an additional 76,890 common units from Natural Resource Partners at the
initial public offering price, and the proceeds from this sale will not be
reduced by the underwriting discount and commission described below.
The WPP Group, Arch Coal and their affiliates, including our partnership,
the operating company, the general partner and the executive officers and
directors of our general partner, have agreed that, for a period of 180 days
from the date of this prospectus, we and they will not, without the prior
written consent of Salomon Smith Barney, dispose of or hedge any of our common
units or subordinated units or any securities convertible into or exchangeable
for our common units or subordinated units. Salomon Smith Barney in its sole
discretion may release any of the common units or subordinated units subject to
the lock-up agreements at any time without notice.
159
Salomon Smith Barney Inc. has informed us that it has no present intent or
arrangement to release any of the units subject to the lock-up agreements. The
release of units subject to any of the lock-up agreements is considered on a
case by case basis. Factors in deciding whether to release these units may
include the length of time before the particular lock-up expires, the number of
units involved, historical trading volumes of our common units and whether the
person seeking the release is an officer, director or affiliate of us or our
general partner.
At our request, the underwriters have reserved up to 7% of the common units
for sale at the initial public offering price to persons who are officers,
directors, employees or who are otherwise associated with the WPP Group, Arch
Coal and their affiliates through a directed unit program. The number of common
units available for sale to the general public will be reduced by the number of
directed units purchased by participants in the program. Any directed units not
purchased will be offered by the underwriters to the general public on the same
basis as all other common units offered. We have agreed to indemnify the
underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, in connection with the sales of the directed units.
Prior to this offering, there has been no public market for our common
units. Consequently, the initial public offering price for the common units was
determined by negotiations among our general partner, Arch Coal and the
representatives. The material factors considered in determining the initial
public offering price were our record of operations, our current financial
condition, our future prospects, our markets, the economic conditions in and
future prospects for the industry in which we compete, our management and
current prevailing conditions in the equity securities markets, including
current market valuations of publicly traded companies comparable to our
company. We cannot assure you, however, that the prices at which the common
units will sell in the public market after this offering will not be lower than
the initial public offering price or that an active trading market in our common
units will develop and continue after this offering.
We have applied to list our common units on the NYSE under the symbol
"NRP." The underwriters have undertaken to sell the common units to a minimum of
2,000 beneficial owners in lots of 100 or more units to meet the NYSE
distribution requirements for trading.
The following table shows the per common unit and total underwriting
discounts and commissions to be paid to the underwriters in connection with this
offering. The amounts shown assume both no exercise and full exercise of the
underwriters' option to purchase additional common units.
PAID BY NATURAL
RESOURCE PARTNERS PAID BY ARCH COAL
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
Per common unit....................... $ $ $ $
Total............................... $ $ $ $
In addition to the underwriting fee, we will pay a fee of 0.375% of gross
proceeds of the offering to Lehman Brothers Inc. for advisory services rendered
to us in connection with the evaluation, analysis and structuring of our
partnership.
In connection with this offering, Salomon Smith Barney on behalf of the
underwriters, may purchase and sell common units in the open market. These
transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of common units in
excess of the number of common units to be purchased by the underwriters in the
offering, which creates a syndicate short position. "Covered" short sales are
sales of common units made in an amount up to the number of common units
represented by the underwriters' over-allotment option. In determining the
source of common units to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of common units
available for purchase in the open market as compared to the price at which they
may purchase common units through the over-allotment option. Transactions to
close out the covered syndicate short involve either purchases of the common
units in the open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also
160
make "naked" short sales of common units in excess of the over-allotment option.
The underwriters must close out any naked short position by purchasing common
units in the open market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward pressure on the price
of the common units in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of bids
for or purchases of common units in the open market while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney repurchases common units originally sold by that syndicate
member in order to cover syndicate short positions or make stabilizing
purchases.
Any of these activities by the underwriters may have the effect of
preventing or retarding a decline in the market price of the common units. They
may also cause the price of the common units to be higher than the price that
otherwise would exist in the open market in the absence of such transactions.
The underwriters may conduct these transactions on the New York Stock Exchange,
in the over-the-counter market, or otherwise. If the underwriters commence any
of these transactions, they may discontinue them at any time.
The underwriters have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The underwriters may, from time to time, engage in transactions
with and perform services for us in the ordinary course of their business.
We estimate that our portion of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $2.2
million.
The WPP Group, Arch Coal, Natural Resource Partners, our general partner
and certain of their affiliates have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect of
these liabilities.
Because the National Association for Securities Dealers, Inc. views the
common units offered by this prospectus as interests in a direct participation
program, the offering is being made in compliance with Rule 2810 of the NASD's
Conduct Rules.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for Natural Resource
Partners by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in
connection with the common units offered hereby will be passed upon for the
underwriters by Baker Botts L.L.P., Houston, Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited (i) the Western
Pocahontas Properties Limited Partnership, the Great Northern Properties Limited
Partnership, the New Gauley Coal Corporation and the Arch Coal, Inc. Contributed
Properties financial statements at December 31, 2000 and 2001, and for each of
the three years in the period ended December 31, 2001 and (ii) the balance
sheets of Natural Resource Partners L.P., NRP (GP) LP and GP Natural Resource
Partners LLC as of April 15, 2002, as set forth in their reports. We have
included these financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
On April 26, 2002, each of Western Pocahontas Properties Limited
Partnership, Great Northern Properties Limited Partnership and New Gauley Coal
Corporation dismissed Arthur Andersen LLP as their independent public
accountants due to the adverse publicity being experienced by Arthur Andersen
LLP and concerns regarding the acceptance of its audits. Ernst & Young LLP was
engaged on May 3,
161
2002 by each of Western Pocahontas Properties Limited Partnership, Great
Northern Properties Limited Partnership and New Gauley Coal Corporation to serve
as their independent auditors for the three years ended December 31, 1999,
December 31, 2000 and December 31, 2001.
Arthur Andersen LLP's reports on the financial statements of each of
Western Pocahontas Properties Limited Partnership, Great Northern Properties
Limited Partnership and New Gauley Coal Corporation for the past two years did
not contain an adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles. During the
most recent two fiscal years and through April 26, 2002:
- there were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Arthur Andersen
LLP's satisfaction, would have caused them to make reference to the
subject matter in connection with their reports on the financial
statements of any of Western Pocahontas Properties Limited Partnership,
Great Northern Properties Limited Partnership or New Gauley Coal
Corporation for such years;
- there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K; and
- none of Western Pocahontas Properties Limited Partnership, Great Northern
Properties Limited Partnership and New Gauley Coal Corporation consulted
Ernst & Young LLP with respect to the application of accounting
principles to a specified transaction either completed or proposed, or
the type of audit opinion that might be rendered on the financial
statements of any of Western Pocahontas Properties Limited Partnership,
Great Northern Properties Limited Partnership or New Gauley Coal
Corporation, or any other matters or reportable events listed in Items
304(a)(2)(i) and (ii) of Regulation S-K.
The reserve report and estimates of our proven and probable coal reserves
attributable to properties contributed to us by Arch Coal included in this
prospectus have, to the extent described in this prospectus, been prepared by
Arch Coal and audited by Weir International Mining Consultants. The reserve
report and estimates of our proven and probable coal reserves attributable to
properties contributed to us by the WPP Group included in this prospectus have,
to the extent described in this prospectus, been prepared by the WPP Group and
audited by Stagg Resource Consultants, Inc. A summary of the estimates contained
in the coal reserve audit summary reports of Weir International Mining
Consultants and Stagg Resource Consultants, Inc. have been included in this
prospectus as Appendix E and Appendix F, respectively, in reliance upon those
firms as experts with respect to the measurement of coal reserves.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 regarding
the common units. This prospectus does not contain all of the information set
forth in the registration statement. For further information regarding us and
the common units offered in this prospectus, you may desire to review the full
registration statement, including its exhibits and schedules. You may desire to
review the full text of any contracts, agreements or other documents filed as
exhibits to the registration statement for a more complete description of the
matter involved. The registration statement, including the exhibits and
schedules, may be inspected and copied at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of this material can also be obtained upon written request
from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates or from the SEC's web
site on the Internet at http://www.sec.gov. Please call the SEC at
1-800-SEC-0330 for further information on public reference rooms.
As a result of the offering, we will file periodic reports and other
information with the SEC. These reports and other information may be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates, or obtained from the
SEC's web site on the Internet at http://www.sec.gov.
162
We intend to furnish or make available to our unitholders within 90 days
following the close of our fiscal year end annual reports containing audited
financial statements prepared in accordance with generally accepted accounting
principles and furnish or make available within 45 days following the close of
each fiscal quarter quarterly reports containing unaudited interim financial
information, including the information required by Form 10-Q, for the first
three fiscal quarters of each of our fiscal years. Our annual report will
include a description of our related party transactions, including transactions
with our general partner and its affiliates in the most recent fiscal year.
FORWARD-LOOKING STATEMENTS
Statements included in this prospectus which are not historical facts
(including any statements concerning plans and objectives of management for
future operations or economic performance, or assumptions related thereto) are
forward-looking statements. In addition, we and our representatives may from
time to time make other oral or written statements which are also
forward-looking statements.
Such forward-looking statements include, among other things, statements
regarding capital expenditures, acquisitions and dispositions, expected
commencement dates of coal mining, projected quantities of future coal
production by our lessees producing coal from our reserves leased, projected
demand or supply for coal which will affect sales levels, prices and royalties
realized by us.
These forward-looking statements are made based upon management's current
plans, expectations, estimates, assumptions and beliefs concerning future events
impacting us and therefore involve a number or risks and uncertainties. We
caution that forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied in the
forward-looking statements.
Important factors that could cause our actual results of operations or our
actual financial condition to differ include, but are not necessarily limited
to:
- the cost of acquiring new coal reserves;
- the ability to acquire coal reserves on satisfactory terms;
- the prices for which coal from our properties can be sold;
- the volatility of commodity prices for coal;
- our ability to lease new and existing coal reserves;
- the ability of our lessees to produce sufficient quantities of coal on an
economic basis from our reserves;
- the ability of our lessees to obtain favorable sales contracts for coal
produced from our reserves;
- competition among producers in the coal industry generally;
- the extent to which the amount and quality of actual production differs
from estimated coal reserves;
- unanticipated geologic problems;
- availability of required materials and equipment;
- the occurrence of unusual weather events, accidents, changes in
governmental regulation, equipment failures, transportation delays,
labor-related interruptions or operating conditions, including force
majeure;
- the timing of receipt by our lessees of necessary governmental permits;
- our lessees' labor relations and costs;
163
- changes in governmental regulation or enforcement practices, especially
with respect to mining environmental, health and safety matters, such as
emissions levels applicable to coal-burning power generators and steel
manufacturers;
- the experience and financial condition of lessees of coal reserves,
including their ability to satisfy their royalty, environmental,
reclamation and other obligations to us and others; and
- fluctuations in transportation costs and the availability or reliability
of transportation of coal from our properties;
- any future announcements of production cuts or implementation of
previously announced cuts by our lessees;
- a decrease in the demand for coal by the electricity generation or steel
production industries;
- any increase or decrease in coal imports or exports; and
- risks and uncertainties relating to general domestic and international
economic (including inflation and interest rates) and political
conditions.
Many of such factors are beyond our ability to control or predict. Readers
are cautioned not to put undue reliance on forward-looking statements.
164
NATURAL RESOURCE PARTNERS L.P.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Natural Resource Partners L.P. Unaudited Pro Forma Financial
Statements:
Basis of Presentation..................................... F-3
Pro Forma Balance Sheet as of March 31, 2002.............. F-6
Pro Forma Statement of Revenues and Direct Costs and
Expenses for the three months ended March 31, 2002..... F-8
Pro Forma Statement of Revenues and Direct Costs and
Expenses for the year ended December 31, 2001.......... F-9
Notes to Pro Forma Financial Statements................... F-10
Natural Resource Partners L.P.:
Report of Independent Auditors............................ F-13
Balance Sheet as of April 15, 2002........................ F-14
Note to Balance Sheet..................................... F-15
The WPP Group:
Western Pocahontas Properties Limited Partnership:
Report of Independent Auditors......................... F-16
Balance Sheets as of December 31, 2000 and 2001 and
March 31, 2002........................................ F-17
Statements of Income for the years ended December 31,
1999, 2000 and 2001 and the three months ended March
31, 2001 and 2002..................................... F-18
Statements of Changes in Partners' Capital for the
years ended December 31, 1999, 2000 and 2001 and the
three months ended March 31, 2002..................... F-19
Statements of Cash Flows for the years ended December
31, 1999, 2000 and 2001 and the three months ended
March 31, 2001 and 2002............................... F-20
Notes to Financial Statements.......................... F-21
Great Northern Properties Limited Partnership:
Report of Independent Auditors......................... F-30
Balance Sheets as of December 31, 2000 and 2001 and
March 31, 2002........................................ F-31
Statements of Income for the years ended December 31,
1999, 2000 and 2001 and the three months ended March
31, 2001 and 2002..................................... F-32
Statements of Changes in Partners' Capital for the
years ended December 31, 1999, 2000 and 2001 and the
three months ended March 31, 2002..................... F-33
Statements of Cash Flows for the years ended December
31, 1999, 2000 and 2001 and the three months ended
March 31, 2001 and 2002............................... F-34
Notes to Financial Statements.......................... F-35
New Gauley Coal Corporation:
Report of Independent Auditors......................... F-41
Balance Sheets as of December 31, 2000 and 2001 and
March 31, 2002........................................ F-42
Statements of Income for the years ended December 31,
1999, 2000 and 2001 and the three months ended March
31, 2001 and 2002..................................... F-43
Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1999, 2000 and 2001
and the three months ended March 31, 2002............. F-44
Statements of Cash Flows for the years ended December
31, 1999, 2000 and 2001 and the three months ended
March 31, 2001 and 2002............................... F-45
Notes to Financial Statements.......................... F-46
F-1
PAGE
----
Arch Coal, Inc. Contributed Properties:
Report of Independent Auditors......................... F-51
Statements of Assets Purchased and Liabilities Assumed
as of December 31, 2000 and 2001 and March 31, 2002... F-52
Statements of Revenues and Direct Costs and Expenses
for the years ended December 31, 1999, 2000 and 2001
and the three months ended March 31, 2001 and 2002.... F-53
Notes to Financial Statements.......................... F-54
NRP (GP) LP
Report of Independent Auditors......................... F-58
Balance Sheet as of April 15, 2002..................... F-59
Note to Balance Sheet.................................. F-60
GP Natural Resource Partners LLC:
Report of Independent Auditors......................... F-61
Balance Sheet as of April 15, 2002..................... F-62
Note to Balance Sheet.................................. F-63
F-2
NATURAL RESOURCE PARTNERS L.P.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Following are the unaudited pro forma financial statements of Natural
Resource Partners L.P., a newly formed limited partnership, as of March 31, 2002
and for the three months ended March 31, 2002 and the year ended December 31,
2001. The pro forma balance sheet assumes that the offering and related
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 period presented. We presented
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 financial statements and related notes of
the WPP Group and the Arch Coal Contributed Properties included elsewhere in the
prospectus.
We derived the pro forma balance sheet by adjusting the historical balance
sheets of Western Pocahontas Properties Limited Partnership ("Western
Pocahontas"), Great Northern Properties Limited Partnership ("Great Northern"),
New Gauley Coal Corporation ("New Gauley") and the Arch Coal Contributed
Properties. We derived the pro forma statements of revenues and direct costs and
expenses by extracting the revenues and direct costs and expenses from the
historical statements of income of Western Pocahontas, Great Northern and New
Gauley included elsewhere in this prospectus and adding them to the Arch Coal
Contributed Properties historical 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 historical statements of income of the WPP Group included
elsewhere in this prospectus. The pro forma statements of revenues and direct
costs and expenses were adjusted to exclude revenues and direct costs and
expenses related to properties not being contributed to us by the WPP Group. We
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 as contemplated and that the pro forma
adjustments give appropriate effect to these assumptions and are properly
applied in the pro forma financial information.
We have no employees and our operations are conducted by our general
partner and affiliates pursuant to contractual arrangements. Please read "Risks
Related to Our Partnership Structure."
Western Pocahontas is contributing nearly all of its coal royalty producing
properties, while retaining the surface and timber properties. Coal royalties
accounted for approximately 60% of Western Pocahontas' total revenues in 2001.
New Gauley is contributing all of its coal royalty producing properties. Great
Northern is contributing the coal royalty producing properties related to two
leases. The assets retained by Great Northern include one producing property
with insignificant royalty income, one producing property with a productive
reserve life of less than two years and non-producing properties. The properties
being contributed by the WPP Group account for approximately 79% of WPP Group's
total revenues in 2001.
Corbin J. Robertson, Jr. controls the general partners of Western
Pocahontas and Great Northern and is the controlling stockholder of New Gauley.
Corbin J. Robertson, Jr. will also control the general partner of Natural
Resource Partners L.P. As a result, the assets of the WPP Group are being
contributed at historical costs in accordance with EITF 87-21, "Change of
Accounting Basis in Master Limited Partnership Transactions."
The Arch Coal Contributed Properties are indirectly wholly-owned by Arch
Coal, Inc. and comprise only a small percentage of its coal properties. Coal
royalty revenues from the Arch Coal Contributed Properties were approximately
1.3% of Arch Coal, Inc.'s 2001 revenues.
The historical financial statements of the Arch Coal Contributed Properties
reflect the revenues and direct costs and expenses of the properties to be
contributed to Natural Resource Partners L.P. at the
F-3
closing of this offering. These properties do 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 is maintained. The Arch Coal Contributed
Properties do not maintain stand-alone corporate treasury, legal, tax, human
resources, general and administrative and other similar corporate support
functions. Corporate general and administrative expenses have not been
previously allocated in connection with the preparation of the historical
financial statements of the Arch Coal Contributed Properties included elsewhere
in the prospectus 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 have not been maintained as of March 31, 2002 and for the
three months ended March 31, 2002 and the year ended December 31, 2001,
Statements of Revenues and Direct Costs and Expenses and Statements of Assets
Purchased and Liabilities Assumed have been prepared and included elsewhere in
the prospectus. The historical Statements of Revenues and Direct Costs and
Expenses and Statements 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
various operation expenses.
The WPP Group will comprise a majority of the revenues and total net book
value of assets contributed to Natural Resource Partners L.P. Additionally, the
senior executives and other officers who currently manage Western Pocahontas
will continue to manage Natural Resource Partners L.P. The WPP Group will
control approximately 58% of the common units of Natural Resource Partners L.P.
The general partner and majority stockholder of the entities comprising the WPP
Group will hold the controlling general partner interests of Natural Resource
Partners L.P. and is entitled to nominate five directors out of the eight
directors of the general partner of Natural Resources Partners L.P. As a result,
the WPP Group is considered to be the accounting acquirer and the assets and
liabilities of the Arch Coal Contributed Properties will be recorded at their
fair values upon consummation of the transaction.
All properties contributed by the WPP Group and the Arch Coal Contributed
Properties will be contributed to Natural Resource Partners L.P. in exchange for
common and subordinated units in Natural Resource Partners L.P. and its
assumption of debt upon the closing of this offering. A table of coal reserve
quantities, assuming the reserves were contributed to us on December 31, 2001,
is summarized below (tons in thousands):
ARCH COAL
WESTERN GREAT NEW CONTRIBUTED
POCAHONTAS NORTHERN GAULEY PROPERTIES TOTAL
---------- -------- ------ ----------- ---------
Surface................................... 97,919 166,939 11,929 21,706 298,493
Underground............................... 415,217 -- 7,917 432,291 855,425
------ ------- ------ ------- ---------
513,136 166,939 19,846 453,997 1,153,918
====== ======= ====== ======= =========
The unaudited pro forma financial statements do not purport to present the
financial position or the results of operations of Natural Resource Partners
L.P. had the 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 L.P. for any future date or period.
RECENT FEDERAL DISTRICT COURT RULINGS
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. 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.
F-4
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. Although the
U.S. Army Corps of Engineers is planning to appeal the ruling, this appeal may
not be successful. As a result, the ruling could have a long-term material
adverse effect on our financial condition and results operations. Please see
"Risk Factors -- A recent federal district court ruling could preclude our
lessees from obtaining Clean Water Act permits required for some of their future
operations and could also result in the revocation of existing permits."
F-5
NATURAL RESOURCE PARTNERS L.P.
PRO FORMA BALANCE SHEET
AS OF MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
HISTORICAL
------------------------------------------------
ARCH COAL
WESTERN GREAT CONTRIBUTED
POCAHONTAS NORTHERN NEW GAULEY PROPERTIES
---------- -------- ---------- -----------
ASSETS
Current assets
Cash and cash equivalents........ $ 5,974 $ 433 $ 681 $ --
Restricted cash.................. 4,928 10,716 -- --
Accounts receivable.............. 3,330 1,015 128 982
Other............................ 84 68 223 --
-------- -------- ------- ---------
Total current assets.............. 14,316 12,232 1,032 982
Property and equipment, at cost... 156,550 72,720 6,490 242,730
Less accumulated depletion,
depreciation and amortization.... (48,007) (16,322) (2,813) (154,900)
-------- -------- ------- ---------
108,543 56,398 3,677 87,830
Deferred financing costs.......... 2,122 824 196 --
-------- -------- ------- ---------
Total assets...................... 124,981 69,454 4,905 88,812
======== ======== ======= =========
LIABILITIES AND PARTNERS' CAPITAL/EQUITY
Current liabilities
Current portion of long-term
debt........................... 3,022 1,500 101 --
Accounts payable-affiliate....... 15 -- -- --
Accrued liabilities.............. 433 86 146 281
Accrued interest................. -- 302 -- --
-------- -------- ------- ---------
Total current liabilities......... 3,470 1,888 247 281
Deferred revenue.................. 7,717 1,029 3,459 9,981
Long term debt.................... 91,939 46,750 1,558 --
Partners' capital/equity(k)....... 21,855 19,787 (359) 78,550
ADJUSTMENTS
FOR PROPERTIES PRO FORMA OFFERING PRO FORMA
NOT CONTRIBUTED COMBINED ADJUSTMENTS AS ADJUSTED
--------------- --------- ----------- -----------
ASSETS
Current assets
Cash and cash equivalents........ $ (7,088)(a) $ -- $ 53,513 (e) $ 1,000
(6,266)(f)
(111)(f)
845 (f)
(423)(f)
(46,558)(g)
Restricted cash.................. (15,644)(a) -- -- --
Accounts receivable.............. (5,455)(a) -- -- --
Other............................ (375)(a) -- -- --
-------- --------- --------- --------
Total current assets.............. (28,562) -- 1,000 1,000
Property and equipment, at cost... (65,148)(b) 413,342 127,472 (i) 385,914
(154,900)(j)
Less accumulated depletion,
depreciation and amortization.... 19,483 (b) (202,559) 154,900 (j) (47,659)
-------- --------- --------- --------
(45,665) 210,783 127,472 338,255
Deferred financing costs.......... (3,142)(c) -- 1,000 (f) 1,000
-------- --------- --------- --------
Total assets...................... (77,369) 210,783 129,472 340,255
======== ========= ========= ========
LIABILITIES AND PARTNERS' CAPITAL/EQUITY
Current liabilities
Current portion of long-term
debt........................... (4,623)(a) -- -- --
Accounts payable-affiliate....... (15)(a) -- -- --
Accrued liabilities.............. (946)(a) -- -- --
Accrued interest................. (302)(a) -- -- --
-------- --------- --------- --------
Total current liabilities......... (5,886) -- -- --
Deferred revenue.................. (2,580)(c) 19,606 -- 19,606
Long term debt.................... (93,689)(d) 46,558 (46,558)(g) --
Partners' capital/equity(k)....... (22,676)(a) 144,619 (144,619)(h) --
(45,665)(b)
(562)(c)
93,689 (d)
F-6
NATURAL RESOURCE PARTNERS L.P.
PRO FORMA BALANCE SHEET -- (CONTINUED)
AS OF MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
HISTORICAL
------------------------------------------------
ARCH COAL
WESTERN GREAT CONTRIBUTED
POCAHONTAS NORTHERN NEW GAULEY PROPERTIES
---------- -------- ---------- -----------
Common units
4,500,000 units held by public....
4,334,138 units held by WPP
Group...........................
3,170,862 units held by Arch
Coal............................
Total common units (12,005,000
units)........................
Subordinated units
6,932,888 units held by the WPP
Group...........................
5,072,112 units held by Arch
Coal............................
Total subordinated units
(12,005,000 units)............
General partner interest...........
-------- -------- ------- ---------
Total partners' capital............ 21,855 19,787 (359) 78,550
-------- -------- ------- ---------
Total liabilities and partners'
capital........................... 124,981 69,454 4,905 88,812
======== ======== ======= =========
ADJUSTMENTS
FOR
PROPERTIES
NOT PRO FORMA OFFERING PRO FORMA
CONTRIBUTED COMBINED ADJUSTMENTS AS ADJUSTED
----------- --------- ------------ -----------
Common units
4,500,000 units held by public.... 53,513 (e)
(5,800)(f) 47,713
4,334,138 units held by WPP
Group........................... 31,340 (h)
27,624 (i) 58,964
3,170,862 units held by Arch
Coal............................ 845 (f)
22,928 (h)
20,210 (i) 43,983
------------ --------
Total common units (12,005,000
units)........................ 150,660 150,660
------------ --------
Subordinated units
6,932,888 units held by the WPP
Group........................... 50,132 (h)
44,187 (i) 94,319
5,072,112 units held by Arch
Coal............................ 36,676 (h)
32,328 (i) 69,004
------------ --------
Total subordinated units
(12,005,000 units)............ 163,323 163,323
------------ --------
General partner interest........... 3,543 (h)
3,123 (i) 6,666
---------- --------- ------------ --------
Total partners' capital............ 24,786 144,619 176,030 320,649
---------- --------- ------------ --------
Total liabilities and partners'
capital........................... (77,369) 210,783 129,472 340,255
========== ========= ============ ========
The accompanying footnotes are an integral part of these pro forma financial
statements.
F-7
NATURAL RESOURCE PARTNERS L.P.
PRO FORMA STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES FOR THE
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
HISTORICAL
------------------------------------------------
ARCH COAL
WESTERN GREAT NEW GAULEY CONTRIBUTED
POCAHONTAS NORTHERN COAL PROPERTIES
---------- -------- ---------- -----------
Revenues
Coal royalties............... $4,779 $1,444 $528 $4,351
Timber royalties............. 623 17 -- --
Gain on sale of property..... 61 -- -- --
Lease and easement income.... -- 139 -- --
Property taxes............... 587 -- -- 269
Other........................ 211 76 -- 448
------ ------ ---- ------
Total revenues................. 6,261 1,676 528 5,068
Direct cost and expenses
Taxes other than income...... 697 5 12 269
Depreciation, depletion and
amortization............... 707 696 32 1,469
Other expenses............... -- -- -- 197
------ ------ ---- ------
Total direct costs and
expenses..................... 1,404 701 44 1,935
------ ------ ---- ------
Excess of revenues over direct
costs and expenses........... $4,857 $ 975 $484 $3,133
====== ====== ==== ======
ADJUSTMENTS
FOR
PROPERTIES
NOT PRO FORMA OFFERING PRO FORMA
CONTRIBUTED COMBINED ADJUSTMENTS AS ADJUSTED
----------- --------- ----------- -----------
Revenues
Coal royalties............... $ (36)(l) $11,066 $ -- $11,066
Timber royalties............. (640)(l) -- -- --
Gain on sale of property..... (61)(l) -- -- --
Lease and easement income.... (139)(l) -- -- --
Property taxes............... -- 856 -- 856
Other........................ (173)(l) 562 -- 562
------- ------- ------- -------
Total revenues................. (1,049) 12,484 -- 12,484
Direct cost and expenses
Taxes other than income...... (127)(m) 856 -- 856
Depreciation, depletion and
amortization............... (94)(m) 2,810 2,553 (n) 5,363
Other expenses............... -- 197 -- 197
------- ------- ------- -------
Total direct costs and
expenses..................... (221) 3,863 2,553 6,416
------- ------- ------- -------
Excess of revenues over direct
costs and expenses........... $ (828) $ 8,621 $(2,553) $ 6,068 (o)
======= ======= ======= =======
The accompanying footnotes are an integral part of these pro forma financial
statements.
F-8
NATURAL RESOURCE PARTNERS L.P.
PRO FORMA STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS)
HISTORICAL
------------------------------------------------
ARCH COAL
WESTERN GREAT NEW GAULEY CONTRIBUTED
POCAHONTAS NORTHERN COAL PROPERTIES
---------- -------- ---------- -----------
Revenues
Coal royalties............... $15,458 $7,457 $1,609 $18,415
Timber royalties............. 3,691 -- -- --
Gain on sale of property..... 3,125 439 25 --
Lease and easement income.... -- 787 -- --
Property taxes............... 1,184 88 28 1,033
Other........................ 2,512 31 61 1,363
------- ------ ------ -------
Total revenues................. 25,970 8,802 1,723 20,811
Direct cost and expenses
Taxes other than income...... 1,457 110 45 1,033
Depreciation, depletion and
amortization............... 1,369 2,144 212 6,382
Other expenses............... -- -- -- 283
------- ------ ------ -------
Total direct costs and
expenses..................... 2,826 2,254 257 7,698
------- ------ ------ -------
Excess of revenues over direct
costs and expenses........... $23,144 $6,548 $1,466 $13,113
======= ====== ====== =======
ADJUSTMENTS
FOR
PROPERTIES
NOT PRO FORMA OFFERING PRO FORMA
CONTRIBUTED COMBINED ADJUSTMENTS AS ADJUSTED
----------- --------- ----------- -----------
Revenues
Coal royalties............... $ (506)(l) $42,433 $ -- $42,433
Timber royalties............. (3,691)(l) -- -- --
Gain on sale of property..... (3,369)(l) 220 -- 220
Lease and easement income.... (406)(l) 381 -- 381
Property taxes............... (146)(m) 2,187 -- 2,187
Other........................ (1,939)(l) 2,028 -- 2,028
-------- ------- -------- -------
Total revenues................. (10,057) 47,249 -- 47,249
Direct cost and expenses
Taxes other than income...... (458)(m) 2,187 -- 2,187
Depreciation, depletion and
amortization............... (215)(m) 9,892 10,211 (n) 20,103
Other expenses............... -- 283 -- 283
-------- ------- -------- -------
Total direct costs and
expenses..................... (673) 12,362 10,211 22,573
-------- ------- -------- -------
Excess of revenues over direct
costs and expenses........... $ (9,384) $34,887 $(10,211) $24,676 (o)
======== ======= ======== =======
The accompanying footnotes are an integral part of these pro forma financial
statements
F-9
NATURAL RESOURCE PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
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 Resources Partners in exchange for the issuance by Natural
Resource Partners to the WPP Group of 4,257,258 common units and
6,932,888 subordinated units and 25% of the incentive distribution
rights.
- 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 5,072,112 common units and 5,072,112
subordinated units and 10% of the incentive distribution rights.
- The public offering by Natural Resource Partners of 2,598,750 common
units at an assumed initial offering price of $20.00 per common unit,
resulting in gross proceeds to Natural Resource Partners of $52.0
million. Arch Coal will sell 1,901,250 of its common units. Natural
Resource Partners will not receive any proceeds from the sale of the
common units by Arch Coal.
- The sale by Natural Resource Partners of 76,890 common units at an
assumed initial public offering price of $20.00 per common unit to Great
Northern and New Gauley (which assumes that the underwriters do not
exercise their over-allotment option).
- The repayment of $46.6 million of debt contributed by the WPP Group with
proceeds from the offering.
- The contribution of $0.8 million by Arch Coal to Natural Resource
Partners, representing Arch Coal's share of the deferred financing costs
and initial working capital.
- The payment of $0.1 million by Natural Resource Partners to the WPP
Group, which represents excess proceeds from the offering after the
repayment of $46.6 million of debt contributed by the WPP Group, the
payment of expenses associated with the offering and related transactions
and the funding of working capital.
PRO FORMA ADJUSTMENTS TO BALANCE SHEET
(a)Represents the working capital of the WPP Group and the Arch Coal
Contributed Properties that will not be contributed to Natural Resource
Partners.
(b)Represents the property, plant and equipment and related accumulated
depletion, depreciation and amortization of the WPP Group that will not
be contributed to Natural Resource Partners. The property retained is as
follows (in thousands):
GROSS PROPERTY (EXCLUDING ACCUMULATED DEPLETION, WESTERN GREAT
DEPRECIATION AND AMORTIZATION) PROPERTIES NORTHERN NEW GAULEY TOTAL
------------------------------------------------ ---------- -------- ---------- -------
Coal......................................... $27,291 $14,814 $88 $42,193
Timber....................................... 18,366 -- -- 18,366
Land......................................... 4,144 -- -- 4,144
Other........................................ 445 -- -- 445
------- ------- --- -------
Total...................................... $50,246 $14,814 $88 $65,148
======= ======= === =======
(c)Represents deferred financing costs and deferred revenues of the WPP
Group that will not be contributed to Natural Resource Partners. The
deferred revenues not contributed relate to a coal property that is not
contributed to Natural Resource Partners.
F-10
NATURAL RESOURCE PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(d)Represents debt which will not be 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.......................................... $55,939
Great Northern.............................................. 37,750
New Gauley.................................................. --
-------
Total..................................................... $93,689
=======
(e)Reflects gross proceeds to Natural Resource Partners of $53.5 million
from the issuance and sale of 2,675,640 common units at an assumed
initial offering price of $20.00 per share, of which 2,598,750 common
units were sold to the public and 76,890 were sold to Great Northern and
New Gauley.
(f)Reflects payment of fees of $577,500 for the new credit facility,
underwriting discount of approximately $3,378,000 (assuming the
underwriters do not exercise their over-allotment option) and legal and
other professional fees and expenses of approximately $2,310,000
associated with the offering and $577,500 for working capital purposes.
The fees for the new revolving credit facility that will be capitalized
and amortized and the underwriting commissions and offering expenses
will be allocated to the common units. Also reflects $845,000 cash
contribution by Arch Coal to provide $422,500 of working capital and
$422,500 for fees for the new revolving credit facility that will be
capitalized and amortized. Also reflects payment of $111,000 by Natural
Resource Partners to the WPP Group which represents excess proceeds from
the offering after the repayment of $46.6 million of debt contributed by
the WPP Group, the payment of expenses associated with the offering and
related transactions and the funding of working capital.
(g)Represents the repayment of $46.6 million of debt assumed from the WPP
Group.
(h)Represents the pro rata allocation of the net assets contributed by the
WPP Group and Arch Coal of $144.6 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:
(IN THOUSANDS)
12,005,000 common units issued at the assumed initial
offering price of $20.00 per unit......................... $240,100
12,005,000 subordinated units issued at the assumed initial
offering price for the common units of $20.00 per unit.... 240,100
2% general partner interest equivalent to 490,000 units
issued at $20.00 per unit................................. 9,800
--------
Assumed enterprise value of Natural Resource Partners....... $490,000
Arch Coal ownership interest................................ 42.25%
--------
Purchase price for Arch Coal Contributed Properties......... $207,025
Establishment of working capital............................ 423
Revolving credit facility fees.............................. 423
--------
Total purchase price for Arch Coal Contributed Properties... $207,871
========
F-11
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... $207,871
Less: Historical net book value of Arch Coal Contributed
Properties................................................ 79,553
--------
Total purchase price in excess of historical cost of Arch
Coal Contributed Properties............................... $128,318
========
Allocation to cash.......................................... 423
Allocation to deferred financing costs...................... 423
Allocation to mineral reserves.............................. 127,472
--------
Allocation of purchase price in excess of historical cost... $128,318
========
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 $127,472, to reflect these assets at their
estimated fair values. This allocation is preliminary and may change
based on the final terms of the transactions, including the offering
price and the number of units offered. The final purchase allocation is
expected to be completed 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 our general partner and its affiliates own more than 80%
of the outstanding common units, our 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. Upon completion of this offering, our
general partner and its affiliates will own 62.5% of the outstanding
common units. If we do not issue any equity securities prior to the
expiration of the subordination period, upon the conversion of
subordinated units into common units at the end of the subordination
period, our general partner and its affiliates will own 81.3% of our
outstanding common units 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.
F-12
NATURAL RESOURCE PARTNERS L.P.
REPORT OF INDEPENDENT AUDITORS
To Natural Resource Partners L.P.:
We have audited the accompanying balance sheet of Natural Resource Partners
L.P. as of April 15, 2002. This financial statement is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Natural Resource Partners L.P. as
of April 15, 2002 in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
April 16, 2002
St. Louis, Missouri
F-13
NATURAL RESOURCE PARTNERS L.P.
BALANCE SHEET
APRIL 15, 2002
ASSETS
Current Assets
Cash................................................... $1,000
------
Total Assets......................................... $1,000
======
PARTNERS' CAPITAL
Limited Partners' Capital................................. $ 980
General Partner's Capital................................. 20
------
Total Partners' Capital.............................. $1,000
======
The accompanying note is an integral part of the financial statement.
F-14
NATURAL RESOURCE PARTNERS L.P.
NOTE TO BALANCE SHEET
Natural Resource Partners L.P. (the "Partnership") is a Delaware limited
partnership formed on April 9, 2002 to acquire certain of the producing coal
royalty related assets of Western Pocahontas Properties Limited Partnership,
Great Northern Properties Limited Partnership, New Gauley Coal Corporation and
Ark Land Company.
The Partnership intends to offer common units, representing limited partner
interests, pursuant to a public offering, and to concurrently issue common units
and subordinated units, representing additional limited partner interests, to
Western Pocahontas Properties Limited Partnership, Great Northern Properties
Limited Partnership, New Gauley Coal Corporation and Arch Coal, Inc.
NRP (GP) LP, as general partner, contributed $20 and affiliates of the
Partnership, as limited partners, contributed $980 in proportion to their
ownership on April 15, 2002. There have been no other transactions involving the
Partnership as of April 15, 2002.
F-15
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Partners of Western Pocahontas Properties Limited Partnership
We have audited the accompanying balance sheets of Western Pocahontas
Properties Limited Partnership as of December 31, 2000 and 2001, and the related
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Western Pocahontas
Properties Limited Partnership at December 31, 2000 and 2001, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
June 3, 2002
Houston, Texas
F-16
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------- MARCH 31,
2000 2001 2002
-------- -------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,108 $ 4,415 $ 5,974
Restricted cash........................................... 2,526 4,912 4,928
Cash in escrow............................................ -- 1,000 --
Accounts receivable....................................... 1,689 2,787 3,330
Other..................................................... 33 37 84
-------- -------- --------
Total current assets................................... 8,356 13,151 14,316
Property and equipment, at cost............................. 113,137 121,424 156,550
Less accumulated depreciation and depletion............... (46,039) (47,321) (48,007)
-------- -------- --------
67,098 74,103 108,543
-------- -------- --------
Deferred financing costs.................................... 1,056 970 2,122
-------- -------- --------
Total assets........................................... $ 76,510 $ 88,224 $124,981
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt......................... $ 2,749 $ 2,966 $ 3,022
Note payable.............................................. -- 7,848 --
Accounts payable -- affiliate............................. 15 24 15
Accrued liabilities....................................... 671 720 433
Reversionary interest payable............................. -- 865 --
-------- -------- --------
Total current liabilities.............................. 3,435 12,423 3,470
Deferred revenue............................................ 7,468 7,916 7,717
Long-term debt.............................................. 50,681 47,716 91,939
Commitments and contingencies............................... -- -- --
Partners' capital........................................... 14,926 20,169 21,855
-------- -------- --------
Total liabilities and partners' capital................ $ 76,510 $ 88,224 $124,981
======== ======== ========
The accompanying footnotes are an integral part of these financial statements.
F-17
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31
--------------------------- -------------------
1999 2000 2001 2001 2002
------- ------- ------- -------- --------
(UNAUDITED)
REVENUES:
Coal royalties............................. $15,754 $11,585 $15,458 $ 2,982 $ 4,779
Timber royalties........................... 3,770 4,236 3,691 1,697 623
Gain on sale of property................... 205 3,982 3,125 5 61
Property tax............................... 1,163 1,404 1,184 572 587
Other...................................... 1,293 1,342 2,512 313 211
------- ------- ------- ------- -------
Total revenues..................... 22,185 22,549 25,970 5,569 6,261
EXPENSES:
General and administrative................. 3,161 3,009 2,981 812 823
Taxes other than income.................... 1,447 1,701 1,457 665 697
Depreciation, depletion and amortization... 1,270 1,168 1,369 327 707
------- ------- ------- ------- -------
Total expenses..................... 5,878 5,878 5,807 1,804 2,227
------- ------- ------- ------- -------
Income from operations....................... 16,307 16,671 20,163 3,765 4,034
Other income (expense):
Interest expense........................... (4,353) (4,167) (3,966) (1,011) (1,322)
Interest income............................ 254 321 270 87 35
Reversionary interest...................... -- -- (1,924) -- (561)
------- ------- ------- ------- -------
Net income................................... $12,208 $12,825 $14,543 $ 2,841 $ 2,186
======= ======= ======= ======= =======
The accompanying footnotes are an integral part of these financial statements.
F-18
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
GENERAL PARTNER LIMITED PARTNERS TOTAL
--------------- ---------------- --------
BALANCE, DECEMBER 31, 1998............................ $ 164 $ 11,756 $ 11,920
Net income............................................ 122 12,086 12,208
Cash distributions.................................... (121) (11,956) (12,077)
----- -------- --------
BALANCE, DECEMBER 31, 1999............................ 165 11,886 12,051
Net income............................................ 128 12,697 12,825
Cash distributions.................................... (100) (9,850) (9,950)
----- -------- --------
BALANCE, DECEMBER 31, 2000............................ 193 14,733 14,926
Net income............................................ 146 14,397 14,543
Cash distributions.................................... (93) (9,207) (9,300)
----- -------- --------
BALANCE, DECEMBER 31, 2001............................ 246 19,923 20,169
Net income (unaudited)................................ 22 2,164 2,186
Cash distributions (unaudited)........................ (5) (495) (500)
----- -------- --------
BALANCE, MARCH 31, 2002 (unaudited)................... $ 263 $ 21,592 $ 21,855
===== ======== ========
The accompanying footnotes are an integral part of these financial statements.
F-19
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1999 2000 2001 2001 2002
-------- -------- -------- ------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 12,208 $ 12,825 $ 14,543 $ 2,841 $ 2,186
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and
amortization........................... 1,270 1,168 1,369 327 707
Gain on sale of property.................. (205) (3,982) (3,125) (5) (61)
Increase (decrease) in deferred
revenues............................... 110 65 448 300 (199)
Change in operating assets and liabilities
(Increase) decrease in accounts
receivable........................... 541 580 (1,098) 672 (543)
(Increase) decrease in other assets.... 2 (11) (4) (67) (47)
Increase (decrease) in accounts
payable -- affiliate................. -- (14) 9 -- --
Increase (decrease) in accrued
liabilities.......................... (88) 39 49 (237) (294)
Increase (decrease) in reversionary
interest payable..................... -- -- 865 -- (865)
-------- -------- -------- ------- --------
Net cash provided by operating
activities......................... 13,838 10,670 13,056 3,831 884
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of properties............ 211 4,001 3,659 5 61
Repayment of notes payable.................. -- -- -- -- (7,848)
Capital expenditures........................ (23) (25) (974) (25) (35,127)
-------- -------- -------- ------- --------
Net cash provided by (used in)
investing activities............... 188 3,976 2,685 (20) (42,914)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing..................... -- -- -- -- 45,000
Deferred financing costs.................... -- -- -- -- (1,174)
Repayment of debt........................... (2,363) (2,549) (2,748) (667) (721)
Distributions to partners................... (12,077) (9,950) (9,300) (3,100) (500)
Cash placed in restricted accounts, net..... (205) (2,131) (2,386) (69) (16)
Cash placed in (returned from) escrow....... -- -- (1,000) -- 1,000
-------- -------- -------- ------- --------
Net cash provided by (used in)
financing activities............... (14,645) (14,630) (15,434) (3,836) 43,589
-------- -------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (619) 16 307 (25) 1,559
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... 4,711 4,092 4,108 4,108 4,415
-------- -------- -------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 4,092 $ 4,108 $ 4,415 $ 4,083 $ 5,974
======== ======== ======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest.... $ 4,353 $ 4,167 $ 3,966 $ 1,011 $ 1,322
Non-cash transactions:
Issuance of note payable for reversionary
interest.................................. $ -- $ -- $ 7,900 $ -- $ --
The accompanying footnotes are an integral part of these financial statements.
F-20
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying 1999, 2000 and 2001 financial statements of Western
Pocahontas Properties Limited Partnership (the "Partnership") have been audited.
The March 31, 2001 and 2002 interim period financial statements and related
disclosures have not been audited. In management's opinion, the unaudited
financial statements included herein contain all adjustments necessary to
present fairly the Partnership's financial position, results of operations and
cash flows for the periods indicated. Such adjustments are of a normal,
recurring nature. The unaudited financial statements should be read in
conjunction with the audited financial statements and the notes thereto.
The Partnership, a Delaware limited partnership, was formed in 1986 to own
and manage land and mineral rights and timber located in West Virginia,
Kentucky, Alabama, Maryland and Indiana. Western Pocahontas Corporation ("WPC"),
a Texas corporation, serves as the general partner. All items of income and loss
of the Partnership are allocated 1% to the general partner and 99% to the
limited partners.
The Partnership enters into leases with various third-party operators for
the right to mine coal reserves and harvest timber on the Partnership's land in
exchange for royalty payments. Generally, the coal lessees make payments to the
Partnership based on the greater of a percentage of the gross sales price or a
fixed price per ton of coal they sell, subject to minimum annual or quarterly
payments. The timber lessees make payments to the Partnership based on
pre-determined rates per board foot harvested.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities in the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Restricted
cash represents cash and cash equivalents placed in a defeasance trust and are
pledged to the Partnership's lender for debt service requirements. Cash placed
in escrow in the amount of $1.0 million relates to the purchase of a
reversionary interest by the Partnership subsequent to December 31, 2001 (see
Note 3).
PROPERTY AND EQUIPMENT
Land, coal property and timberlands are carried at cost and include
expenditures for additions and improvements, such as roads and land
improvements, which substantially increase the productive lives of the existing
assets. Maintenance and repair costs are expensed as incurred. Coal properties
are depleted on a unit-of-production basis by lease based upon coal mined in
relation to the net cost of the mineral properties and estimated proven and
probable tonnage therein. Timberlands are depleted based on the volume of timber
harvested in relation to the amount of estimated merchantable timber volume.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
F-21
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
Substantially all of the Partnership's accounts receivable result from
amounts due from third party companies in the coal industry. This concentration
of customers may impact the Partnership's overall credit risk, either positively
or negatively, in that these entities may be similarly affected by changes in
economic or other conditions. Receivables are generally not collateralized.
Historical credit losses incurred by the Partnership on receivables have not
been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt. The
carrying value of these financial instruments approximate fair value. Fair
values of debt instruments were determined using discounted cash flow
techniques.
DEFERRED FINANCING COSTS
Deferred financing costs consists of legal and other costs related to the
issuance of the Partnership's long-term note payable. These costs are amortized
over the term of the note payable.
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons
of coal sold by the Partnership's lessees and the corresponding revenue from
those sales. Generally, the coal lessees make payments to the Partnership based
on the greater of a percentage of the gross sales price or a fixed price per ton
of coal they sell, subject to minimum annual or quarterly payments.
Timber Royalties. Timber is sold on a contract basis where independent
contractors harvest and sell the timber. Timber revenues are recognized when the
timber has been harvested by the independent contractors.
Minimum Royalties. Most of the Partnership's lessees must make minimum
annual or quarterly payments which are generally recoupable over certain time
periods. These minimum payments are recorded as deferred revenue. The deferred
revenue attributable to the minimum payment is recognized as coal royalty
revenues either when the lessee recoups the minimum payment through production
or when the period during which the lessee is allowed to recoup the minimum
payment expires.
PROPERTY TAXES
The Partnership is responsible for paying property taxes on the properties
it owns. The lessees are responsible for reimbursing the Partnership for
property taxes on the leased properties. The reimbursement of property taxes is
included in revenues in the statement of income as property tax.
INCOME TAXES
The Partnership is not a taxpaying entity as the individual partners are
responsible for reporting their pro-rata share of the Partnership's taxable
income or loss. In the event of an examination of the Partnership's tax return,
the tax liability of the partners could be changed if an adjustment in the
Partnership's income is ultimately sustained by the taxing authorities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interests accounting and requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase
F-22
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
our financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred with the associated asset retirement cost being capitalized
as a part of the carrying amount of the long-lived asset. SFAS No. 143 also
includes disclosure requirements that provide a description of asset retirement
obligations and a reconciliation of changes in the components of those
obligations. We are evaluating the future financial effects of adopting SFAS No.
143 and expect 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 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 on
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. We do not expect
the adoption of SFAS No. 145 on January 1, 2003 to have a material impact on our
financial position or results of operations.
3. REVERSIONARY INTEREST
The previous owner of the Partnership's coal and timber properties (CSX
Corporation and certain of its affiliates, or "CSX") retained a reversionary
interest in those properties whereby it receives either a 25% or 28% interest in
the properties and the net revenues, as defined, from the properties after July
1, 2001, and in the net proceeds, as defined, from any property sale occurring
prior to July 1, 2001.
In 2000, the Partnership sold 1,391 acres of surface land to a third party
and paid $1.3 million to CSX related to its reversionary interest in the
property. In 2001, the Partnership sold 1,928 acres of surface land to various
third parties and paid $936,000 to CSX related to its reversionary interest in
these properties (see Note 4).
In December 2001, the Partnership purchased from CSX its reversionary
interest in the Partnership's Kentucky properties for $2.0 million in cash and a
note payable of $7.9 million (see Note 5). The Partnership allocated $8.8
million to coal and timber properties and $1.1 million to a reduction in the
reversionary interest payable for the six months ended December 31, 2001.
In March 2002, the Partnership purchased from CSX its reversionary interest
in the remaining assets subject to the reversionary interest. The Partnership
allocated $35 million to coal and timber properties
F-23
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and $1.4 million to a reduction in the reversionary interest payable for the
three months ended March 31, 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 the Partnership issued in December 2001 as part of the consideration
for the purchase of the reversionary interest in Kentucky (see Note 5).
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
DECEMBER 31,
------------------- MARCH 31,
2000 2001 2002
-------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
Land................................................ $ 4,497 $ 4,144 $ 4,144
Coal properties..................................... 95,799 103,922 133,665
Timberlands......................................... 12,420 12,915 18,296
Other............................................... 421 443 445
-------- -------- --------
$113,137 $121,424 $156,550
======== ======== ========
In 2000, the Partnership sold 1,391 acres of surface land and recognized a
gain of $4.0 million after considering CSX's reversionary interest (see Note 3).
In connection with the sale, the Partnership was required to place $1.9 million
in its debt service account (see Note 5).
In 2001, the Partnership sold 1,928 acres of surface land and recognized a
gain of $3.1 million after considering CSX's reversionary interest (see Note 3).
In connection with the sale, the Partnership was required to place $2.1 million
in its debt service account (see Note 5).
As explained in Note 3, the Partnership completed the acquisition of the
reversionary interest from CSX in December 2001 and March 2002.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
----------------- MARCH 31,
2000 2001 2002
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
7.6% fixed notes payable due April 1, 2013............ $53,430 $50,682 $49,961
7.84% fixed notes payable due March 1, 2012........... -- -- 15,000
Variable rate senior notes bearing interest at 4.91%
at March 31, 2002, due March 1, 2012................ -- -- 30,000
Less -- Current portion of notes payable.............. (2,749) (2,966) (3,022)
------- ------- -------
Long-term debt........................................ $50,681 $47,716 $91,939
======= ======= =======
F-24
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2001, principal maturities of long-term debt over the
next five years were as follows:
YEAR ENDED
DECEMBER 31,
--------------
(IN THOUSANDS)
2002........................................................ $ 2,966
2003........................................................ 3,199
2004........................................................ 3,451
2005........................................................ 3,722
2006........................................................ 4,015
Thereafter.................................................. 33,329
The notes are collateralized by a mortgage on the Partnership's properties,
a security interest in accounts receivable, other assets and the partners'
interest in the Partnership and the common stock of WPC. The Partnership is
required to maintain an aggregate minimum balance of $3.0 million in cash and
cash equivalents, which is pledged to its lenders. The Partnership is allowed to
make cash distributions to its partners provided no event of default exists, as
defined, and the aggregate cash balance is not reduced below $4.0 million by any
distribution.
The Partnership is required to contribute cash or cash equivalents to a
debt service account when the Partnership receives royalties related to coal
tonnage or timber harvested greater than a predetermined amount or sells certain
properties. Pursuant to these provisions, the Partnership contributed $2.1
million and $2.4 million to the debt service account for the years ended
December 31, 2000 and 2001, respectively.
On December 10, 2001, the Partnership issued a $7.9 million non-interest
bearing note payable to an affiliate of CSX in conjunction with the purchase of
CSX's reversionary interest in properties located in Kentucky (see Note 3), and
is subject to a Purchase and Sale Agreement between the CSX affiliate and the
Partnership. The note was due and paid-off in March 2002. A discount of $152,000
was imputed for the period ended December 31, 2001 (see Note 3).
6. RELATED PARTY TRANSACTIONS
A company controlled by the owner of WPC provides certain administrative
services to the Partnership and charges the Partnership for the direct costs
related to the administrative services. The total expenses charged to the
Partnership under this arrangement were $500,000 for each of the years ended
December 31, 1999, 2000 and 2001. These costs are reflected in the general and
administrative expenses in the accompanying statements of income.
The Partnership has a management contract to provide certain management,
engineering and accounting services to Great Northern Properties Limited
Partnership ("GNP"), a limited partnership which has certain common ownership
with the Partnership. The contract provides for a $250,000 annual fee, which is
intended to reimburse the Partnership for its expense. This fee is presented as
other revenue in the accompanying statement of income. The contract may be
canceled upon 90 days advance notice by GNP.
7. EMPLOYEE BENEFIT PLANS
Substantially all employees of the Partnership are covered by a
noncontributory retirement plan and a defined contribution thrift plan. Under
the retirement plan, the Partnership contributes annually an amount
F-25
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equal to one-twelfth of each participant's base compensation. Participants vest
in the retirement plan based on the following:
YEARS OF SERVICE PERCENT VESTED
---------------- --------------
0-4......................................................... 50%
5........................................................... 60%
6........................................................... 80%
7 or more................................................... 100%
A participant is fully vested upon termination of employment as a result of
death, disability, reduction of labor force or retirement on or after age 55.
For each of the years ended December 31, 1999, 2000 and 2001, the Partnership
contributed approximately $90,000 to the retirement plan.
Under the thrift plan, participants may contribute up to 12% of their base
compensation, subject to a maximum set by IRS regulations, on a tax-deferred
basis. The Partnership makes matching contributions equal to 100% of each
participant's contributions to the extent of 3% of base compensation and 50% of
each participant's contributions between 3% and 6% of base compensation. The
Partnership's contribution is 40% vested after two years of service with the
vested interest increasing by 20% for each additional year of service. A
participant is fully vested as to his own contributions and is fully vested as
to the Partnership's contributions upon termination of employment as a result of
death, reduction of labor force, disability or retirement on or after age 55.
For each of the years ended December 31, 1999, 2000 and 2001, the Partnership
made matching contributions in an amount of approximately $50,000.
8. COMMITMENTS AND CONTINGENCIES
LEGAL
The Partnership is involved, from time to time, in various legal
proceedings arising in the ordinary course of business. While the ultimate
results of these proceedings cannot be predicted with certainty, Partnership
management believes these claims will not have a material effect on the
Partnership's financial position, liquidity or operations.
ENVIRONMENTAL COMPLIANCE
The operations conducted on Partnership properties by its lessees are
subject to environmental laws and regulations adopted by various governmental
authorities in the jurisdictions in which these operations are conducted. As
owner of surface interests in some properties, the Partnership may be liable for
certain environmental conditions occurring at the surface properties. The terms
of substantially all of the Partnership's coal leases require the lessee to
comply with all applicable laws and regulations, including environmental. The
lessees obtain reclamation bonds and substantially all of the leases require the
lessee to indemnify the Partnership against, among other things, environmental
liabilities. Some of these indemnifications survive the termination of the
lease. Employees of the Partnership regularly visit the mines to ensure
compliance with lease terms, but the duty to comply with all regulations rests
with the lessees. Management believes that the Partnership's lessees will be
able to comply with existing regulations and does not expect any material impact
on its financial condition or results of operations. The Partnership has neither
incurred, nor is aware of, any material environmental charges imposed on it
related to its properties for the years ended December 31, 1999, 2000 and 2001.
The Partnership is not associated with any environmental contamination that may
require remediation costs. However, our lessees do, from time to time, conduct
reclamation work on our properties under lease to them. Because the Partnership
is not the permittee of the mines being reclaimed, it is not responsible for the
costs associated with these reclamation operations. Each of our lessees is
required to post a bond assuring that the reclamation will be
F-26
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completed as required by the permit. However, in the event any of our lessees is
unable to complete the reclamation obligations and their bonding company
likewise fails to meet the obligations or provide money to the state to perform
the reclamation, the Partnership could be held liable for these costs.
LEASE COMMITMENTS AND GUARANTEES
The total rental and lease expenses for each of the years ended December
31, 1999, 2000 and 2001 were approximately $143,000, $167,000 and $142,000,
respectively. The minimum rental payments for the next five years are as
follows:
YEAR ENDED
DECEMBER 31,
--------------
(IN THOUSANDS)
2002........................................................ $110
2003........................................................ 110
2004........................................................ 110
2005........................................................ 115
2006........................................................ 115
The Partnership guaranteed a $2.0 million note payable of New Gauley Coal
Corporation, the outstanding balance of which totaled approximately $1.8 million
and $1.7 million at December 31, 2000 and 2001, respectively. New Gauley Coal
Corporation was formerly wholly owned by the Partnership.
9. MAJOR LESSEES
The Partnership depends on a few lessees for a significant portion of its
revenues. Revenues from major lessees which exceed ten percent of total revenues
are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 2000 2001
------------------ ------------------ ------------------
REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Lessee A........................ $4,263 19.2% $3,800 16.9% $2,658 10.2%
Lessee B........................ 1,367 6.2% $1,139 5.1% -- --
Lessee C........................ 2,036 9.2% $1,287 5.7% 5,117 19.7%
10. SEGMENT INFORMATION
Segment information has been provided in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
Partnership's reportable segments are as follows:
Coal Royalty. The coal royalty segment is engaged in managing the
Partnership's coal properties.
Timber Royalty. The Partnership's timber segment is engaged in the selling
of standing timber on the Partnership's properties.
F-27
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of certain financial information relating to the
Partnership's segments:
COAL ROYALTY TIMBER ROYALTY OTHER COMBINED
------------ -------------- ------- --------
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1999
Revenues............................... $16,916 $ 3,770 $ 1,499 $ 22,185
Operating costs and expenses........... 3,017 801 790 4,608
Depreciation, depletion and
amortization......................... 912 235 123 1,270
------- ------- ------- --------
Operating income....................... $12,987 $ 2,734 $ 586 16,307
======= ======= =======
Interest expense....................... (4,353)
Interest income........................ 254
--------
Net income............................. $ 12,208
========
Total assets........................... $57,573 $ 5,853 $12,663 $ 76,089
Capital expenditures................... -- -- 23 23
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenues............................... $12,989 $ 4,236 $ 5,324 $ 22,549
Operating costs and expenses........... 3,140 771 799 4,710
Depreciation, depletion and
amortization......................... 798 234 136 1,168
------- ------- ------- --------
Operating income....................... $ 9,051 $ 3,231 $ 4,389 16,671
======= ======= =======
Interest expense....................... (4,167)
Interest income........................ 321
--------
Net income............................. $ 12,825
========
Total assets........................... $56,775 $ 5,619 $14,116 $ 76,510
Capital expenditures................... -- -- 25 25
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues............................... $16,642 $ 3,691 $ 5,637 $ 25,970
Operating costs and expenses........... 3,109 757 572 4,438
Depreciation, depletion and
amortization......................... 1,035 210 124 1,369
------- ------- ------- --------
Operating income....................... $12,498 $ 2,724 $ 4,941 20,163
======= ======= =======
Interest expense....................... (3,966)
Interest income........................ 270
Reversionary interest.................. (1,924)
--------
Net income............................. $ 14,543
========
Total assets........................... $63,930 $ 5,903 $18,391 $ 88,224
Capital expenditures................... 8,447 494 33 8,974
F-28
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COAL ROYALTY TIMBER ROYALTY OTHER COMBINED
------------ -------------- ------- --------
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31,
2001 (UNAUDITED)
Revenues............................... $ 2,982 $ 1,697 $ 890 $ 5,569
Operating costs and expenses........... 996 293 188 1,477
Depreciation, depletion and
amortization......................... 207 99 21 327
------- ------- ------- --------
Operating income....................... $ 1,779 $ 1,305 $ 735 3,765
======= ======= =======
Interest expense....................... (1,011)
Interest income........................ 87
--------
Net income............................. $ 2,841
========
FOR THE THREE MONTHS ENDED MARCH 31,
2002 (UNAUDITED)
Revenues............................... $ 4,779 $ 623 $ 859 $ 6,261
Operating costs and expenses........... 997 349 774 1,520
Depreciation, depletion and
amortization......................... 620 65 22 707
------- ------- ------- --------
Operating income....................... $ 3,162 $ 209 $ 602 4,034
======= ======= =======
Interest expense....................... (1,322)
Interest income........................ 35
Reversionary interest.................. (561)
--------
Net income............................. $ 2,186
========
Total assets........................... $92,921 $11,291 $20,769 $124,981
Capital expenditures................... 29,673 5,452 2 35,127
11. SUBSEQUENT EVENT
In connection with the formation of Natural Resource Partners L.P. and its
proposed public offering of limited partnership units, the Partnership intends
to transfer to Natural Resource Partners L.P. at historical cost value certain
coal royalty producing properties that are currently under lease to coal mine
operators. The Partnership will also transfer portions of deferred revenue and
long-term debt to Natural Resource Partners L.P. The Partnership will retain a
coal reserve property that is leased to a third party that is experiencing
permitting problems. Additionally, the Partnership will retain unleased coal
reserve properties, surface land and timberlands.
F-29
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Partners of Great Northern Properties Limited Partnership
We have audited the accompanying balance sheets of Great Northern
Properties Limited Partnership as of December 31, 2000 and 2001, and the related
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great Northern Properties
Limited Partnership at December 31, 2000 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
June 3, 2002
Houston, Texas
F-30
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------- MARCH 31,
2000 2001 2002
-------- -------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,161 $ 749 $ 433
Restricted cash........................................... 7,711 9,923 10,716
Accounts receivable....................................... 1,538 1,637 1,015
Other..................................................... 8 10 68
-------- -------- --------
Total current assets................................... 10,418 12,319 12,232
Property and equipment, at cost............................. 72,755 72,720 72,720
Less accumulated depreciation and depletion............... (13,970) (15,709) (16,322)
-------- -------- --------
58,785 57,011 56,398
-------- -------- --------
Deferred financing costs.................................... 1,311 906 824
-------- -------- --------
Total assets........................................... $ 70,514 $ 70,236 $ 69,454
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt......................... $ 1,500 $ 1,500 $ 1,500
Accounts payable.......................................... 41 140 86
Accrued interest.......................................... 666 311 302
-------- -------- --------
Total current liabilities.............................. 2,207 1,951 1,888
Deferred revenue............................................ 1,297 1,034 1,029
Long-term debt.............................................. 48,625 47,125 46,750
Commitments and contingencies............................... -- -- --
Partners' capital........................................... 18,385 20,126 19,787
-------- -------- --------
Total liabilities and partners' capital................ $ 70,514 $ 70,236 $ 69,454
======== ======== ========
The accompanying footnotes are an integral part of these financial statements.
F-31
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1999 2000 2001 2001 2002
------- ------- ------- ------- ------
(UNAUDITED)
REVENUES:
Coal royalties.............................. $11,688 $ 7,966 $ 7,457 $ 2,110 $1,444
Lease and easement income................... 480 583 787 85 139
Gain on sale of property.................... 12 709 439 -- --
Property tax................................ 81 87 88 -- --
Other....................................... 73 45 31 -- 93
------- ------- ------- ------- ------
Total revenues........................... 12,334 9,390 8,802 2,195 1,676
EXPENSES:
General and administrative.................. 574 481 611 133 130
Taxes other than income..................... 98 107 110 4 5
Depreciation, depletion, and amortization... 2,725 2,244 2,144 689 696
------- ------- ------- ------- ------
Total expenses........................... 3,397 2,832 2,865 826 831
------- ------- ------- ------- ------
Income from operations........................ 8,937 6,558 5,937 1,369 845
Other income (expense):
Interest expense............................ (4,999) (4,657) (3,652) (1,072) (562)
Interest income............................. 63 376 307 108 39
------- ------- ------- ------- ------
Net income before extraordinary item.......... 4,001 2,277 2,592 405 322
Extraordinary item
Loss on early extinguishment of debt........ (2,678) -- -- -- --
------- ------- ------- ------- ------
Net income.................................... $ 1,323 $ 2,277 $ 2,592 $ 405 $ 322
======= ======= ======= ======= ======
The accompanying footnotes are an integral part of these financial statements.
F-32
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
GENERAL
PARTNER LIMITED PARTNERS TOTAL
------- ---------------- -------
BALANCE, DECEMBER 31, 1998.................................. $ 88 $ 8,698 $ 8,786
Capital contributions....................................... 60 5,940 6,000
Purchase of partners' interest.............................. -- (1) (1)
Net income.................................................. 13 1,310 1,323
---- ------- -------
BALANCE, DECEMBER 31, 1999.................................. 161 15,947 16,108
Net income.................................................. 23 2,254 2,277
---- ------- -------
BALANCE, DECEMBER 31, 2000.................................. 184 18,201 18,385
Net income.................................................. 26 2,566 2,592
Cash distributions.......................................... (9) (842) (851)
---- ------- -------
BALANCE, DECEMBER 31, 2001.................................. 201 19,925 20,126
Net income (unaudited)...................................... 3 319 322
Cash distributions (unaudited).............................. (7) (654) (661)
---- ------- -------
BALANCE, MARCH 31, 2002 (UNAUDITED)......................... $197 $19,590 $19,787
==== ======= =======
The accompanying footnotes are an integral part of these financial statements.
F-33
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------
1999 2000 2001 2001 2002
-------- ------- ------- ------ ------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before extraordinary item........ $ 4,001 $ 2,277 $ 2,592 $ 405 $ 322
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and depletion............... 2,628 1,824 1,739 584 614
Amortization............................. 97 420 405 105 82
Gain on sale of property................. (12) (709) (439) -- --
Increase (decrease) in deferred
revenue................................ (576) 87 (263) 250 (5)
Change in operating assets and
liabilities
(Increase) decrease in accounts
receivable.......................... (1,162) 1,809 (99) (113) 622
Increase in other assets............... (1,526) (12) (2) (79) (58)
Increase (decrease) in accounts payable
and accrued interest................ (300) 35 (256) (122) (64)
-------- ------- ------- ------ ------
Net cash provided by operating
activities........................ 3,150 5,731 3,677 1,030 1,513
-------- ------- ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Refunds on timber cutting contracts......... (12) -- -- -- --
Proceeds from sale of properties............ 14 726 475 -- --
-------- ------- ------- ------ ------
Net cash provided by investing
activities........................ 2 726 475 -- --
-------- ------- ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt........................... (56,566) (1,500) (1,500) (375) (375)
Repayments on revolving note................ (3,000) -- -- -- --
Proceeds from debt.......................... 52,800 -- -- -- --
Partners' contributions (distributions)..... 6,000 -- (851) (851) (661)
Purchase of partners' interest.............. (1) -- -- -- --
Cash placed in restricted accounts, net..... (2,369) (4,705) (2,213) (656) (793)
-------- ------- ------- ------ ------
Net cash used in financing
activities........................ (3,136) (6,205) (4,564) (1,882) (1,829)
-------- ------- ------- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 16 252 (412) (852) (316)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... 893 909 1,161 1,161 749
-------- ------- ------- ------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 909 $ 1,161 $ 749 $ 309 $ 433
======== ======= ======= ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest.... $ 4,476 $ 4,688 $ 4,018 $1,228 $ 572
======== ======= ======= ====== ======
The accompanying footnotes are an integral part of these financial statements.
F-34
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying 1999, 2000 and 2001 financial statements of Great Northern
Properties Limited Partnership (the "Partnership") have been audited. The March
31, 2001 and 2002 interim period financial statements and related disclosures
have not been audited. In management's opinion, the unaudited financial
statements included herein contain all adjustments necessary to present fairly
the Partnership's financial position, results of operations and cash flows for
the periods indicated. Such adjustments are of a normal, recurring nature. The
unaudited financial statements should be read in conjunction with the audited
financial statements and the notes thereto.
The Partnership, a Delaware limited partnership, was formed in 1992 to own
and manage land and mineral rights located in Montana, North Dakota, Wyoming,
Illinois and Washington. GNP Management Corporation ("GNP"), a Delaware
corporation, serves as its general partner. All items of income and loss of the
Partnership are allocated 1% to the general partner and 99% to the limited
partners. In 1999, a limited partner's interest in the Partnership was redeemed
by the partners for $1,000.
The Partnership enters into leases with various coal mine operators for the
right to mine coal reserves on the Partnership's land in exchange for royalty
payments. Generally, the lessees make payments to the Partnership based on the
greater of a percentage of the gross sales price or a fixed price per ton of
coal they sell, subject to minimum annual or quarterly payments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities in the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Restricted
cash represents cash and cash equivalents placed in a debt service account and
is pledged to the Partnership's lender for debt service requirements.
PROPERTY AND EQUIPMENT
Land and coal property are carried at cost and include expenditures for
additions and improvements, such as roads and land improvements, which
substantially increase the productive lives of the existing assets. Maintenance
and repair costs are expensed as incurred. Coal properties are depleted on a
unit-of-production basis by lease based upon coal mined in relation to the net
cost of the mineral properties and estimated proven and probable tonnage
therein.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
F-35
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
Substantially all of the Partnership's accounts receivable result from
amounts due from third party companies in the coal industry. Coal royalties are
principally received from two lessees (see Note 8). This concentration of
customers may impact the Partnership's overall credit risk, either positively or
negatively, in that these entities may be similarly affected by changes in
economic or other conditions. Receivables are generally not collateralized.
Historical credit losses incurred by the Partnership on receivables have not
been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt. The
carrying value of these financial instruments approximate fair value. Fair
values of debt instruments were determined using discounted cash flow
techniques.
DEFERRED FINANCING COSTS
Deferred financing costs consist of legal and other costs related to the
issuance of the Partnership's long-term debt. These costs are amortized over the
term of the debt.
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons
of coal sold by the Partnership's lessees and the corresponding revenue from
those sales. Generally, the lessees make payments to the Partnership based on
the greater of a percentage of the gross sales price or a fixed price per ton of
coal they sell, subject to minimum annual or quarterly payments.
Lease and Easement Income. Lease and easement income is generated through
contracts with third parties for use of the Partnership's land for
transportation of coal mined on adjacent properties, agricultural grazing and
recreational uses.
Minimum Royalties. Most of the Partnership's lessees must make minimum
annual or quarterly payments which are generally recoupable over certain time
periods. These minimum payments are recorded as deferred revenue. The deferred
revenue attributable to the minimum payment is recognized as coal royalty
revenues either when the lessee recoups the minimum payment through production
or when the period during which the lessee is allowed to recoup the minimum
payment expires.
PROPERTY TAXES
The Partnership is responsible for paying property taxes on the properties
it owns. The lessees are responsible for reimbursing the Partnership for
property taxes on the leased properties. The reimbursement of property taxes is
included in revenues in the statement of income as property tax.
INCOME TAXES
The Partnership is not a taxpaying entity as the individual partners are
responsible for reporting their pro rata share of the Partnership's taxable
income or loss. In the event of an examination of the Partnership's tax return,
the tax liability of the partners could be changed if an adjustment in the
Partnership's income is ultimately sustained by the taxing authorities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interests accounting and
F-36
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 our financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Assets
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. We are evaluating the future financial effects of adopting SFAS No.
143 and expect 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 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 on
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. We do not expect
the adoption of SFAS No. 145 on January 1, 2003 to have a material impact on our
financial position or results of operations.
3. NONPARTICIPATING ROYALTY INTEREST
The previous owner of the Partnership's coal properties, Meridian Minerals
Company ("Meridian"), a subsidiary of Burlington Resources, Inc., retained a
nonparticipating royalty interest in certain properties, which were not leased
at the time of acquisition, at a royalty rate ranging from 2% to 5%. Such
properties are presently not leased. In the event any of the properties subject
to the nonparticipating royalty interest are sold to a third party, Meridian
will receive a certain percentage of the selling price as defined in the asset
purchase agreement.
F-37
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
DECEMBER 31,
----------------- MARCH 31,
2000 2001 2002
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
Land.................................................. $ 2,207 $ 2,172 $ 2,172
Coal properties....................................... 70,491 70,491 70,491
Other................................................. 57 57 57
------- ------- -------
$72,755 $72,720 $72,720
======= ======= =======
In 2000, the Partnership sold 5,628 acres of surface land in Montana and
recognized a gain of $709,000.
In 2001, the Partnership sold 3,194 acres of surface land in Montana and
recognized a gain of $439,000.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
----------------- MARCH 31,
2000 2001 2002
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
Floating rate notes, bearing interest at 9.37 percent,
4.70 percent and 4.70 percent at December 31, 2000,
December 31, 2001 and March 31, 2002, respectively,
due September 30, 2004............................... $50,125 $48,625 $48,250
Less -- Current portion of notes payable............... (1,500) (1,500) (1,500)
------- ------- -------
Long-term debt......................................... $48,625 $47,125 $46,750
======= ======= =======
As of December 31, 2001, principal maturities of long-term debt over the
next three years were as follows:
YEAR ENDED
DECEMBER 31,
------------
(IN THOUSANDS)
2002........................................................ $ 1,500
2003........................................................ 1,500
2004........................................................ 45,625
The notes are collateralized by a mortgage on the Partnership's properties,
a security interest in accounts receivable, other assets, the partners' interest
in the Partnership and the debt service account established by the Partnership.
The debt service account is funded quarterly with 100% of the Partnership's cash
flows, defined as all cash revenue received by the Partnership, net of any
operating expenses, management fees and up to a maximum of 20% of positive
operating income to be used to pay the income tax liabilities of the partners as
they relate to the Partnership properties, except that the Partnership may
maintain $250,000 in cash for general operating purposes. The debt service
account will be used to collateralize the notes until the balance of the account
reaches a minimum of $10.0 million, after which the amount in excess of $10.0
million may be applied directly to the outstanding balance of the notes. The
Partnership contributed $4.7 million and $2.2 million to the debt service
account for the years ended December 31, 2000 and 2001, respectively.
F-38
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, the Partnership retired senior and revolving notes with a carrying
value of $57.0 million. The Partnership paid a $1.8 million prepayment penalty
and expensed approximately $878,000 of deferred financing costs related to the
retired notes. These expenses have been classified as an extraordinary loss on
the early extinguishment of debt in the statement of income.
6. RELATED PARTY TRANSACTIONS
The Partnership has a management contract to receive management,
engineering and accounting services from Western Pocahontas Properties Limited
Partnership ("WPP"), a limited partnership which has some common ownership with
the Partnership. The contract provides for a $250,000 fee to be paid annually.
Such amounts are reflected in general and administrative expenses in the
statements of income. The contract may be canceled upon 90 days advance notice
to the Partnership.
7. COMMITMENTS AND CONTINGENCIES
LEGAL
The Partnership is involved, from time to time, in various legal
proceedings arising in the ordinary course of business. While the ultimate
results of these proceedings cannot be predicted with certainty, Partnership
management believes these claims will not have a material effect on the
Partnership's financial position, liquidity or operations.
ENVIRONMENTAL COMPLIANCE
The operations conducted on Partnership properties by its lessees are
subject to environmental laws and regulations adopted by various governmental
authorities in the jurisdictions in which these operations are conducted. As
owner of surface interests in some properties, the Partnership may be liable for
certain environmental conditions occurring at the surface properties. The terms
of substantially all of the Partnership's coal leases require the lessee to
comply with all applicable laws and regulations, including environmental. The
lessees obtain reclamation bonds and substantially all of the leases require the
lessee to indemnify the Partnership against, among other things, environmental
liabilities. Some of these indemnifications survive the termination of the
lease. Employees regularly visit the mines to ensure compliance with lease
terms, but the duty to comply with all regulations rests with the lessees.
Management believes that the Partnership's lessees will be able to comply with
existing regulations and does not expect any material impact on its financial
condition or results of operations. The Partnership has neither incurred, nor is
aware of, any material environmental charges imposed on it related to its
properties for the years ended December 31, 1999, 2000 and 2001. The Partnership
is not associated with any environmental contamination that may require
remediation costs. However, our lessees do, from time to time, conduct
reclamation work on our properties under lease to them. Because the Partnership
is not the permittee of the mines being reclaimed, it is not responsible for the
costs associated with these reclamation operations. Each of our lessees is
required to post a bond assuring that the reclamation will be completed as
required by the permit. However, in the event any of our lessees is unable to
complete the reclamation obligations and their bonding company likewise fails to
meet the obligations or provide money to the state to perform the reclamation,
the Partnership could be held liable for these costs.
F-39
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. MAJOR LESSEES
The Partnership depends on a few lessees for a significant portion of its
revenues. Revenues from major lessees which exceed ten percent of total revenues
are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 2000 2001
------------------ ------------------ ------------------
REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
Lessee A........................ $8,637 70.0% $6,467 81.2% $5,324 60.5%
Lessee B........................ 2,260 18.3% 1,233 15.5% 1,634 18.6%
9. SUBSEQUENT EVENT
In connection with the formation of Natural Resource Partners L.P. and its
proposed public offering of limited partnership units, the Partnership intends
to transfer to Natural Resource Partners L.P. at historical cost certain coal
royalty producing properties that are currently under lease to coal mine
operators. The Partnership will also transfer portions of deferred revenue and
long-term debt to Natural Resource Partners L.P. The Partnership will retain
unleased coal reserve properties and surface land.
F-40
NEW GAULEY COAL CORPORATION FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Stockholders of New Gauley Coal Corporation
We have audited the accompanying balance sheets of New Gauley Coal
Corporation as of December 31, 2000 and 2001, and the related statements of
income, changes in stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New Gauley Coal Corporation
at December 31, 2000 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
June 3, 2002
Houston, Texas
F-41
NEW GAULEY COAL CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------- MARCH 31,
2000 2001 2002
------- ------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 342 $ 399 $ 681
Accounts receivable....................................... 94 106 128
------- ------- -------
Total current assets................................. 436 505 809
Property and equipment, at cost............................. 6,490 6,490 6,490
Less accumulated depletion................................ (2,592) (2,786) (2,813)
------- ------- -------
3,898 3,704 3,677
------- ------- -------
Deferred financing costs.................................... 219 201 196
------- ------- -------
Note receivable........................................... -- 200 200
Other..................................................... -- 15 23
Total assets......................................... $ 4,553 $ 4,625 $ 4,905
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 92 $ 99 $ 101
Accrued liabilities....................................... 21 107 146
------- ------- -------
Total current liabilities............................ 113 206 247
Deferred revenue............................................ 3,747 3,601 3,459
Long-term debt.............................................. 1,682 1,584 1,558
Commitments and contingencies............................... -- -- --
Stockholders' equity (deficit):
Common stock, $100 par value
25,000 shares authorized, 21,378 issued and
outstanding.......................................... 2,137 2,137 2,137
Accumulated deficit....................................... (3,126) (2,903) (2,496)
------- ------- -------
Total stockholders' (deficit)........................ (989) (766) (359)
------- ------- -------
Total liabilities and stockholders' equity
(deficit)......................................... $ 4,553 $ 4,625 $ 4,905
======= ======= =======
The accompanying footnotes are an integral part of these financial statements.
F-42
NEW GAULEY COAL CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ -------------
1999 2000 2001 2001 2002
------ ------ ------ ----- -----
(UNAUDITED)
REVENUES:
Coal royalties..................................... $1,332 $ 955 $1,609 $413 $528
Gain on sale of property........................... -- -- 25 -- --
Property tax....................................... 26 25 28 -- --
Other.............................................. 75 32 61 28 --
------ ------ ------ ---- ----
Total revenues.................................. 1,433 1,012 1,723 441 528
EXPENSES:
General and administrative......................... 27 32 41 8 19
Taxes other than income............................ 54 48 45 -- 12
Depletion and amortization......................... 214 132 212 53 32
------ ------ ------ ---- ----
Total expenses.................................. 295 212 298 61 63
------ ------ ------ ---- ----
Income from operations............................... 1,138 800 1,425 380 465
Other income (expense):
Interest expense................................... (145) (139) (132) (34) (32)
Interest income.................................... -- -- 15 -- 8
Reversionary interest.............................. -- -- (85) -- (34)
------ ------ ------ ---- ----
Net income........................................... $ 993 $ 661 $1,223 $346 $407
====== ====== ====== ==== ====
The accompanying footnotes are an integral part of these financial statements.
F-43
NEW GAULEY COAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
ACCUMULATED
COMMON STOCK DEFICIT TOTAL
------------ ----------- -------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1998................................ $2,137 $(3,380) $(1,243)
Net income.............................................. -- 993 993
Dividends............................................... -- (900) (900)
------ ------- -------
BALANCE, DECEMBER 31, 1999................................ 2,137 (3,287) (1,150)
Net income.............................................. -- 661 661
Dividends............................................... -- (500) (500)
------ ------- -------
BALANCE, DECEMBER 31, 2000................................ 2,137 (3,126) (989)
Net income.............................................. -- 1,223 1,223
Dividends............................................... -- (1,000) (1,000)
------ ------- -------
BALANCE, DECEMBER 31, 2001................................ 2,137 (2,903) (766)
Net income (unaudited).................................. -- 407 407
------ ------- -------
BALANCE, MARCH 31, 2002 (unaudited)....................... $2,137 $(2,496) $ (359)
====== ======= =======
The accompanying footnotes are an integral part of these financial statements.
F-44
NEW GAULEY COAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ----------------
1999 2000 2001 2001 2002
----- ----- ------- ------ -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 993 $ 661 $ 1,223 $346 $ 407
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion and amortization..................... 214 132 212 53 32
Decrease in deferred revenues.................. (287) (154) (146) (58) (142)
Gain on sale of property....................... -- -- (25) -- --
Change in operating assets and liabilities
Increase in accounts receivable.............. (4) (36) (12) (25) (22)
Increase in other assets..................... -- -- (15) (7) (8)
Increase (decrease) in accrued liabilities... (16) 1 86 (4) 39
----- ----- ------- ---- -----
Net cash provided by operating
activities.............................. 900 604 1,323 305 306
----- ----- ------- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in note receivable..................... -- -- (200) -- --
Proceeds from sale of properties.................. -- -- 25 -- --
Capital expenditures.............................. (67) -- -- -- --
----- ----- ------- ---- -----
Net cash used in investing activities..... (67) -- (175) -- --
----- ----- ------- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt................................. (79) (91) (91) (23) (24)
Dividends......................................... (900) (500) (1,000) -- --
----- ----- ------- ---- -----
Net cash used in financing activities..... (979) (591) (1,091) (23) (24)
----- ----- ------- ---- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (146) 13 57 282 282
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 475 329 342 342 399
----- ----- ------- ---- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 329 $ 342 $ 399 $624 $ 681
===== ===== ======= ==== =====
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest.......... $ 145 $ 139 $ 132 $ 34 $ 32
The accompanying footnotes are an integral part of these financial statements.
F-45
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying 1999, 2000 and 2001 financial statements of New Gauley
Coal Corporation (the "Company") have been audited. The March 31, 2001 and 2002
interim period financial statements and related disclosures have not been
audited. In management's opinion, the unaudited financial statements included
herein contain all adjustments necessary to present fairly the Company's
financial position, results of operations and cash flows for the periods
indicated. Such adjustments are of a normal, recurring nature. The unaudited
financial statements should be read in conjunction with the audited financial
statements and the notes thereto.
The Company, a West Virginia subchapter S corporation, was incorporated in
1918 to own and manage land and mineral rights. The Company owns property
located in Alabama and West Virginia.
The Company enters into leases with various coal mine operators for the
right to mine coal reserves on the Company's land in exchange for royalty
payments. Generally, the lessees make payments to the Company based on the
greater of a percentage of the gross sales price or a fixed price per ton of
coal they sell, subject to minimum annual or quarterly payments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities in the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Land and coal property are carried at cost and include expenditures for
additions and improvements, such as roads and land improvements, which
substantially increase the productive lives of the existing assets. Maintenance
and repair costs are expensed as incurred. Coal properties are depleted on a
unit-of-production basis by lease based upon coal mined in relation to the net
cost of the mineral properties and estimated proven and probable tonnage
therein.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable result from amounts
due from third party companies in the coal industry. Coal royalties are
principally received from two lessees (see Note 8). This concentration of
customers may impact the Company's overall credit risk, either positively or
negatively, in that these entities may be similarly affected by changes in the
economic or other conditions. Receivables
F-46
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are generally not collateralized. Historical credit losses incurred by the
Company on receivables have not been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt. The carrying value of
these financial instruments approximate fair value. Fair values of debt
instruments were determined using discounted cash flow techniques.
DEFERRED FINANCING COSTS
Deferred financing costs consist of legal and other costs related to the
issuance of the Company's long-term note payable. These costs are amortized over
the term of the note payable.
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons
of coal sold by the Company's lessees and the corresponding revenue from those
sales. Generally, the lessees make payments to the Company based on the greater
of a percentage of the gross sales price or a fixed price per ton of coal they
sell, subject to minimum annual or quarterly payments.
Minimum Royalties. Most of the Company's lessees must make minimum annual
or quarterly payments which are generally recoupable over certain time periods.
These minimum payments are recorded as deferred revenue. The deferred revenue
attributable to the minimum payment is recognized as coal royalty revenues
either when the lessee recoups the minimum payment through production or when
the period during which the lessee is allowed to recoup the minimum payment
expires.
PROPERTY TAXES
The Company is responsible for paying property taxes on the properties it
owns. One of the lessees is not responsible for reimbursing the Company for
property taxes on the leased properties. The reimbursement of property taxes is
included in revenues in the statement of income as property tax.
INCOME TAXES
The Company is not a taxpaying entity as the individual stockholders are
responsible for reporting their pro rata share of the Company's taxable income
or loss. In the event of an examination of the shareholders' tax return, the tax
liability of the shareholders could be changed if an adjustment in the
shareholders' income is ultimately sustained by the taxing authorities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interests accounting and requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. With regard
to intangible assets, SFAS No. 141 states that intangible assets acquired in a
business combination subsequent to June 30, 2001 should be recognized separately
if the benefit of the intangible asset is obtained through contractual rights or
if the intangible asset can be sold, transferred, licensed, rented to or
exchanged, without regard to the acquirer's intent. The adoption of SFAS No. 141
did not have a material impact on the 2001 financial statements. SFAS No. 142
discontinues goodwill amortization; rather, goodwill will be subject to at least
an annual fair-value based impairment test. The adoption of SFAS No. 142 on
January 1, 2002 did not have a material impact on our financial statements.
F-47
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred with the associated asset retirement cost being capitalized
as a part of the carrying amount of the long-lived asset. SFAS No. 143 also
includes disclosure requirements that provide a description of asset retirement
obligations and a reconciliation of changes in the components of those
obligations. We are evaluating the future financial effects of adopting SFAS No.
143 and expect 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 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 on
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. We do not expect
the adoption of SFAS No. 145 on January 1, 2003 to have a material impact on our
financial position or results of operations.
3. REVERSIONARY INTEREST
The previous owner of the Company's coal properties (CSX Corporation and
certain of its affiliates, or "CSX") retained a reversionary interest in certain
of those properties whereby it receives a 25% interest in the properties and the
net revenues, as defined, from the properties after July 1, 2001, and in the net
proceeds, as defined, of any property sale occurring prior to July 1, 2001. The
reversionary interest only applies to the Company's Alabama property. In March
2002, Western Pocahontas Properties Limited Partnership (the "Partnership"), who
formerly owned the Company, purchased the reversionary interest from CSX. As a
result of this transaction, the Alabama property is now owned 25% by the
Partnership and 75% by the Company.
4. NOTE RECEIVABLE
In June 2001, the Company loaned $200,000 to a third party. The agreement
requires the third party to use the proceeds to develop certain coal properties
it owned. In exchange for the loan, the Company will receive a royalty on coal
produced from the developed properties. The total royalty received by the
Company is limited to the greater of $200,000 plus 15% interest per year or
$240,000. If no royalties are received by June 2005, the third party is required
to repay the note with interest. Currently, the Company has recognized $15,000
of interest income related to this note. This agreement may be terminated at any
time by the third party by repaying the note under the terms described above.
F-48
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment includes:
DECEMBER 31,
--------------- MARCH 31,
2000 2001 2002
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
Land.................................................... $ 88 $ 88 $ 88
Coal properties......................................... 6,402 6,402 6,402
------ ------ ------
$6,490 $6,490 $6,490
====== ====== ======
In January of 2001, the Company sold property to a lessee, and recognized a
gain of $25,000.
6. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
--------------- MARCH 31,
2000 2001 2002
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
7.6% fixed note payable due April 1, 2013............... $1,774 $1,683 $1,659
Less -- Current portion of note payable................. (92) (99) (101)
------ ------ ------
Long-term debt.......................................... $1,682 $1,584 $1,558
====== ====== ======
As of December 31, 2001, principal maturities of long-term debt over the
next five years were as follows:
YEAR ENDED
DECEMBER 31,
--------------
(IN THOUSANDS)
2002........................................................ $ 99
2003........................................................ 107
2004........................................................ 115
2005........................................................ 124
2006........................................................ 134
Thereafter.................................................. 1,104
The note is collateralized by a mortgage on the Company's properties, a
security interest in accounts receivable, other assets, the stockholders'
interest in the Company and the debt service account established by the Company.
The notes are guaranteed by the Partnership.
The Company is required to contribute cash or cash equivalents to a debt
service account when the Company receives royalties greater than a predetermined
amount or sells qualified properties. The Company was not required to contribute
to the debt service account for the years ended December 31, 1999, 2000 and
2001.
7. COMMITMENTS AND CONTINGENCIES
LEGAL
The Company is involved, from time to time, in various legal proceedings
arising in the ordinary course of business. While the ultimate results of these
proceedings cannot be predicted with certainty,
F-49
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company management believes these claims will not have a material effect on the
Company's financial position, liquidity or operations.
ENVIRONMENTAL COMPLIANCE
The operations conducted on Company properties by its lessees are subject
to environmental laws and regulations adopted by various governmental
authorities in the jurisdictions in which these operations are conducted. As
owner of surface interests in some properties, the Company may be liable for
certain environmental conditions occurring at the surface properties. The terms
of substantially all of the Company's coal leases require the lessee to comply
with all applicable laws and regulations, including environmental. The lessees
obtain reclamation bonds and substantially all of the leases require the lessee
to indemnify the Company against, among other things, environmental liabilities.
Some of these indemnifications survive the termination of the lease. Employees
of the Company regularly visit the mines to ensure compliance with lease terms,
but the duty to comply with all regulations rests with the lessees. Management
believes that the Company's lessees will be able to comply with existing
regulations and does not expect any material impact on its financial condition
or results of operations. The Company has neither incurred, nor is aware of, any
material environmental charges imposed on it related to its properties for the
years ended December 31, 1999, 2000 and 2001. The Company is not associated with
any environmental contamination that may require remediation costs. However, our
lessees do, from time to time, conduct reclamation work on our properties under
lease to them. Because the Company is not the permittee of the mines being
reclaimed, it is not responsible for the costs associated with these reclamation
operations. Each of our lessees is required to post a bond assuring that the
reclamation will be completed as required by the permit. However, in the event
any of our lessees is unable to complete the reclamation obligations and their
bonding company likewise fails to meet the obligations or provide money to the
state to perform the reclamation, the Company could be held liable for these
costs.
8. MAJOR LESSEES
The Company depends on a few lessees for a significant portion of its
revenues. Revenues from major lessees which exceed ten percent of total revenues
are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 2000 2001
------------------ ------------------ ------------------
REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Lessee A........................ $368 25.7% $298 29.4% $985 57.2%
Lessee B........................ 640 44.6% 464 45.9% 477 27.7%
9. SUBSEQUENT EVENT
In connection with the formation of Natural Resource Partners L.P. and its
proposed public offering of limited partnership units, the Company intends to
transfer to Natural Resource Partners L.P. at historical cost certain coal
royalty producing properties that are currently under lease to coal mine
operators. The Company will also transfer portions of deferred revenue and
long-term debt to Natural Resource Partners L.P. The Company will retain
unleased coal reserve properties.
F-50
ARCH COAL, INC. CONTRIBUTED PROPERTIES FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Arch Coal, Inc.
We have audited the accompanying statements of assets purchased and
liabilities assumed as of December 31, 2000 and 2001, and the related statements
of revenues and direct costs and expenses for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1, the accompanying financial statements have been
prepared solely to present the assets purchased and liabilities assumed of the
properties acquired by Natural Resource Partners L.P. from Arch Coal, Inc., as
of December 31, 2000 and 2001 and the revenue and direct costs and expenses of
the acquired properties for each of the three years in the period ended December
31, 2001, for the purpose of complying with the requirements of the Securities
and Exchange Commission and are not intended to be a complete presentation of
the financial position and results of operations of the acquired properties on a
stand-alone basis.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets purchased and liabilities assumed of the
properties acquired from Arch Coal, Inc. as of December 31, 2000 and 2001, and
the revenues and direct costs and expenses of the acquired properties for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
St. Louis, Missouri
April 12, 2002
F-51
ARCH COAL, INC. CONTRIBUTED PROPERTIES
STATEMENTS OF ASSETS PURCHASED AND LIABILITIES ASSUMED
(IN THOUSANDS)
DECEMBER 31,
--------------------- MARCH 31,
2000 2001 2002
--------- --------- -----------
(UNAUDITED)
ASSETS
Accounts receivable from lessees.......................... $ 1,549 $ 1,434 $ 982
--------- --------- ---------
Total current assets.................................... 1,549 1,434 982
Coal lands and mineral rights:
Coal lands and mineral rights, at cost.................. 242,730 242,730 242,730
Less accumulated depletion.............................. (147,049) (153,431) (154,900)
--------- --------- ---------
95,681 89,299 87,830
--------- --------- ---------
Total assets.............................................. $ 97,230 $ 90,733 $ 88,812
========= ========= =========
LIABILITIES
Current liabilities:
Property tax payable.................................... $ 919 $ 771 $ 281
--------- --------- ---------
Total current liabilities................................. 919 771 281
Deferred revenue.......................................... 10,035 10,409 9,981
--------- --------- ---------
Total liabilities......................................... 10,954 11,180 10,262
--------- --------- ---------
Net assets purchased...................................... $ 86,276 $ 79,553 $ 78,550
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-52
ARCH COAL, INC. CONTRIBUTED PROPERTIES
STATEMENTS OF REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ---------------
1999 2000 2001 2001 2002
-------- ------- ------- ------ ------
(UNAUDITED)
REVENUES
Coal royalties.............................. $ 13,193 $16,152 $18,415 $4,642 $4,351
Other royalties............................. 983 907 1,363 383 448
Property tax................................ 1,173 1,204 1,033 258 269
-------- ------- ------- ------ ------
15,349 18,263 20,811 5,283 5,068
-------- ------- ------- ------ ------
DIRECT COSTS AND EXPENSES
Depletion................................... 5,625 5,395 6,382 1,561 1,469
Property tax................................ 1,173 1,204 1,033 258 269
Other expense............................... -- 18 283 83 197
Write-down of impaired assets............... 65,229 -- -- -- --
-------- ------- ------- ------ ------
72,027 6,617 7,698 1,902 1,935
-------- ------- ------- ------ ------
Excess (deficit) of revenue over direct costs
and expenses................................ $(56,678) $11,646 $13,113 $3,381 $3,133
======== ======= ======= ====== ======
The accompanying notes are an integral part of the financial statements.
F-53
ARCH COAL, INC. CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying 1999, 2000 and 2001 financial statements of Arch Coal,
Inc. Contributed Properties have been audited. The March 31, 2001 and 2002
interim period financial statements and related disclosures have not been
audited. In management's opinion, the unaudited financial statements included
herein contain all adjustments necessary to present fairly the assets purchased
and liabilities assumed of the properties acquired from Arch Coal, Inc. and the
revenues and direct costs and expenses of the acquired properties for the
periods indicated. Such adjustments are of a normal, recurring nature. The
unaudited financial statements should be read in conjunction with the audited
financial statements and notes thereto.
Ark Land Company ("Ark Land") is a wholly owned subsidiary of Arch Coal,
Inc. ("Arch Coal"). Ark Land owns and manages land and mineral rights primarily
located in the Western, Central Appalachian and the Illinois Basins. In
conjunction with the formation of Natural Resource Partners, Ark Land intends to
contribute certain owned land and coal interests on which coal leasing activity
occurs ("Contributed Properties") to the Natural Resource Partners. Ark Land
will retain owned land and mineral reserves with no leasing activity as well as
other land and mineral reserves controlled through leasing arrangements. The
accompanying statements have been prepared on Ark Land's historical cost basis
in the Contributed Properties.
The Contributed Properties are not a legal entity and, except for revenues
earned from the properties and certain direct costs and expenses of the
properties and assets acquired and liabilities assumed, no separate financial
information is maintained. The Contributed Properties do not maintain
stand-alone corporate treasury, legal, tax, human resources, general
administration and other similar corporate support functions. Corporate general
and administrative expenses have not been previously allocated to the
Contributed Properties, nor were they allocated in connection with the
preparation of the accompanying statements because there was not sufficient
information to develop a reasonable cost allocation. Because the separate and
distinct accounts necessary to present individual balance sheets and income
statements of the Contributed Properties have not been maintained as of December
31, 2000 and 2001 and for each of the three years ended December 31, 2001,
Statements of Revenues and Direct Costs and Expenses and Assets Purchased and
Liabilities Assumed have been prepared.
The accompanying Statements of Revenues and Direct Costs and Expenses and
Statements of Assets Purchased and Liabilities Assumed are not intended to be a
complete presentation of the financial position and results of operations of the
Contributed Properties. The accompanying financial statements were prepared to
comply with the requirements of the Securities and Exchange Commission for
inclusion in the registration statement, and to provide information regarding
the Contributed Properties to potential investors in Natural Resource Partners.
With respect to cash flows, the Contributed Properties do not maintain cash
accounts. Cash receipts and expenditures are maintained by Ark Land. A
description of cash flows directly attributable to the Contributed Properties is
included in Note 6.
2. ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities in the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-54
ARCH COAL, INC. CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COAL PROPERTIES
Coal properties are carried at cost. Coal properties are depleted on a
unit-of-production basis by lease based upon coal mined in relation to the net
cost of the mineral properties and estimated proven tonnage therein. Depletion
occurs either as Arch Coal mines on the property, or as others mine on the
property through leasing transactions.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value. See additional discussion
in Note 7, "Write-Down of Impaired Assets".
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons
of coal sold by the Partnership's lessees and the corresponding revenue from
those sales. Generally, the coal lessees make payments to the Contributed
Properties based on the greater of a percentage of the gross sales price or a
fixed price per ton of coal they sell, subject to minimum annual or quarterly
payments.
Minimum Royalties. Most of the Contributed Properties' lessees must make
minimum annual or quarterly payments which are generally recoupable over certain
time periods. These minimum payments are recorded as deferred revenue. The
deferred revenue attributable to the minimum payment is recognized as coal
royalty revenues either when the lessee recoups the minimum payment through
production or when the period during which the lessee is allowed to recoup the
minimum payment expires.
PROPERTY TAXES
Ark Land is responsible for paying property taxes on the properties it
owns. The lessees are responsible for reimbursing Ark Land for property taxes on
the leased properties. The reimbursement of property taxes is included in
revenues in the statement of revenues and direct costs and expenses as property
tax.
NEW ACCOUNTING STANDARDS
While these financial statements are not intended to be a complete
presentation of financial statements prepared in conformity with accounting
principles generally accepted in the United States, the following recent
accounting pronouncements are included in consideration of potential impacts
associated with the accounts included in these financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. The adoption of SFAS No. 133 on January 1, 2001 did not have a material
impact on the Contributed Properties' financial position or results of
operations. The Contributed Properties currently do not use derivative
instruments.
F-55
ARCH COAL, INC. CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 discontinues goodwill amortization over its
estimated useful life; rather, goodwill will be subject to at least an annual
fair-value based impairment test. With regard to intangible assets, SFAS No. 142
states that acquired intangible assets 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 or exchanged,
without regard to the acquirer's intent. The future adoption of SFAS No. 142 on
January 1, 2002 will not have a material impact on the Contributed Properties'
financial position or results of operations. The Contributed Properties
currently do not have any goodwill or intangible assets recorded in its
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred with the associated asset retirement costs being
capitalized as a part of the carrying amount of the long-lived asset. SFAS No.
143 also includes disclosure requirements that provide a description of asset
retirement obligations and a reconciliation of changes in the components of
those obligations. The Contributed Properties are 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 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 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 Contributed Properties expect
to adopt SFAS No. 144 effective January 1, 2002 and does not expect such
adoption to have a material impact on its financial position or results of
operations.
3. RELATED PARTY TRANSACTIONS
Certain of the Contributed Properties are leased to affiliates of Arch Coal
that mine on the properties. Contracted royalty rates from these affiliates
("affiliate royalties") for the three years ended December 31, 2001 were 6.5% of
the gross sales price of coal sold from the property using underground mining
methods and 7.5% of the gross sales price of coal sold from the property using
surface mining methods, which are similar to those that are received from third
parties. Affiliate royalties amounted to $10.5 million, $10.2 million and $10.3
million during the years ended December 31, 2001, 2000 and 1999, respectively.
4. MAJOR LESSEES
The Contributed Properties depend on a few lessees for a significant
portion of its revenues. Revenues from major lessees, which exceed 10% of total
revenues, are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 2000 2001
------------------ ------------------ ------------------
REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- ------- -------- -------
(IN THOUSANDS OF DOLLARS)
Arch Coal....................... $10,253 66% $10,191 55% $10,492 50%
Lessee A........................ -- -- 2,942 16% 4,895 23%
F-56
ARCH COAL, INC. CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. ENVIRONMENTAL COMPLIANCE
The operations conducted on our property by our lessees are subject to
environmental laws and regulations adopted by various governmental authorities
in the jurisdictions in which these operations are conducted. As owner of
surface interests in some properties, Ark Land may be liable for certain
environmental conditions occurring at the surface properties. The terms of
substantially all of Ark Land's coal leases require the lessee to comply with
all applicable laws and regulations, including environmental. The lessees obtain
reclamation bonds and substantially all of the leases require the lessee to
indemnify Ark Land against, among other things, environmental liabilities. Some
of these indemnifications survive the termination of the lease. Employees of Ark
Land regularly visit the mines to ensure compliance with lease terms, but the
duty to comply with all regulations rests with the lessees. Management of Ark
Land believes that Ark Land's lessees will be able to comply with existing
regulations and does not expect any material impact on the financial condition
or results of operations of the Contributed Properties. Ark Land has neither
incurred, nor is aware of, any material environmental charges imposed on it
related to the Contributed Properties for the years ended December 31, 2001,
2000 and 1999.
6. CASH FLOW
The Contributed Properties do not maintain cash accounts. Cash receipts and
expenditures are maintained by Ark Land. However, the following information is
provided to identify direct cash flows generated from the Contributed
Properties:
YEAR ENDED DECEMBER 31,
----------------------------
1999 2000 2001
-------- ------- -------
(IN THOUSANDS)
CASH FLOWS FROM CONTRIBUTED PROPERTIES
Excess (deficit) of revenue over direct costs and
expenses............................................... $(56,678) $11,646 $13,113
Adjustments to reconcile to net cash provided from
Contributed Properties:
Depletion............................................ 5,625 5,395 6,382
Write-down of impaired assets........................ 65,229 -- --
Change in working capital:
(Increase) decrease in accounts receivable........ 139 (457) 115
Increase (decrease) in property tax payable....... (67) 60 (148)
Increase (decrease) in deferred royalties......... 1,107 (43) 374
-------- ------- -------
Direct cash flow from Contributed Properties.... $ 15,355 $16,601 $19,836
======== ======= =======
7. WRITE-DOWN OF IMPAIRED ASSETS
During 1999, Arch Coal determined that as a result of several adverse
regulatory rulings and the continued negative pricing trends related to Central
Appalachian coal production experienced by Arch Coal that existed at that time,
an evaluation of the recoverability of its active mining operations and coal
reserves was necessary pursuant to SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The evaluation
indicated that the future undiscounted cash flows of certain coal reserves were
below the carrying value of such assets. Accordingly, Arch Coal adjusted the
value of certain reserves. The estimated fair value for the coal reserves with
no future mine plans was based upon the fair value of these properties to be
derived from leasing operations. The Contributed Properties affected by the
write-down were written down to approximately $47.1 million, resulting in a
non-cash impairment charge of $65.2 million.
F-57
NRP (GP) LP
REPORT OF INDEPENDENT AUDITORS
To NRP (GP) LP:
We have audited the accompanying balance sheet of NRP (GP) LP as of April
15, 2002. This financial statement is the responsibility of the Partnership's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of NRP (GP) LP as of April 15, 2002 in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
April 16, 2002
St. Louis, Missouri
F-58
NRP (GP) LP
BALANCE SHEET
APRIL 15, 2002
ASSETS
Current Assets
Cash................................................... $ 980
Investment in Natural Resource Partners L.P............... 20
------
Total Assets......................................... $1,000
======
PARTNERS' CAPITAL
Limited Partners' Capital................................. $ 999
General Partner's Capital................................. 1
------
Total Partners' Capital.............................. $1,000
======
The accompanying note is an integral part of the financial statement.
F-59
NRP (GP) LP
NOTE TO BALANCE SHEET
NRP (GP) LP (the "Partnership") is a Delaware limited partnership formed on
April 9, 2002 by GP Natural Resource Partners LLC as the general partner, and by
Western Pocahontas Properties Limited Partnership, Great Northern Properties
Limited Partnership, New Gauley Coal Corporation and Ark Land Company as limited
partners to manage Natural Resource Partners L.P.
On April 15, 2002 GP Natural Resource Partners LLC, its general partner
contributed $1, and the limited partners contributed $999 to the Partnership in
exchange for 0.001% and 99.999% ownership interest respectively.
The Partnership has invested $20 in Natural Resource Partners L.P. There
have been no other transactions involving the Partnership as of April 15, 2002.
F-60
GP NATURAL RESOURCE PARTNERS LLC
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
GP Natural Resource Partners LLC:
We have audited the accompanying balance sheet of GP Natural Resource
Partners LLC as of April 15, 2002. This financial statement is the
responsibility of the LLC's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of GP Natural Resource Partners LLC as
of April 15, 2002 in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
April 16, 2002
St. Louis, Missouri
F-61
GP NATURAL RESOURCE PARTNERS LLC
BALANCE SHEET
APRIL 15, 2002
ASSETS
Current Assets
Cash................................................... $ 999
Investment in NRP (GP) LP.............................. 1
------
Total Assets......................................... $1,000
======
MEMBERS' EQUITY
Members' Equity........................................... $1,000
------
Total Members' Equity................................ $1,000
======
The accompanying note is an integral part of the financial statement.
F-62
GP NATURAL RESOURCE PARTNERS LLC
NOTE TO BALANCE SHEET
GP Natural Resource Partners LLC ("LLC") is a Delaware limited Liability
Company formed on April 9, 2002 to become the general partner of NRP (GP) LP
(the "Partnership"). LLC owns a 0.001% interest in the Partnership.
On April 15, 2002, members of the LLC contributed $1,000 in exchange for
100% ownership interest in LLC.
LLC has invested $1 in the Partnership. There have been no other
transactions involving the LLC as of April 15, 2002.
F-63
APPENDIX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
NATURAL RESOURCE PARTNERS L.P.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
A-1
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions................................................. A-6
SECTION 1.2 Construction................................................ A-20
ARTICLE II
ORGANIZATION
SECTION 2.1 Formation................................................... A-20
SECTION 2.2 Name........................................................ A-20
SECTION 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices..................................................... A-21
SECTION 2.4 Purpose and Business........................................ A-21
SECTION 2.5 Powers...................................................... A-21
SECTION 2.6 Power of Attorney........................................... A-21
SECTION 2.7 Term........................................................ A-23
SECTION 2.8 Title to Partnership Assets................................. A-23
ARTICLE III
RIGHTS OF LIMITED PARTNERS
SECTION 3.1 Limitation of Liability..................................... A-23
SECTION 3.2 Management of Business...................................... A-23
SECTION 3.3 Outside Activities of the Limited Partners.................. A-23
SECTION 3.4 Rights of Limited Partners.................................. A-24
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
SECTION 4.1 Certificates................................................ A-24
SECTION 4.2 Mutilated, Destroyed, Lost or Stolen Certificates........... A-25
SECTION 4.3 Record Holders.............................................. A-25
SECTION 4.4 Transfer Generally.......................................... A-26
SECTION 4.5 Registration and Transfer of Limited Partner Interests...... A-26
SECTION 4.6 Transfer of the General Partner's General Partner
Interest.................................................... A-27
SECTION 4.7 Transfer of Incentive Distribution Rights................... A-27
SECTION 4.8 Restrictions on Transfers................................... A-28
SECTION 4.9 Citizenship Certificates; Non-citizen Assignees............. A-28
SECTION 4.10 Redemption of Partnership Interests of Non-citizen
Assignees................................................... A-29
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
SECTION 5.1 Organizational Contributions................................ A-30
SECTION 5.2 Contributions by the General Partner and its Affiliates..... A-30
SECTION 5.3 Contributions by Initial Limited Partners................... A-31
SECTION 5.4 Interest and Withdrawal..................................... A-31
SECTION 5.5 Capital Accounts............................................ A-31
SECTION 5.6 Issuances of Additional Partnership Securities.............. A-33
A-2
SECTION 5.7 Limitations on Issuance of Additional Partnership
Securities.................................................. A-34
SECTION 5.8 Conversion of Subordinated Units............................ A-36
SECTION 5.9 Limited Preemptive Right.................................... A-37
SECTION 5.10 Splits and Combinations..................................... A-37
SECTION 5.11 Fully Paid and Non-Assessable Nature of Limited Partner
Interests................................................... A-38
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
SECTION 6.1 Allocations for Capital Account Purposes.................... A-38
SECTION 6.2 Allocations for Tax Purposes................................ A-44
SECTION 6.3 Requirement and Characterization of Distributions;
Distributions to Record Holders............................. A-45
SECTION 6.4 Distributions of Available Cash from Operating Surplus...... A-46
SECTION 6.5 Distributions of Available Cash from Capital Surplus........ A-47
SECTION 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels......................................... A-47
SECTION 6.7 Special Provisions Relating to the Holders of Subordinated
Units....................................................... A-48
SECTION 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights......................................... A-48
SECTION 6.9 Entity-Level Taxation....................................... A-48
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 7.1 Management.................................................. A-49
SECTION 7.2 Certificate of Limited Partnership.......................... A-50
SECTION 7.3 Restrictions on the General Partner's Authority............. A-51
SECTION 7.4 Reimbursement of the General Partner........................ A-51
SECTION 7.5 Outside Activities.......................................... A-52
SECTION 7.6 Loans from the General Partner; Loans or Contributions from
the Partnership; Contracts with Affiliates; Certain
Restrictions on the General Partner......................... A-53
SECTION 7.7 Indemnification............................................. A-54
SECTION 7.8 Liability of Indemnitees.................................... A-55
SECTION 7.9 Resolution of Conflicts of Interest......................... A-56
SECTION 7.10 Other Matters Concerning the General Partner................ A-57
SECTION 7.11 Purchase or Sale of Partnership Securities.................. A-58
SECTION 7.12 Registration Rights of the General Partner and its
Affiliates.................................................. A-58
SECTION 7.13 Reliance by Third Parties................................... A-59
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1 Records and Accounting...................................... A-60
SECTION 8.2 Fiscal Year................................................. A-60
SECTION 8.3 Reports..................................................... A-60
ARTICLE IX
TAX MATTERS
SECTION 9.1 Tax Returns and Information................................. A-61
SECTION 9.2 Tax Elections............................................... A-61
SECTION 9.3 Tax Controversies........................................... A-61
SECTION 9.4 Withholding................................................. A-61
A-3
ARTICLE X
ADMISSION OF PARTNERS
SECTION 10.1 Admission of Initial Limited Partners....................... A-62
SECTION 10.2 Admission of Substituted Limited Partner.................... A-62
SECTION 10.3 Admission of Successor General Partner...................... A-62
SECTION 10.4 Admission of Additional Limited Partners.................... A-62
SECTION 10.5 Amendment of Agreement and Certificate of Limited
Partnership................................................. A-63
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
SECTION 11.1 Withdrawal of the General Partner........................... A-63
SECTION 11.2 Removal of the General Partner.............................. A-64
SECTION 11.3 Interest of Departing Partner and Successor General
Partner..................................................... A-65
SECTION 11.4 Termination of Subordination Period, Conversion of
Subordinated Units and Extinguishment of Cumulative Common
Unit Arrearages............................................. A-66
SECTION 11.5 Withdrawal of Limited Partners.............................. A-66
ARTICLE XII
DISSOLUTION AND LIQUIDATION
SECTION 12.1 Dissolution................................................. A-66
SECTION 12.2 Continuation of the Business of the Partnership After
Dissolution................................................. A-66
SECTION 12.3 Liquidator.................................................. A-67
SECTION 12.4 Liquidation................................................. A-68
SECTION 12.5 Cancellation of Certificate of Limited Partnership.......... A-68
SECTION 12.6 Return of Contributions..................................... A-68
SECTION 12.7 Waiver of Partition......................................... A-68
SECTION 12.8 Capital Account Restoration................................. A-69
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 13.1 Amendment to be Adopted Solely by the General Partner....... A-69
SECTION 13.2 Amendment Procedures........................................ A-70
SECTION 13.3 Amendment Requirements...................................... A-70
SECTION 13.4 Special Meetings............................................ A-71
SECTION 13.5 Notice of a Meeting......................................... A-71
SECTION 13.6 Record Date................................................. A-71
SECTION 13.7 Adjournment................................................. A-71
SECTION 13.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes..................................................... A-72
SECTION 13.9 Quorum...................................................... A-72
SECTION 13.10 Conduct of a Meeting........................................ A-72
SECTION 13.11 Action Without a Meeting.................................... A-72
SECTION 13.12 Voting and Other Rights..................................... A-73
ARTICLE XIV
MERGER
SECTION 14.1 Authority................................................... A-73
SECTION 14.2 Procedure for Merger or Consolidation....................... A-73
A-4
SECTION 14.3 Approval by Limited Partners of Merger or Consolidation..... A-74
SECTION 14.4 Certificate of Merger....................................... A-75
SECTION 14.5 Effect of Merger............................................ A-75
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
SECTION 15.1 Right to Acquire Limited Partner Interests.................. A-76
ARTICLE XVI
GENERAL PROVISIONS
SECTION 16.1 Addresses and Notices....................................... A-77
SECTION 16.2 Further Action.............................................. A-77
SECTION 16.3 Binding Effect.............................................. A-77
SECTION 16.4 Integration................................................. A-77
SECTION 16.5 Creditors................................................... A-78
SECTION 16.6 Waiver...................................................... A-78
SECTION 16.7 Counterparts................................................ A-78
SECTION 16.8 Applicable Law.............................................. A-78
SECTION 16.9 Invalidity of Provisions.................................... A-78
SECTION 16.10 Consent of Partners......................................... A-78
A-5
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF NATURAL RESOURCE PARTNERS L.P.
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF NATURAL
RESOURCE PARTNERS L.P., dated as of ,2002, is entered into by and among
NRP (GP) LP, a Delaware limited partnership, as the General Partner, and GP
Natural Resource Partners LLC, a Delaware limited liability company, as the
Organizational Limited Partner, together with any other Persons who become
Partners in the Partnership or parties hereto as provided herein. In
consideration of the covenants, conditions and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value
of an Adjusted Property that is attributable to positive adjustments made to
such Carrying Value as a result of Book-Up Events. For purposes of determining
the extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is
reduced as a result of a Book-Down Event and the Carrying Value of other
property is increased as a result of such Book-Down Event, an allocable
portion of any such increase in Carrying Value shall be treated as
Additional Book Basis; provided that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall not exceed
the amount by which the Aggregate Remaining Net Positive Adjustments after
such Book-Down Event exceeds the remaining Additional Book Basis
attributable to all of the Partnership's Adjusted Property after such
Book-Down Event (determined without regard to the application of this
clause (ii) to such Book-Down Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Ark Land" means Ark Land Company, a Delaware corporation.
A-6
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b)
decreased by (i) the amount of all losses and deductions that, as of the end of
such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The
"Adjusted Capital Account" of a Partner in respect of a General Partner
Interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such General Partner Interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by such Partner from
and after the date on which such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other interest was first
issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings with respect to such period and (ii) any net reduction in
cash reserves for Operating Expenditures with respect to such period not
relating to an Operating Expenditure made with respect to such period, and (b)
plus (i) any net decrease in Working Capital Borrowings with respect to such
period, and (ii) any net increase in cash reserves for Operating Expenditures
with respect to such period required by any debt instrument for the repayment of
principal, interest or premium. Adjusted Operating Surplus does not include that
portion of Operating Surplus included in clause (a)(i) of the definition of
Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. The General Partner shall, in its discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of Contributed
Properties contributed to the Partnership in a single or integrated transaction
among each separate property on a basis proportional to the fair market value of
each Contributed Property.
"Agreement" means this First Amended and Restated Agreement of Limited
Partnership of Natural Resource Partners L.P., as it may be amended,
supplemented or restated from time to time.
A-7
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
"Associate" means, when used to indicate a relationship with any Person,
(a) any corporation or organization of which such Person is a director, officer
or partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date:
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such Quarter, and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such Quarter resulting from
Working Capital Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that are necessary or appropriate
in the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units, plus any Cumulative
Common Unit Arrearage on all Common Units, with respect to such Quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash with respect
to such Quarter shall be deemed to have been made, established, increased
or reduced, for purposes of determining Available Cash, within such Quarter
if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
"Book-Down Event" means an event which triggers a negative adjustment to
the Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
5.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
A-8
"Business Day" means Monday through Friday of each week, except that a
legal holiday recognized as such by the government of the United States of
America or the State of Texas shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by such Partner from and after
the date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution Agreement, or any payment made by
the General Partner to the Partnership described in Section 5.2(c).
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation, coal mines
and related assets), in each case if such addition, improvement, acquisition or
construction is made to increase the operating capacity or revenues of the
Partnership Group from the operating capacity or revenues of the Partnership
Group existing immediately prior to such addition, improvement, acquisition or
construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cause" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as a general
partner of the Partnership.
"Certificate" means a certificate (i) substantially in the form of Exhibit
A to this Agreement, (ii) issued in global form in accordance with the rules and
regulations of the Depositary or (iii) in such other form as may be adopted by
the General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more Common Units or a certificate, in such form as may be
adopted by the General Partner in its discretion, issued by the Partnership
evidencing ownership of one or more other Partnership Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as such Certificate of Limited Partnership may be amended, supplemented
or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.12(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
A-9
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
any successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part
of the Partnership Interests of all Limited Partners and Assignees, and having
the rights and obligations specified with respect to Common Units in this
Agreement. The term "Common Unit" does not refer to a Subordinated Unit prior to
its conversion into a Common Unit pursuant to the terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Conflicts Committee" means a committee of the Board of Directors of the
general partner of the General Partner (or the applicable governing body of any
successor to the General Partner) composed entirely of two or more directors who
are not (a) security holders, officers or employees of the General Partner, (b)
officers, directors or employees of any Affiliate of the General Partner or (c)
holders of any ownership interest in the Partnership Group other than Common
Units and who also meet the independence standards required to serve on an audit
committee of a board of directors by the National Securities Exchange on which
the Common Units are listed for trading.
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership. Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
"Contribution Agreement" means that certain Contribution, Conveyance and
Assumption Agreement, dated as of the Closing Date, among the General Partner,
the Partnership, the Operating Company and certain other parties, together with
the additional conveyance documents and instruments contemplated or referenced
thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act,
6 Del. C. Section 17-101, et seq., as amended, supplemented or restated from
time to time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Depositary" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
A-10
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes to
do business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.55 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on September 30,
2002, it means the product of $0.55 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"Fully Diluted Basis" means, when calculating the number of Outstanding
Units for any period, a basis that includes, in addition to the Outstanding
Units, all Partnership Securities and options, rights, warrants and appreciation
rights relating to an equity interest in the Partnership (a) that are
convertible into or exercisable or exchangeable for Units that are senior to or
pari passu with the Subordinated Units, (b) whose conversion, exercise or
exchange price is less than the Current Market Price on the date of such
calculation, and (c) that may be converted into or exercised or exchanged for
such Units prior to or during the Quarter following the end of the last Quarter
contained in the period for which the calculation is being made without the
satisfaction of any contingency beyond the control of the holder other than the
payment of consideration and the compliance with administrative mechanics
applicable to such conversion, exercise or exchange; provided that for purposes
of determining the number of Outstanding Units on a Fully Diluted Basis when
calculating whether the Subordination Period has ended or Subordinated Units are
entitled to convert into Common Units pursuant to Section 5.8, such Partnership
Securities, options, rights, warrants and appreciation rights shall be deemed to
have been Outstanding Units only for the four Quarters that comprise the last
four Quarters of the measurement period; provided, further, that if
consideration will be paid to any Group Member in connection with such
conversion, exercise or exchange, the number of Units to be included in such
calculation shall be that number equal to the difference between (i) the number
of Units issuable upon such conversion, exercise or exchange and (ii) the number
of Units which such consideration would purchase at the Current Market Price.
"General Partner" means NRP (GP) LP and its successors and permitted
assigns as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General Partner
to comply with the terms and provisions of this Agreement.
"Great Northern" means Great Northern Properties Limited Partnership, a
Delaware limited partnership.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
A-11
"Incentive Distribution Right" means a non-voting Limited Partner Interest
issued to the General Partner, Western Pocahontas, Great Northern, New Gauley
and Ark Land in connection with their Capital Contributions to the Partnership
pursuant to Section 5.2, which Partnership Interest will confer upon the holder
thereof only the rights and obligations specifically provided in this Agreement
with respect to Incentive Distribution Rights (and no other rights otherwise
available to or other obligations of a holder of a Partnership Interest).
Notwithstanding anything in this Agreement to the contrary, the holder of an
Incentive Distribution Right shall not be entitled to vote such Incentive
Distribution Right on any Partnership matter except as may otherwise be required
by law.
"Incentive Distributions" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, (b) any Departing Partner, (c)
any Person who is or was an Affiliate of the General Partner or any Departing
Partner, (d) any Person who is or was a member, partner, officer, director,
employee, agent or trustee of any Group Member, the General Partner or any
Departing Partner or any Affiliate of any Group Member, the General Partner or
any Departing Partner, and (e) any Person who is or was serving at the request
of the General Partner or any Departing Partner or any Affiliate of the General
Partner or any Departing Partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another Person; provided, that a Person
shall not be an Indemnitee by reason of providing, on a fee-for-services basis,
trustee, fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partner, Western Pocahontas,
Great Northern, New Gauley, Ark Land and the Underwriters, in each case upon
being admitted to the Partnership in accordance with Section 10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
Partnership, as determined by the General Partner, in each case adjusted as the
General Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (including the Common Units sold to the Underwriters pursuant to
the exercise of the Over-Allotment Option); and (c) sales or other voluntary or
involuntary dispositions of any assets of any Group Member other than (i) sales
or other dispositions of inventory, accounts receivable and other assets in the
ordinary course of business, and (ii) sales or other dispositions of assets as
part of normal retirements or replacements.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Departing Partner upon the change of its status from
General Partner to Limited Partner pursuant to Section 11.3 or (b) solely for
purposes of Articles V, VI, VII and IX, each Assignee; provided, however, that
when the term "Limited Partner" is used herein
A-12
in the context of any vote or other approval, including without limitation
Articles XIII and XIV, such term shall not, solely for such purpose, include any
holder of an Incentive Distribution Right except as may otherwise be required by
law.
"Limited Partner Interest" means the ownership interest of a Limited
Partner or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "Limited Partner Interest" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $0.50 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on September 30,
2002, it means the product of $0.50 multiplied by a fraction of which the
numerator is the number of days in such period and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 5.5(b) and shall
not include any items specially allocated under Section 6.1(d); provided that
the determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with
A-13
Section 5.5(b) and shall not include any items specially allocated under Section
6.1(d); provided that the determination of the items that have been specially
allocated under Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not
in this Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"New Gauley" means New Gauley Coal Corporation, a West Virginia
Corporation.
"Non-citizen Assignee" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"Nonrecourse Built-in Gain" means with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditure (including, without limitation, any expenditure described in Section
705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury
Regulation Section 1.704-2(b), are attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b).
"Omnibus Agreement" means that Omnibus Agreement, dated as of the Closing
Date, among Arch Coal, Inc., Ark Land, Great Northern, New Gauley, Western
Pocahontas, the General Partner, the Partnership, the Operating Company and
certain other parties.
"Operating Company" means NRP (Operating) LLC, a Delaware limited
partnership, and any successors thereto.
"Operating Company Agreement" means the Amended and Restated Limited
Liability Company Agreement of the Operating Company, as it may be amended,
supplemented or restated from time to time.
"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
repayment of Working Capital Borrowings, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness other than Working Capital Borrowings shall not constitute
Operating Expenditures; and
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to Partners. Where capital expenditures are made in part for
A-14
Acquisitions or for Capital Improvements and in part for other purposes,
the General Partner's good faith allocation between the amounts paid for
each shall be conclusive.
"Operating Surplus" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $15.0 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions (except to the
extent specified in Section 6.5) and (iii) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from Working Capital Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Option Closing Date" means the date or dates on which any Common Units are
sold by the Partnership to the Underwriters upon exercise of the Over-Allotment
Option.
"Organizational Limited Partner" means GP Natural Resource Partners LLC in
its capacity as the organizational limited partner of the Partnership pursuant
to this Agreement.
"Outstanding" means, with respect to Partnership Securities, all
Partnership Securities that are issued by the Partnership and reflected as
outstanding on the Partnership's books and records as of the date of
determination; provided, however, that if at any time any Person or Group (other
than the General Partner or its Affiliates) beneficially owns 20% or more of any
Outstanding Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not be voted on any
matter and shall not be considered to be Outstanding when sending notices of a
meeting of Limited Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a quorum or for
other similar purposes under this Agreement, except that Common Units so owned
shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided, further, that the
foregoing limitation shall not apply (i) to any Person or Group who acquired 20%
or more of any Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates, (ii) to any Person or Group
who acquired 20% or more of any Outstanding Partnership Securities of any class
then Outstanding directly or indirectly from a Person or Group described in
clause (i) provided that the General Partner shall have notified such Person or
Group in writing that such limitation shall not apply, or (iii) to any Person or
Group who acquired 20% or more of any Partnership Securities issued by the
Partnership with the prior approval of the board of directors of the General
Partner.
"Over-Allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership and Ark Land pursuant to the Underwriting
Agreement.
A-15
"Parity Units" means Common Units and all other Units of any other class or
series that have the right (i) to receive distributions of Available Cash from
Operating Surplus pursuant to each of subclauses (a)(i) and (a)(ii) of Section
6.4 in the same order of priority with respect to the participation of Common
Units in such distributions or (ii) to participate in allocations of Net
Termination Gain pursuant to Section 6.1(c)(i)(B) in the same order of priority
with the Common Units, in each case regardless of whether the amounts or value
so distributed or allocated on each Parity Unit equals the amount or value so
distributed or allocated on each Common Unit. Units whose participation in such
(i) distributions of Available Cash from Operating Surplus and (ii) allocations
of Net Termination Gain are subordinate in order of priority to such
distributions and allocations on Common Units shall not constitute Parity Units
even if such Units are convertible under certain circumstances into Common Units
or Parity Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Natural Resource Partners L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Company and any
Subsidiary of any such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"Percentage Interest" means as of any date of determination (a) as to the
General Partner (in its capacity as General Partner without reference to any
Limited Partner Interests held by it), 2.0%, (b) as to any Unitholder or
Assignee holding Units, the product obtained by multiplying (i) 98.0% less the
percentage applicable to paragraph (c) by (ii) the quotient obtained by dividing
(A) the number of Units held by such Unitholder or Assignee by (B) the total
number of all Outstanding Units, and (c) as to the holders of additional
Partnership Securities issued by the Partnership in accordance with Section 5.6,
the percentage established as a part of such issuance. The Percentage Interest
with respect to an Incentive Distribution Right shall at all times be zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and
A-16
Assignees, apportioned among all Partners and Assignees in accordance with their
relative Percentage Interests and (c) when modifying holders of Incentive
Distribution Rights, apportioned equally among all holders of Incentive
Distribution Rights in accordance with the relative number of Incentive
Distribution Rights held by each such holder.
"Purchase Date" means the date determined by the General Partner as the
date for purchase of all Outstanding Units of a certain class (other than Units
owned by the General Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter,
or, with respect to the first fiscal quarter after the Closing Date, the portion
of such fiscal quarter after the Closing Date, of the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-86582) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partner (as holder of the
General Partner Interest), the excess of (a) the Net Positive Adjustments of the
General Partner as of the end of such period over (b) the sum of the General
Partner's Share of Additional Book Basis Derivative Items with respect to the
General Partner Interest for each prior taxable period, and (iii) with respect
to the holders of Incentive Distribution Rights, the excess of (a) the Net
Positive Adjustments of the holders of Incentive Distribution Rights as of the
end of such period over (b) the sum of the Share of Additional Book Basis
Derivative Items of the holders of the Incentive Distribution Rights for each
prior taxable period.
"Required Allocations" means (a) any limitation imposed on any allocation
of Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
A-17
"Restricted Business" has the meaning assigned to such term in the Omnibus
Agreement.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.65 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on September 30,
2002, it means the product of $0.65 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 92), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or Subordinated Units,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Unitholders' Remaining Net Positive Adjustments as of the end of
such period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, (ii) with respect to the General Partner (as holder of the General Partner
Interest), the amount that bears the same ratio to such additional Book Basis
Derivative Items as the General Partner's Remaining Net Positive Adjustments as
of the end of such period bears to the Aggregate Remaining Net Positive
Adjustment as of that time, and (iii) with respect to the Partners holding
Incentive Distribution Rights, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments
of the Partners holding the Incentive Distribution Rights as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time.
"Special Approval" means approval by a majority of the members of the
Conflicts Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated Units in this
Agreement. The term "Subordinated Unit" as used herein does not include a Common
Unit or Parity Unit. A Subordinated Unit that is convertible into a Common Unit
or a Parity Unit shall not constitute a Common Unit or Parity Unit until such
conversion occurs.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after June 30, 2007 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units and
any other Outstanding Units that are senior or equal in right of
distribution to the Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
(or portion thereof for the first fiscal quarter after the Closing Date) on
all Outstanding Common Units and Subordinated Units and any other
Outstanding Units that are senior or equal in right of distribution to the
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Common Units
and Subordinated Units and any other Units that are senior or equal in
right of distribution to the Subordinated Units that were Outstanding
during such periods on a Fully Diluted Basis, plus the related distribution
on the General Partner Interest, during such periods and (ii) there are no
Cumulative Common Unit Arrearages; and
(b) the date on which the General Partner is removed as general
partner of the Partnership upon the requisite vote by holders of
Outstanding Units under circumstances where Cause does not exist and Units
held by the General Partner and its Affiliates are not voted in favor of
such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the
A-18
election of directors or other governing body of such corporation is owned,
directly or indirectly, at the date of determination, by such Person, by one or
more Subsidiaries of such Person or a combination thereof, (b) a partnership
(whether general or limited) in which such Person or a Subsidiary of such Person
is, at the date of determination, a general or limited partner of such
partnership, but only if more than 50% of the partnership interests of such
partnership (considering all of the partnership interests of the partnership as
a single class) is owned, directly or indirectly, at the date of determination,
by such Person, by one or more Subsidiaries of such Person, or a combination
thereof, or (c) any other Person (other than a corporation or a partnership) in
which such Person, one or more Subsidiaries of such Person, or a combination
thereof, directly or indirectly, at the date of determination, has (i) at least
a majority ownership interest or (ii) the power to elect or direct the election
of a majority of the directors or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in
Section 14.2(b).
"Third Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(F).
"Third Target Distribution" means $0.75 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on September 30,
2002, it means the product of $0.75 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 92), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Common
Units; provided that if no Transfer Agent is specifically designated for any
other Partnership Securities, the General Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to
the Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated ,
2002 among the Underwriters, the Partnership, the General Partner, the Operating
Company, Western Pocahontas, Great Northern, New Gauley, Ark Land, Arch Coal,
Inc. and certain other parties, providing for the purchase of Common Units by
the Underwriters.
"Unit" means a Partnership Security that is designated as a "Unit" and
shall include Common Units and Subordinated Units but shall not include (i) a
General Partner Interest or (ii) Incentive Distribution Rights.
"Unitholders" means the holders of Units.
"Unit Majority" means, during the Subordination Period, at least a majority
of the Outstanding Common Units (excluding Common Units owned by the General
Partner and its Affiliates) voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Common Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the fair market
value of such property as of such date (as
A-19
determined under Section 5.5(d)) over (b) the Carrying Value of such property as
of such date (prior to any adjustment to be made pursuant to Section 5.5(d) as
of such date).
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the Carrying Value
of such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the
Initial Unit Price less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any distributions in kind) in
connection with the dissolution and liquidation of the Partnership theretofore
made in respect of an Initial Common Unit, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of such Units.
"Western Pocahontas" means Western Pocahontas Properties Limited
Partnership, a Delaware limited partnership.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
"Working Capital Borrowings" means borrowings used solely for working
capital purposes or to pay distributions to Partners made pursuant to a credit
facility or other arrangement to the extent such borrowings are required to be
reduced to a relatively small amount each year (or for the year in which the
Initial Offering is consummated, the 12-month period beginning on the Closing
Date) for an economically meaningful period of time.
SECTION 1.2 Construction.
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) the term "include" or "includes" means
includes, without limitation, and "including" means including, without
limitation.
ARTICLE II
ORGANIZATION
SECTION 2.1 Formation.
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of Limited
Partnership of Natural Resource Partners L.P. in its entirety. This amendment
and restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights, duties
(including fiduciary duties), liabilities and obligations of the Partners and
the administration, dissolution and termination of the Partnership shall be
governed by the Delaware Act. All Partnership Interests shall constitute
personal property of the owner thereof for all purposes and a Partner has no
interest in specific Partnership property.
SECTION 2.2 Name.
The name of the Partnership shall be "Natural Resource Partners L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner in its sole discretion,
including the name of the General Partner. The words "Limited Partnership,"
"L.P.," "Ltd." or similar words or letters shall be included in the
Partnership's name where
A-20
necessary for the purpose of complying with the laws of any jurisdiction that so
requires. The General Partner in its discretion may change the name of the
Partnership at any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the Limited
Partners.
SECTION 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices.
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at 1209 Orange Street,
Wilmington, Delaware 19801, and the registered agent for service of process on
the Partnership in the State of Delaware at such registered office shall be The
Corporation Trust Company. The principal office of the Partnership shall be
located at 601 Jefferson Street, Suite 3600, Houston, Texas 77002 or such other
place as the General Partner may from time to time designate by notice to the
Limited Partners. The Partnership may maintain offices at such other place or
places within or outside the State of Delaware as the General Partner deems
necessary or appropriate. The address of the General Partner shall be 601
Jefferson Street, Suite 3600, Houston, Texas 77002 or such other place as the
General Partner may from time to time designate by notice to the Limited
Partners.
SECTION 2.4 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a member of the Operating Company and, in connection
therewith, to exercise all the rights and powers conferred upon the Partnership
as a member of the Operating Company pursuant to the Operating Company Agreement
or otherwise, (b) engage directly in, or enter into or form any corporation,
partnership, joint venture, limited liability company or other arrangement to
engage indirectly in, any business activity that the Operating Company is
permitted to engage in by the Operating Company Agreement or that its
subsidiaries are permitted to engage in by their limited liability company or
partnership agreements and, in connection therewith, to exercise all of the
rights and powers conferred upon the Partnership pursuant to the agreements
relating to such business activity, (c) engage directly in, or enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any business activity that is
approved by the General Partner and which lawfully may be conducted by a limited
partnership organized pursuant to the Delaware Act and, in connection therewith,
to exercise all of the rights and powers conferred upon the Partnership pursuant
to the agreements relating to such business activity; and (d) do anything
necessary or appropriate to the foregoing, including the making of capital
contributions or loans to a Group Member; provided, however, that the General
Partner shall not cause the Partnership to engage, directly or indirectly, in
any business activity that the General Partner reasonably determines would cause
the Partnership to be treated as an association taxable as a corporation or
otherwise taxable as an entity for federal income tax purposes. The General
Partner has no obligation or duty to the Partnership, the Limited Partners or
the Assignees to propose or approve, and in its discretion may decline to
propose or approve, the conduct by the Partnership of any business.
SECTION 2.5 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
2.4 and for the protection and benefit of the Partnership.
SECTION 2.6 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator shall have been selected pursuant to
Section 12.3, the Liquidator (and any successor to the Liquidator by merger,
transfer, assignment, election or otherwise) and each of their authorized
A-21
officers and attorneys-in-fact, as the case may be, with full power of
substitution, as his true and lawful agent and attorney-in-fact, with full power
and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner and the Liquidator may exercise the power of attorney made
in this Section 2.6(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XIII
or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal representatives.
Each such Limited Partner or Assignee hereby agrees to be bound by any
representation made by the General Partner or the Liquidator acting in good
faith pursuant to such power of attorney; and each such Limited Partner or
Assignee, to the maximum extent permitted by law, hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of the
General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the request
therefor, such further designation, powers of attorney and other instruments as
the General Partner or the Liquidator deems necessary to effectuate this
Agreement and the purposes of the Partnership.
A-22
SECTION 2.7 Term.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the dissolution of the Partnership in accordance with the
provisions of Article XII. The existence of the Partnership as a separate legal
entity shall continue until the cancellation of the Certificate of Limited
Partnership as provided in the Delaware Act.
SECTION 2.8 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner, one or more of its Affiliates or one or more nominees, as
the General Partner may determine. The General Partner hereby declares and
warrants that any Partnership assets for which record title is held in the name
of the General Partner or one or more of its Affiliates or one or more nominees
shall be held by the General Partner or such Affiliate or nominee for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in respect
of which the General Partner determines that the expense and difficulty of
conveyancing makes transfer of record title to the Partnership impracticable) to
be vested in the Partnership as soon as reasonably practicable; provided,
further, that, prior to the withdrawal or removal of the General Partner or as
soon thereafter as practicable, the General Partner shall use reasonable efforts
to effect the transfer of record title to the Partnership and, prior to any such
transfer, will provide for the use of such assets in a manner satisfactory to
the General Partner. All Partnership assets shall be recorded as the property of
the Partnership in its books and records, irrespective of the name in which
record title to such Partnership assets is held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
SECTION 3.1 Limitation of Liability.
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
SECTION 3.2 Management of Business.
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the General Partner or any officer, director,
employee, manager, member, general partner, agent or trustee of the General
Partner or any of its Affiliates, or any officer, director, employee, manager,
member, general partner, agent or trustee of a Group Member, in its capacity as
such, shall not be deemed to be participation in the control of the business of
the Partnership by a limited partner of the Partnership (within the meaning of
Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners or Assignees under this
Agreement.
SECTION 3.3 Outside Activities of the Limited Partners.
Subject to the provisions of Section 7.5 and the Omnibus Agreement, which
shall continue to be applicable to the Persons referred to therein, regardless
of whether such Persons shall also be Limited Partners or Assignees, any Limited
Partner or Assignee shall be entitled to and may have business
A-23
interests and engage in business activities in addition to those relating to the
Partnership, including business interests and activities in direct competition
with the Partnership Group. Neither the Partnership nor any of the other
Partners or Assignees shall have any rights by virtue of this Agreement in any
business ventures of any Limited Partner or Assignee.
SECTION 3.4 Rights of Limited Partners.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the nature
of trade secrets or (ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
SECTION 4.1 Certificates.
Upon the Partnership's issuance of Common Units or Subordinated Units to
any Person, the Partnership shall issue one or more Certificates in the name of
such Person evidencing the number of such Units being so issued. In addition,
(a) upon the General Partner's request, the Partnership shall issue to it one or
more Certificates in the name of the General Partner evidencing its interests in
the Partnership and (b) upon the request of any Person owning Incentive
Distribution Rights or any other Partnership Securities other than Common Units
or Subordinated Units, the Partnership shall issue to such Person one or more
certificates evidencing such Incentive Distribution Rights or other Partnership
Securities other than Common Units or Subordinated Units. Certificates shall be
executed on behalf of the Partnership by
A-24
the Chairman of the Board, President or any Vice President and the Secretary or
any Assistant Secretary of the General Partner. No Common Unit Certificate shall
be valid for any purpose until it has been countersigned by the Transfer Agent;
provided, however, that if the General Partner elects to issue Common Units in
global form, the Common Unit Certificates shall be valid upon receipt of a
certificate from the Transfer Agent certifying that the Common Units have been
duly registered in accordance with the directions of the Partnership and the
Underwriters. Subject to the requirements of Section 6.7(b), the Partners
holding Certificates evidencing Subordinated Units may exchange such
Certificates for Certificates evidencing Common Units on or after the date on
which such Subordinated Units are converted into Common Units pursuant to the
terms of Section 5.8.
SECTION 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of the General Partner on behalf of the Partnership shall
execute, and the Transfer Agent shall countersign and deliver in exchange
therefor, a new Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall countersign
a new Certificate in place of any Certificate previously issued if the Record
Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the General Partner, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the General
Partner has notice that the Certificate has been acquired by a purchaser
for value in good faith and without notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the General
Partner a bond, in form and substance satisfactory to the General Partner,
with surety or sureties and with fixed or open penalty as the Partnership
may reasonably direct, in its sole discretion, to indemnify the General
Partner, the Partners, the General Partner and the Transfer Agent against
any claim that may be made on account of the alleged loss, destruction or
theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
General Partner.
If a Limited Partner or Assignee fails to notify the General Partner within
a reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee shall
be precluded from making any claim against the Partnership, the General Partner
or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the General Partner may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Transfer
Agent) reasonably connected therewith.
SECTION 4.3 Record Holders.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which such Partnership Interests are listed
for trading. Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent of any of the
foregoing) is acting as nominee,
A-25
agent or in some other representative capacity for another Person in acquiring
and/or holding Partnership Interests, as between the Partnership on the one
hand, and such other Persons on the other, such representative Person (a) shall
be the Partner or Assignee (as the case may be) of record and beneficially, (b)
must execute and deliver a Transfer Application and (c) shall be bound by this
Agreement and shall have the rights and obligations of a Partner or Assignee (as
the case may be) hereunder and as, and to the extent, provided for herein.
SECTION 4.4 Transfer Generally.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its General Partner Interest to another Person who
becomes a General Partner, by which the holder of a Limited Partner Interest
assigns such Limited Partner Interest to another Person who is or becomes a
Limited Partner or an Assignee, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article IV.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any member of the General Partner of any or all of the membership
interests of the General Partner.
SECTION 4.5 Registration and Transfer of Limited Partner Interests.
(a) The General Partner shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests. The
Transfer Agent is hereby appointed registrar and transfer agent for the purpose
of registering Common Units and transfers of such Common Units as herein
provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers of the General Partner on behalf of the Partnership shall execute and
deliver, and in the case of Common Units, the Transfer Agent shall countersign
and deliver, in the name of the holder or the designated transferee or
transferees, as required pursuant to the holder's instructions, one or more new
Certificates evidencing the same aggregate number and type of Limited Partner
Interests as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the General Partner shall
not recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly authorized
in writing). No charge shall be imposed by the General Partner for such
transfer; provided, that as a condition to the issuance of any new Certificate
under this Section 4.5, the General Partner may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5 and in Section 4.7. The transfer of any Limited
Partner Interests and the admission of any new Limited Partner shall not
constitute an amendment to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
A-26
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested admission
as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and
to have executed this Agreement, (iii) represented and warranted that such
transferee has the right, power and authority and, if an individual, the
capacity to enter into this Agreement, (iv) granted the powers of attorney set
forth in this Agreement and (v) given the consents and approvals and made the
waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any time
to transfer their Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
SECTION 4.6 Transfer of the General Partner's General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to June 30, 2012, the General
Partner shall not transfer all or any part of its General Partner Interest to a
Person unless such transfer (i) has been approved by the prior written consent
or vote of the holders of at least a majority of the Outstanding Common Units
(excluding Common Units held by the General Partner and its Affiliates) or (ii)
is of all, but not less than all, of its General Partner Interest to (A) an
Affiliate of the General Partner (other than an individual) or (B) another
Person (other than an individual) in connection with the merger or consolidation
of the General Partner with or into another Person (other than an individual) or
the transfer by the General Partner of all or substantially all of its assets to
another Person (other than an individual).
(b) Subject to Section 4.6(c) below, on or after June 30, 2012, the General
Partner may transfer all or any of its General Partner Interest without
Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to another
Person shall be permitted unless (i) the transferee agrees to assume the rights
and duties of the General Partner under this Agreement and to be bound by the
provisions of this Agreement, (ii) the Partnership receives an Opinion of
Counsel that such transfer would not result in the loss of limited liability of
any Limited Partner or of any member of the Operating Company or cause the
Partnership or the Operating Company to be treated as an association taxable as
a corporation or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not already so treated or taxed) and (iii) such
transferee also agrees to purchase all (or the appropriate portion thereof, if
applicable) of the partnership or membership interest of the General Partner as
the general partner or managing member, if any, of each other Group Member. In
the case of a transfer pursuant to and in compliance with this Section 4.6, the
transferee or successor (as the case may be) shall, subject to compliance with
the terms of Section 10.3, be admitted to the Partnership as the General Partner
immediately prior to the transfer of the Partnership Interest, and the business
of the Partnership shall continue without dissolution.
SECTION 4.7 Transfer of Incentive Distribution Rights.
Prior to June 30, 2012, the General Partner or a subsequent holder of its
Incentive Distribution Rights may transfer any or all of such Incentive
Distribution Rights without any consent of the Unitholders (a) to an Affiliate
of such holder (other than an individual) or (b) to another Person (other than
an individual) in connection with (i) the merger or consolidation of such holder
of Incentive Distribution Rights with or into such other Person or (ii) the
transfer by such holder of all or substantially all of its assets to such other
Person or (iii) the sale of all or substantially all of the equity interests of
such holder to such other Person. Western Pocahontas, Great Northern, New Gauley
and Ark Land and any subsequent holder of their Incentive Distribution Rights
may transfer any of their Incentive Distribution Rights at any time without
Unitholder approval. Any other transfer of the Incentive Distribution Rights
prior to June 30, 2012, shall require the prior approval of holders of at least
a majority of the Outstanding Common Units (excluding Common Units held by the
General Partner and its Affiliates). On or after June 30, 2012, the General
Partner or any other holder of Incentive Distribution Rights restricted by this
Section 4.7 may transfer any or all of its Incentive Distribution Rights without
A-27
Unitholder approval. Notwithstanding anything herein to the contrary, no
transfer of Incentive Distribution Rights to another Person shall be permitted
unless the transferee agrees to be bound by the provisions of this Agreement.
SECTION 4.8 Restrictions on Transfers.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership Interests
shall be made if such transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction over
such transfer, (ii) terminate the existence or qualification of the Partnership
or the Operating Company under the laws of the jurisdiction of its formation, or
(iii) cause the Partnership or the Operating Company to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes (to the extent not already so treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of any Group Member
becoming taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes. The restrictions may be imposed by making such
amendments to this Agreement as the General Partner may determine to be
necessary or appropriate to impose such restrictions; provided, however, that
any amendment that the General Partner believes, in the exercise of its
reasonable discretion, could result in the delisting or suspension of trading of
any class of Limited Partner Interests on the principal National Securities
Exchange on which such class of Limited Partner Interests is then traded must be
approved, prior to such amendment being effected, by the holders of at least a
majority of the Outstanding Limited Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
SECTION 4.9 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
General Partner may request any Limited Partner or Assignee to furnish to the
General Partner, within 30 days after receipt of such request, an executed
Citizenship Certification or such other information concerning his nationality,
citizenship or other related status (or, if the Limited Partner or Assignee is a
nominee holding for the account of another Person, the nationality, citizenship
or other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Partnership Interests owned by such Limited Partner or Assignee shall be subject
to redemption in accordance with the provisions of Section 4.10. In addition,
the General Partner may require that the status of any such Partner or Assignee
be changed to that of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the Limited Partner in
respect of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner Interests
other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
A-28
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall be
entitled to the cash equivalent thereof, and the Partnership shall provide cash
in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the General
Partner, request admission as a Substituted Limited Partner with respect to any
Limited Partner Interests of such Non-citizen Assignee not redeemed pursuant to
Section 4.10, and upon his admission pursuant to Section 10.2, the General
Partner shall cease to be deemed to be the Limited Partner in respect of the
Non-citizen Assignee's Limited Partner Interests.
SECTION 4.10 Redemption of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee establishes
to the satisfaction of the General Partner that such Limited Partner or Assignee
is an Eligible Citizen or has transferred his Partnership Interests to a Person
who is an Eligible Citizen and who furnishes a Citizenship Certification to the
General Partner prior to the date fixed for redemption as provided below, redeem
the Partnership Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner Interests
of the class to be so redeemed multiplied by the number of Limited Partner
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or
Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed in blank or
accompanied by an assignment duly executed in blank, the Limited Partner or
Assignee or his duly authorized representative shall be entitled to receive
the payment therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to Limited
Partner Interests held by a Limited Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice of
redemption from transferring his Limited Partner Interest before the redemption
date if such transfer is otherwise permitted
A-29
under this Agreement. Upon receipt of notice of such a transfer, the General
Partner shall withdraw the notice of redemption, provided the transferee of such
Limited Partner Interest certifies to the satisfaction of the General Partner in
a Citizenship Certification delivered in connection with the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make such
certification, such redemption shall be effected from the transferee on the
original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
SECTION 5.1 Organizational Contributions.
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $20.00, for a 2% General Partner Interest in the Partnership and
has been admitted as the General Partner of the Partnership, and the
Organizational Limited Partner made an initial Capital Contribution to the
Partnership in the amount of $980.00 for a 98% Limited Partner Interest in the
Partnership and has been admitted as a Limited Partner of the Partnership. As of
the Closing Date, the interest of the Organizational Limited Partner shall be
redeemed as provided in the Contribution Agreement; the initial Capital
Contributions of the Organizational Limited Partner shall thereupon be refunded;
and the Organizational Limited Partner shall cease to be a Limited Partner of
the Partnership. Ninety-eight percent of any interest or other profit that may
have resulted from the investment or other use of such initial Capital
Contributions shall be allocated and distributed to the Organizational Limited
Partner, and the balance thereof shall be allocated and distributed to the
General Partner.
SECTION 5.2 Contributions by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, (i) New Gauley shall contribute to the Partnership as a Capital
Contribution all of its interest in NNG LLC in exchange for (A) a special
limited partner interest, (B) Common Units, (C) Subordinated Units and
(D) % of the Incentive Distribution Rights; (ii) Western Pocahontas shall
contribute to the Partnership as a Capital Contribution all of its interest in
WPP LLC to the Partnership in exchange for (A) a special limited partner
interest, (B) Common Units, (C) Subordinated Units and (D) % of
the Incentive Distribution Rights; (iii) Great Northern shall contribute to the
Partnership as a Capital Contribution all of its interest in GNP LLC in exchange
for (A) a special limited partner interest, (B) Common Units, (C)
Subordinated Units and (D) % of the Incentive Distribution Rights; (iv) Ark
Land shall contribute to the Partnership as a Capital Contribution all of its
interest in ACIN LLC in exchange for (A) a special limited partner interest, (B)
Common Units, (C) Subordinated Units and (D) % of the Incentive
Distribution Rights; and (v) New Gauley, Western Pocahontas, Great Northern and
Ark Land each contribute such special limited partner interests to the General
Partner and such special limited partner interests shall (A) be deemed to be an
additional Capital Contribution by the General Partner and a continuation of its
General Partner Interest and (B) shall no longer be treated as a special limited
partner interest.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of Limited Partner Interests (i) in the
Initial Offering, (ii) pursuant to the Over-Allotment Option and (iii) to the
extent the Over-Allotment Option is not exercised, to New Gauley and Great
Northern, the General Partner shall be required to make additional Capital
Contributions equal to 2/98ths of any amount contributed to the Partnership by
the Limited Partners in exchange for such additional Limited Partner Interests.
Except as set forth in the immediately preceding sentence and Article XII, the
General Partner shall not be obligated to make any additional Capital
Contributions to the Partnership.
A-30
SECTION 5.3 Contributions by Initial Limited Partners.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (i) the cash contribution to the Partnership by or
on behalf of such Underwriter by (ii) the Issue Price per Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option and pursuant to the
Underwriting Agreement, each Underwriter shall contribute to the Partnership
cash in an amount equal to the Issue Price per Initial Common Unit, multiplied
by the number of Common Units specified in the Underwriting Agreement to be
purchased by such Underwriter at the Option Closing Date. In exchange for such
Capital Contributions by the Underwriters, the Partnership shall issue Common
Units to each Underwriter on whose behalf such Capital Contribution is made in
an amount equal to the quotient obtained by dividing (i) the cash contributions
to the Partnership by or on behalf of such Underwriter by (ii) the Issue Price
per Initial Common Unit.
(c) No Limited Partner Interests will be issued or issuable as of or at the
Closing Date other than (i) the Common Units issuable pursuant to subparagraph
(a) hereof in aggregate number equal to 2,675,640, (ii) the "Additional Units"
as such term is used in the Underwriting Agreement in an aggregate number up to
675,000 issuable upon exercise of the Over-Allotment Option pursuant to
subparagraph (b) hereof or up to 70,000 units to New Gauley and Great Northern
to the extent the Over-Allotment Option is not exercised, (iii) the 12,005,000
Subordinated Units issuable to Western Pocahontas, Great Northern, New Gauley
and Ark Land pursuant to Section 5.2 hereof, and (iii) the Incentive
Distribution Rights.
SECTION 5.4 Interest and Withdrawal.
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if any, that distributions made pursuant to
this Agreement or upon termination of the Partnership may be considered as such
by law and then only to the extent provided for in this Agreement. Except to the
extent expressly provided in this Agreement, no Partner or Assignee shall have
priority over any other Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
Section 17-502(b) of the Delaware Act.
SECTION 5.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate Capital
Account with respect to such Partnership Interest in accordance with the rules
of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be
increased by (i) the amount of all Capital Contributions made to the Partnership
with respect to such Partnership Interest pursuant to this Agreement and (ii)
all items of Partnership income and gain (including, without limitation, income
and gain exempt from tax) computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest pursuant to Section 6.1, and
decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed
distributions of cash or property made with respect to such Partnership Interest
pursuant to this Agreement and (y) all items of Partnership deduction and loss
computed in accordance with Section 5.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 6.1.
A-31
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Company
Agreement) of all property owned by the Operating Company or any other
Subsidiary that is classified as a partnership for federal income tax
purposes.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred.
A-32
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section
5.8 by a holder thereof (other than a transfer to an Affiliate unless the
General Partner elects to have this subparagraph 5.5(c)(ii) apply), the
Capital Account maintained for such Person with respect to its Subordinated
Units or converted Subordinated Units will (A) first, be allocated to the
Subordinated Units or converted Subordinated Units to be transferred in an
amount equal to the product of (x) the number of such Subordinated Units or
converted Subordinated Units to be transferred and (y) the Per Unit Capital
Amount for a Common Unit, and (B) second, any remaining balance in such
Capital Account will be retained by the transferor, regardless of whether
it has retained any Subordinated Units or converted Subordinated Units.
Following any such allocation, the transferor's Capital Account, if any,
maintained with respect to the retained Subordinated Units or converted
Subordinated Units, if any, will have a balance equal to the amount
allocated under clause (B) hereinabove, and the transferee's Capital
Account established with respect to the transferred Subordinated Units or
converted Subordinated Units will have a balance equal to the amount
allocated under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for
cash or Contributed Property or the conversion of the General Partner's Combined
Interest to Common Units pursuant to Section 11.3(b), the Capital Account of all
Partners and the Carrying Value of each Partnership property immediately prior
to such issuance shall be adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to such Partnership property, as if such
Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each
such property immediately prior to such issuance and had been allocated to the
Partners at such time pursuant to Section 6.1 in the same manner as any item of
gain or loss actually recognized during such period would have been allocated.
In determining such Unrealized Gain or Unrealized Loss, the aggregate cash
amount and fair market value of all Partnership assets (including, without
limitation, cash or cash equivalents) immediately prior to the issuance of
additional Partnership Interests shall be determined by the General Partner
using such reasonable method of valuation as it may adopt; provided, however,
that the General Partner, in arriving at such valuation, must take fully into
account the fair market value of the Partnership Interests of all Partners at
such time. The General Partner shall allocate such aggregate value among the
assets of the Partnership (in such manner as it determines in its discretion to
be reasonable) to arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than a
distribution of cash that is not in redemption or retirement of a
Partnership Interest), the Capital Accounts of all Partners and the
Carrying Value of all Partnership property shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable to
such Partnership property, as if such Unrealized Gain or Unrealized Loss
had been recognized in a sale of such property immediately prior to such
distribution for an amount equal to its fair market value, and had been
allocated to the Partners, at such time, pursuant to Section 6.1 in the
same manner as any item of gain or loss actually recognized during such
period would have been allocated. In determining such Unrealized Gain or
Unrealized Loss the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash
equivalents) immediately prior to a distribution shall (A) in the case of
an actual distribution which is not made pursuant to Section 12.4 or in the
case of a deemed distribution, be determined and allocated in the same
manner as that provided in Section 5.5(d)(i) or (B) in the case of a
liquidating distribution pursuant to Section 12.4, be determined and
allocated by the Liquidator using such reasonable method of valuation as it
may adopt.
SECTION 5.6 Issuances of Additional Partnership Securities.
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership purpose at any time
and from time to time to such Persons for such consideration and on such terms
and conditions
A-33
as shall be established by the General Partner in its sole discretion, all
without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) rights upon dissolution and liquidation of the Partnership;
(iv) whether, and the terms and conditions upon which, the Partnership may
redeem the Partnership Security; (v) whether such Partnership Security is issued
with the privilege of conversion or exchange and, if so, the terms and
conditions of such conversion or exchange; (vi) the terms and conditions upon
which each Partnership Security will be issued, evidenced by certificates and
assigned or transferred; and (vii) the right, if any, of each such Partnership
Security to vote on Partnership matters, including matters relating to the
relative rights, preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this Section
5.6, (ii) the conversion of the General Partner Interest or any Incentive
Distribution Rights into Units pursuant to the terms of this Agreement, (iii)
the admission of Additional Limited Partners and (iv) all additional issuances
of Partnership Securities. The General Partner is further authorized and
directed to specify the relative rights, powers and duties of the holders of the
Units or other Partnership Securities being so issued. The General Partner shall
do all things necessary to comply with the Delaware Act and is authorized and
directed to do all things it deems to be necessary or advisable in connection
with any future issuance of Partnership Securities or in connection with the
conversion of the General Partner Interest or any Incentive Distribution Rights
into Units pursuant to the terms of this Agreement, including compliance with
any statute, rule, regulation or guideline of any federal, state or other
governmental agency or any National Securities Exchange on which the Units or
other Partnership Securities are listed for trading.
SECTION 5.7 Limitations on Issuance of Additional Partnership Securities.
Except as otherwise specified in this Section 5.7, the issuance of
Partnership Securities pursuant to Section 5.6 shall be subject to the following
restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue
(and shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than 6,002,500 additional Parity Units
without the prior approval of the holders of a Unit Majority. In applying
this limitation, there shall be excluded Common Units and other Parity
Units issued (A) in connection with the Underwriting Agreement, (B) in
accordance with Sections 5.7(b) and 5.7(c), (C) upon conversion of
Subordinated Units pursuant to Section 5.8, (D) upon conversion of the
General Partner Interest or any Incentive Distribution Rights pursuant to
Section 11.3(b), (D) pursuant to the employee benefit plans of the General
Partner, the Partnership or any other Group Member, (E) upon a conversion
or exchange of Parity Units issued after the date hereof into Common Units
or other Parity Units; provided that the total amount of Available Cash
required to pay the aggregate Minimum Quarterly Distribution on all Common
Units and all Parity Units does not increase as a result of this conversion
or exchange and (F) in the event of a combination or subdivision of Common
Units.
(b) During the Subordination Period, the Partnership may also issue an
unlimited number of Parity Units without the prior approval of the
Unitholders, if such issuance occurs (i) in connection with an Acquisition
or a Capital Improvement or (ii) within 365 days of, and the net proceeds
from such issuance are used to repay debt incurred in connection with, an
Acquisition or a Capital Improvement, in each case where such Acquisition
or Capital Improvement involves assets that, if acquired by the Partnership
as of the date that is one year prior to the first day of the Quarter in
A-34
which such Acquisition is to be consummated or such Capital Improvement is
to be completed, would have resulted, on a pro forma basis, in an increase
in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect
to each of the four most recently completed Quarters (on a pro forma
basis as described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by
the Partnership on a per-Unit basis (for all Outstanding Units)
(excluding Adjusted Operating Surplus attributable to the Acquisition or
Capital Improvement) with respect to each of such four most recently
completed Quarters.
The General Partner's good faith determination that such an increase would have
resulted shall be conclusive. If the issuance of Parity Units with respect to an
Acquisition or Capital Improvement occurs within the first four full Quarters
after the Closing Date, then Adjusted Operating Surplus as used in clauses (A)
(subject to the succeeding sentence) and (B) above shall be calculated (i) for
each Quarter, if any, that commenced after the Closing Date for which actual
results of operations are available, based on the actual Adjusted Operating
Surplus of the Partnership generated with respect to such Quarter, and (ii) for
each other Quarter, on a pro forma basis consistent with the procedures, as
applicable, set forth in Appendix D to the Registration Statement. Furthermore,
the amount in clause (A) shall be determined on a pro forma basis assuming that
(1) all of the Parity Units to be issued in connection with or within 365 days
of such Acquisition or Capital Improvement had been issued and outstanding, (2)
all indebtedness for borrowed money to be incurred or assumed in connection with
such Acquisition or Capital Improvement (other than any such indebtedness that
is to be repaid with the proceeds of such issuance of Parity Units) had been
incurred or assumed, in each case as of the commencement of such four-Quarter
period, (3) the personnel expenses that would have been incurred by the
Partnership in the operation of the acquired assets are the personnel expenses
for employees to be retained by the Partnership in the operation of the acquired
assets, and (4) the non-personnel costs and expenses are computed on the same
basis as those incurred by the Partnership in the operation of the Partnership's
business at similarly situated Partnership facilities. For the purposes of this
Section 5.7(b), the term "debt" shall be deemed to include indebtedness used to
extend, refinance, renew, replace or defease debt originally incurred in
connection with an Acquisition or Capital Improvement; provided that the amount
of such extended, refinanced, renewed, replaced or defeased indebtedness does
not exceed the principal sum of, plus accrued interest on, the indebtedness so
extended, refinanced, renewed, replaced or defeased.
(c) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership shall not issue any additional
Partnership Securities (or options, rights, warrants or appreciation rights
related thereto) (i) that are entitled in any Quarter to receive in respect of
the Subordination Period any distribution of Available Cash from Operating
Surplus before the Common Units and any Parity Units have received (or amounts
have been set aside for payment of) the Minimum Quarterly Distribution and any
Cumulative Common Unit Arrearage for such Quarter or (ii) that are entitled to
allocations in respect of the Subordination Period of Net Termination Gain
before the Common Units and any Parity Units have been allocated Net Termination
Gain pursuant to Section 6.1(c)(i)(B).
(d) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership may issue additional Partnership
Securities (or options, rights, warrants or appreciation rights related thereto)
(i) that are not entitled in any Quarter during the Subordination Period to
receive any distributions of Available Cash from Operating Surplus until after
the Common Units and any Parity Units have received (or amounts have been set
aside for payment of) the Minimum Quarterly Distribution and any Cumulative
Common Unit Arrearage for such Quarter and (ii) that are not entitled to
allocations in respect of the Subordination Period of Net Termination Gain
before the Common Units and Parity Units have been allocated Net Termination
Gain pursuant to Section 6.1(c)(i)(B), even if (A) the amount of Available Cash
from Operating Surplus to which each such Partnership Security is entitled to
receive after the Minimum Quarterly Distribution and any Cumulative Common Unit
Arrearage have been paid or set aside for payment on the Common Units exceeds
the Minimum Quarterly Distribution,
A-35
(B) the amount of Net Termination Gain to be allocated to such Partnership
Security after Net Termination Gain has been allocated to any Common Units and
Parity Units pursuant to Section 6.1(c)(i)(B) exceeds the amount of such Net
Termination Gain to be allocated to each Common Unit or Parity Unit or (C) the
holders of such additional Partnership Securities have the right to require the
Partnership or its Affiliates to repurchase such Partnership Securities at a
discount, par or a premium.
(e) During the Subordination Period, the Partnership may also issue an
unlimited number of Parity Units without the approval of the Unitholders, if the
proceeds from such issuance are used exclusively to repay up to $25.0 million of
indebtedness of a Group Member where the aggregate amount of distributions that
would have been paid with respect to such newly issued Units or Partnership
Securities, plus the related distributions on the General Partner Interest in
respect of the four-Quarter period ending prior to the first day of the Quarter
in which the issuance is to be consummated (assuming such additional Units or
Partnership Securities had been Outstanding throughout such period and that
distributions equal to the distributions that were actually paid on the
Outstanding Units during the period were paid on such additional Units or
Partnership Securities) did not exceed the interest costs actually incurred
during such period on the indebtedness that is to be repaid (or, if such
indebtedness was not outstanding throughout the entire period, would have been
incurred had such indebtedness been outstanding for the entire period). In the
event that the Partnership is required to pay a prepayment penalty in connection
with the repayment of such indebtedness, for purposes of the foregoing test the
number of Parity Units issued to repay such indebtedness shall be deemed
increased by the number of Parity Units that would need to be issued to pay such
penalty.
(f) No fractional Units shall be issued by the Partnership.
SECTION 5.8 Conversion of Subordinated Units.
(a) A total of 3,001,250 of the Outstanding Subordinated Units will convert
into Common Units on a one-for-one basis immediately after the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in respect of any Quarter
ending on or after June 30, 2005 in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest in the Partnership,
during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(b) An additional 3,001,250 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect
of any Quarter ending on or after June 30, 2006, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other
A-36
Outstanding Units that are senior or equal in right of distribution to the
Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest during such periods;
and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to
this Section 5.8(b) may not occur until at least one year following the
conversion of Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless all
of the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata based on the number of
Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units
pursuant to Section 5.8(a) and (b) shall convert into Common Units on a
one-for-one basis immediately after the distribution of Available Cash to
Partners pursuant to Section 6.3(a) in respect of the final Quarter of the
Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on a
one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
SECTION 5.9 Limited Preemptive Right.
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
SECTION 5.10 Splits and Combinations.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a number of
Units (including the number of Subordinated Units that may convert prior to the
end of the Subordination Period and the number of additional Parity Units that
may be issued pursuant to Section 5.7 without a Unitholder vote) are
proportionately adjusted retroactive to the beginning of the Partnership.
A-37
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of a date not less than 10 days prior to the date of such notice. The
General Partner also may cause a firm of independent public accountants selected
by it to calculate the number of Partnership Securities to be held by each
Record Holder after giving effect to such distribution, subdivision or
combination. The General Partner shall be entitled to rely on any certificate
provided by such firm as conclusive evidence of the accuracy of such
calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such changes.
If any such combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a condition to the
delivery to a Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
SECTION 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests.
All Limited Partner Interests issued pursuant to, and in accordance with
the requirements of, this Article V shall be fully paid and non-assessable
Limited Partner Interests in the Partnership, except as such non-assessability
may be affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
SECTION 6.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) Net Income. After giving effect to the special allocations set forth in
Section 6.1(d), Net Income for each taxable year and all items of income, gain,
loss and deduction taken into account in computing Net Income for such taxable
year shall be allocated as follows:
(i) First, 100% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 2% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years and 98% to the Unitholders, Pro
Rata, until the aggregate Net Income allocated to such Partners pursuant to
this Section 6.1(a)(ii) for the current taxable year and all previous
taxable years is equal to the aggregate Net Losses allocated to such
Partners pursuant to Section 6.1(b)(ii) for all previous taxable years; and
(iii) Third, 2% to the General Partner, and 98% to the Unitholders,
Pro Rata.
A-38
(b) Net Losses. After giving effect to the special allocations set forth in
Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 2% to the General Partner, and 98% to the Unitholders, Pro
Rata, until the aggregate Net Losses allocated pursuant to this Section
6.1(b)(i) for the current taxable year and all previous taxable years is
equal to the aggregate Net Income allocated to such Partners pursuant to
Section 6.1(a)(iii) for all previous taxable years, provided that the Net
Losses shall not be allocated pursuant to this Section 6.1(b)(i) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(ii) Second, 2% to the General Partner, and 98% to the Unitholders,
Pro Rata; provided, that Net Losses shall not be allocated pursuant to this
Section 6.1(b)(ii) to the extent that such allocation would cause any
Unitholder to have a deficit balance in its Adjusted Capital Account at the
end of such taxable year (or increase any existing deficit balance in its
Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder. All
allocations under this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this Section
6.1 and after all distributions of Available Cash provided under Sections 6.4
and 6.5 have been made; provided, however, that solely for purposes of this
Section 6.1(c), Capital Accounts shall not be adjusted for distributions made
pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B) Second, 98% to all Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Capital plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to
such Common Unit for such Quarter (the amount determined pursuant to
this clause (2) is hereinafter defined as the "Unpaid MQD") plus (3) any
then existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
98% to all Unitholders holding Subordinated Units, Pro Rata, and 2% to
the General Partner, until the Capital Account in respect of each
Subordinated Unit then Outstanding equals the sum of (1) its Unrecovered
Capital, determined for the taxable year (or portion thereof) to which
this allocation of gain relates, plus (2) the Minimum Quarterly
Distribution for the Quarter during which the Liquidation Date occurs,
reduced by any distribution pursuant to Section 6.4(a)(iii) with respect
to such Subordinated Unit for such Quarter;
A-39
(D) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered Capital, plus (2)
the Unpaid MQD, plus (3) any then existing Cumulative Common Unit
Arrearage, plus (4) the excess of (aa) the First Target Distribution
less the Minimum Quarterly Distribution for each Quarter of the
Partnership's existence over (bb) the cumulative per Unit amount of any
distributions of Available Cash that is deemed to be Operating Surplus
made pursuant to Sections 6.4(a)(iv) and 6.4(b)(ii) (the sum of (1) plus
(2) plus (3) plus (4) is hereinafter defined as the "First Liquidation
Target Amount");
(E) Fifth, 85% to all Unitholders, Pro Rata, 13% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Available Cash that is deemed to be Operating Surplus made pursuant
to Sections 6.4(a)(v) and 6.4(b)(iii) (the sum of (1) plus (2) is
hereinafter defined as the "Second Liquidation Target Amount");
(F) Sixth, 75% to all Unitholders, Pro Rata, 23% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the Second Liquidation Target
Amount, plus (2) the excess of (aa) the Third Target Distribution less
the Second Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Available Cash that is deemed to be Operating Surplus made pursuant
to Sections 6.4(a)(vi)and 6.4(b)(iv) (the sum of (1) plus (2) is
hereinafter defined as the "Third Liquidation Target Amount"); and
(G) Finally, any remaining amount 50% to all Unitholders, Pro Rata,
48% to the holders of the Incentive Distribution Rights, Pro Rata, and
2% to the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 98% to the Unitholders holding Subordinated Units,
Pro Rata, and 2% to the General Partner, until the Capital Account in
respect of each Subordinated Unit then Outstanding has been reduced to
zero;
(B) Second, 98% to all Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable
period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to
A-40
comply with the Partnership Minimum Gain chargeback requirement in Treasury
Regulation Section 1.704-2(f) and shall be interpreted consistently
therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d), other than Section 6.1(d)(i) and other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with respect to
such taxable period. This Section 6.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury Regulation
Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Unitholders with respect to
their Units (on a per Unit basis), then (1) each Unitholder receiving
such greater cash or property distribution shall be allocated gross
income in an amount equal to the product of (aa) the amount by which the
distribution (on a per Unit basis) to such Unitholder exceeds the
distribution (on a per Unit basis) to the Unitholders receiving the
smallest distribution and (bb) the number of Units owned by the
Unitholder receiving the greater distribution; and (2) the General
Partner shall be allocated gross income in an aggregate amount equal to
2/98ths of the sum of the amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable year
and all previous taxable years is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an allocation pursuant to
this Section 6.1(d)(v) shall be made only if and to the extent that such
Partner would have a deficit
A-41
balance in its Capital Account as adjusted after all other allocations
provided for in this Section 6.1 have been tentatively made as if this
Section 6.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy
such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance
with Treasury Regulation Section 1.704-2(i). If more than one Partner bears
the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking into
account allocations pursuant to Section 6.1(d)(iii), shall be allocated
100% to each Partner holding Subordinated Units that are Outstanding as of
the termination of the Subordination Period ("Final Subordinated Units") in
the proportion of the number of Final Subordinated Units held by such
Partner to the total number of Final Subordinated Units then Outstanding,
until each such Partner has been allocated an amount of gross income or
gain which increases the Capital Account maintained with respect to such
Final Subordinated Units to an amount equal to the product of (A) the
number of Final Subordinated Units held by such Partner and (B) the Per
Unit Capital Amount for a Common Unit. The purpose of this allocation is to
establish uniformity between the Capital Accounts underlying Final
Subordinated Units and the Capital Accounts underlying Common Units held by
Persons other than the General Partner and its Affiliates immediately prior
to the conversion of such Final Subordinated Units into Common Units. This
allocation method for establishing such economic uniformity will only be
available to the General Partner if the method for allocating the Capital
Account maintained with respect to the Subordinated Units between the
transferred and retained Subordinated Units pursuant to Section 5.5(c)(ii)
does not otherwise provide such economic uniformity to the Final
Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed
A-42
Allocations so that, to the extent possible, the net amount of items of
income, gain, loss and deduction allocated to each Partner pursuant to
the Required Allocations and the Agreed Allocations, together, shall be
equal to the net amount of such items that would have been allocated to
each such Partner under the Agreed Allocations had the Required
Allocations and the related Curative Allocation not otherwise been
provided in this Section 6.1. Notwithstanding the preceding sentence,
Required Allocations relating to (1) Nonrecourse Deductions shall not be
taken into account except to the extent that there has been a decrease
in Partnership Minimum Gain and (2) Partner Nonrecourse Deductions shall
not be taken into account except to the extent that there has been a
decrease in Partner Nonrecourse Debt Minimum Gain. Allocations pursuant
to this Section 6.1(d)(xi)(A) shall only be made with respect to
Required Allocations to the extent the General Partner reasonably
determines that such allocations will otherwise be inconsistent with the
economic agreement among the Partners. Further, allocations pursuant to
this Section 6.1(d)(xi)(A) shall be deferred with respect to allocations
pursuant to clauses (1) and (2) hereof to the extent the General Partner
reasonably determines that such allocations are likely to be offset by
subsequent Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General Partner shall
allocate additional items of gross income and gain away from the holders
of Incentive Distribution Rights to the Unitholders and the General
Partner, or additional items of deduction and loss away from the
Unitholders and the General Partner to the holders of Incentive
Distribution Rights, to the extent that the Additional Book Basis
Derivative Items allocated to the Unitholders or the General Partner
exceed their Share of Additional Book Basis Derivative Items. For this
purpose, the Unitholders and the General Partner shall be treated as
being allocated Additional Book Basis Derivative Items to the extent
that such Additional Book Basis Derivative Items have reduced the amount
of income that would otherwise have been allocated to the Unitholders or
the General Partner under the Partnership Agreement (e.g., Additional
Book Basis Derivative Items taken into account in computing cost of
goods sold would reduce the amount of book income otherwise available
for allocation among the Partners). Any allocation made pursuant to this
Section 6.1(d)(xii)(A) shall be made after all of the other Agreed
Allocations have been made as if this Section 6.1(d)(xii) were not in
this Agreement and, to the extent necessary, shall require the
reallocation of items that have been allocated pursuant to such other
Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the Partners will equal the amount which would have been the Capital
Account balance of the Partners if no prior Book-Up Events had occurred,
and (2) any negative adjustment in excess of the Aggregate Remaining Net
Positive Adjustments shall be allocated pursuant to Section 6.1(c)
hereof.
A-43
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
SECTION 6.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain, loss
or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2)
second, in the event such property was originally a Contributed Property,
be allocated among the Partners in a manner consistent with Section
6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i) adopt
such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of this
Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury
Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise
to preserve or achieve uniformity of the Limited Partner Interests (or any class
or classes thereof). The General Partner may adopt such conventions, make such
allocations and make such amendments to this Agreement as provided in this
Section 6.2(c) only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of any class or
classes of Limited Partner Interests issued and Outstanding or the Partnership,
and if such allocations are consistent with the principles of Section 704 of the
Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Treasury Regulation Section 1.167(c)-l(a)(6) or any successor
regulations thereto. If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt depreciation
and amortization conventions under which all purchasers acquiring Limited
Partner Interests in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct
A-44
interest in the Partnership's property. If the General Partner chooses not to
utilize such aggregate method, the General Partner may use any other reasonable
depreciation and amortization conventions to preserve the uniformity of the
intrinsic tax characteristics of any Limited Partner Interests that would not
have a material adverse effect on the Limited Partners or the Record Holders of
any class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction shall for
federal income tax purposes, be determined on an annual basis and prorated on a
monthly basis and shall be allocated to the Partners as of the opening of the
New York Stock Exchange on the first Business Day of each month; provided,
however, that (i) such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Option Closing Date or the
expiration of the Over-Allotment Option occurs shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first Business
Day of the next succeeding month; and provided, further, that gain or loss on a
sale or other disposition of any assets of the Partnership or any other
extraordinary item of income or loss realized and recognized other than in the
ordinary course of business, as determined by the General Partner in its sole
discretion, shall be allocated to the Partners as of the opening of the New York
Stock Exchange on the first Business Day of the month in which such gain or loss
is recognized for federal income tax purposes. The General Partner may revise,
alter or otherwise modify such methods of allocation as it determines necessary
or appropriate in its sole discretion, to the extent permitted or required by
Section 706 of the Code and the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
SECTION 6.3 Requirement and Characterization of Distributions; Distributions to
Record Holders.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on September 30, 2002, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the Delaware
Act, be distributed in accordance with this Article VI by the Partnership to the
Partners as of the Record Date selected by the General Partner in its reasonable
discretion. All amounts of Available Cash distributed by the Partnership on any
date from any source shall be deemed to be Operating Surplus until the sum of
all amounts of Available Cash theretofore distributed by the Partnership to the
Partners pursuant to Section 6.4 equals the Operating Surplus from the Closing
Date through the close of the immediately preceding Quarter. Any remaining
amounts of Available Cash distributed by the Partnership on such date shall,
except as otherwise provided in Section 6.5, be deemed to be "Capital Surplus."
All distributions required to be made under this Agreement shall be made subject
to Section 17-607 of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other
A-45
than from borrowings described in (a)(ii) of the definition of Available Cash,
shall be applied and distributed solely in accordance with, and subject to the
terms and conditions of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners, as a distribution of Available Cash to such Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of an assignment or otherwise.
SECTION 6.4 Distributions of Available Cash from Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5 shall, subject to Section 17-607 of the
Delaware Act, be distributed as follows, except as otherwise required by Section
5.6(b) in respect of additional Partnership Securities issued pursuant thereto:
(i) First, 98% to the Unitholders holding Common Units, Pro Rata, and
2% to the General Partner, until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 98% to the Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until there has been distributed in respect
of each Common Unit then Outstanding an amount equal to the Cumulative
Common Unit Arrearage existing with respect to such Quarter;
(iii) Third, 98% to the Unitholders holding Subordinated Units, Pro
Rata, and 2% to the General Partner, until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85% to all Unitholders, Pro Rata, 13% to the holders of the
Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Second Target Distribution over the
First Target Distribution for such Quarter;
(vi) Sixth, 75% to all Unitholders, Pro Rata, 23% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Third Target Distribution over the
Second Target Distribution for such Quarter; and
(vii) Thereafter, 50% to all Unitholders, Pro Rata, 48% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to
A-46
Section 17-607 of the Delaware Act, shall be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85% to all Unitholders, Pro Rata, 13% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Second Target Distribution over the
First Target Distribution for such Quarter;
(iv) Fourth, 75% to all Unitholders Pro Rata, 23% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Third Target Distribution over the
Second Target Distribution for such Quarter; and
(v) Thereafter, 50% to all Unitholders, Pro Rata, 48% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).
SECTION 6.5 Distributions of Available Cash from Capital Surplus.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 98%
to all Unitholders, Pro Rata, and 2% to the General Partner, until a
hypothetical holder of a Common Unit acquired on the Closing Date has received
with respect to such Common Unit, during the period since the Closing Date
through such date, distributions of Available Cash that are deemed to be Capital
Surplus in an aggregate amount equal to the Initial Unit Price. Available Cash
that is deemed to be Capital Surplus shall then be distributed 98% to all
Unitholders holding Common Units, Pro Rata, and 2% to the General Partner, until
there has been distributed in respect of each Common Unit then Outstanding an
amount equal to the Cumulative Common Unit Arrearage. Thereafter, all Available
Cash shall be distributed as if it were Operating Surplus and shall be
distributed in accordance with Section 6.4.
SECTION 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution, Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the event
of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction of
which the numerator is the Unrecovered Capital of the Common Units immediately
after giving effect to such distribution and of which the denominator is the
Unrecovered Capital of the Common Units immediately prior to giving effect to
such distribution.
A-47
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution, shall also be subject to
adjustment pursuant to Section 6.9.
SECTION 6.7 Special Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain, loss
and deduction and distributions made with respect to Common Units, the holder of
a Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with respect to Common
Units; provided, however, that such converted Subordinated Units shall remain
subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its
converted Subordinated Units to a Person which is not an Affiliate of the holder
until such time as the General Partner determines, based on advice of counsel,
that a converted Subordinated Unit should have, as a substantive matter, like
intrinsic economic and federal income tax characteristics, in all material
respects, to the intrinsic economic and federal income tax characteristics of an
Initial Common Unit. In connection with the condition imposed by this Section
6.7(b), the General Partner may take whatever reasonable steps are required to
provide economic uniformity to the converted Subordinated Units in preparation
for a transfer of such converted Subordinated Units, including the application
of Sections 5.5(c)(ii) and 6.1(d)(x); provided, however, that no such steps may
be taken that would have a material adverse effect on the Unitholders holding
Common Units represented by Common Unit Certificates.
SECTION 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and (v),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
SECTION 6.9 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes a Group Member to
be treated as an association taxable as a corporation or otherwise subjects a
Group Member to entity-level taxation for federal, state or local income tax
purposes, the then applicable Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution, shall be
adjusted to equal the product obtained by multiplying (a) the amount thereof by
(b) one minus the sum of (i) the highest marginal federal corporate (or other
entity, as applicable) income tax rate of the Group Member for the taxable year
of the Group Member in which such Quarter occurs (expressed as a percentage)
plus (ii) the effective overall state and local income tax rate (expressed as a
percentage) applicable to the Group Member for the calendar year next preceding
the calendar year in which such Quarter occurs (after taking into account the
benefit of any deduction allowable for federal income tax purposes with respect
to the payment of state and local income taxes), but only to the extent of the
increase in such rates resulting from such legislation or interpretation. Such
effective overall state and local income tax rate shall be determined for the
taxable year next preceding the first taxable year during which the Group Member
is taxable for federal income
A-48
tax purposes as an association taxable as a corporation or is otherwise subject
to entity-level taxation by determining such rate as if the Group Member had
been subject to such state and local taxes during such preceding taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 7.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 7.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group;
subject to Section 7.6(a), the lending of funds to other Persons (including
other Group Members), the repayment or guarantee of obligations of the
Partnership Group and the making of capital contributions to any member of
the Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
A-49
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations, limited liability
companies or other relationships (including the acquisition of interests
in, and the contributions of property to, any Group Member from time to
time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase,
sale or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the
Partnership's participation in any Group Member as a member or partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Company Agreement, the Delaware Act or any applicable law, rule or regulation,
each of the Partners and the Assignees and each other Person who may acquire an
interest in Partnership Securities hereby (i) approves, ratifies and confirms
the execution, delivery and performance by the parties thereto of the Operating
Company Agreement, any other limited liability company or partnership agreement
of any other Group Member, the Underwriting Agreement, the Omnibus Agreement,
the Contribution Agreement and the other agreements described in or filed as
exhibits to the Registration Statement that are related to the transactions
contemplated by the Registration Statement; (ii) agrees that the General Partner
(on its own or through any officer of the Partnership) is authorized to execute,
deliver and perform the agreements referred to in clause (i) of this sentence
and the other agreements, acts, transactions and matters described in or
contemplated by the Registration Statement on behalf of the Partnership without
any further act, approval or vote of the Partners or the Assignees or the other
Persons who may acquire an interest in Partnership Securities; and (iii) agrees
that the execution, delivery or performance by the General Partner, any Group
Member or any Affiliate of any of them, of this Agreement or any agreement
authorized or permitted under this Agreement (including the exercise by the
General Partner or any Affiliate of the General Partner of the rights accorded
pursuant to Article XV), shall not constitute a breach by the General Partner of
any duty that the General Partner may owe the Partnership or the Limited
Partners or any other Persons under this Agreement (or any other agreements) or
of any duty stated or implied by law or equity.
SECTION 7.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act. The General Partner shall use all reasonable efforts to cause to
be filed such other certificates or documents as may be determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate for the formation, continuation, qualification and operation of a
limited partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware or any other state in which the Partnership
may elect to do business or own property. To the extent that such action is
determined by the General Partner in its sole discretion to be reasonable and
necessary or appropriate, the General Partner shall file amendments to and
restatements of the Certificate of Limited Partnership and do all things to
maintain the Partnership as a limited partnership (or a partnership or other
entity in which the limited partners
A-50
have limited liability) under the laws of the State of Delaware or of any other
state in which the Partnership may elect to do business or own property. Subject
to the terms of Section 3.4(a), the General Partner shall not be required,
before or after filing, to deliver or mail a copy of the Certificate of Limited
Partnership, any qualification document or any amendment thereto to any Limited
Partner.
SECTION 7.3 Restrictions on the General Partner's Authority.
(a) The General Partner may not, without written approval of the specific
act by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of the Outstanding
Limited Partner Interests subsequent to the date of this Agreement, take any
action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it impossible
to carry on the ordinary business of the Partnership; (ii) possessing
Partnership property, or assigning any rights in specific Partnership property,
for other than a Partnership purpose; (iii) admitting a Person as a Partner;
(iv) amending this Agreement in any manner; or (v) transferring its interest as
a general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination) or approve on
behalf of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Company and its Subsidiaries
taken as a whole without the approval of holders of a Unit Majority; provided
however that this provision shall not preclude or limit the General Partner's
ability to mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the assets of the Partnership or the Operating Company and
shall not apply to any forced sale of any or all of the assets of the
Partnership or the Operating Company pursuant to the foreclosure of, or other
realization upon, any such encumbrance. Without the approval of holders of a
Unit Majority, the General Partner shall not, on behalf of the Partnership, (i)
consent to any amendment to the Operating Company Agreement or, except as
expressly permitted by Section 7.9(d), take any action permitted to be taken by
a member of the Operating Company, in either case, that would adversely affect
the Limited Partners (including any particular class of Partnership Interests as
compared to any other class of Partnership Interests) in any material respect or
(ii) except as permitted under Sections 4.6, 11.1 and 11.2, elect or cause the
Partnership to elect a successor general partner of the Partnership.
SECTION 7.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement,
the General Partner shall not be compensated for its services as a general
partner or managing member of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of the
General Partner to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Reimbursements pursuant to this Section 7.4
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote in
respect thereof), may propose and adopt on behalf of the Partnership employee
benefit plans, employee programs and employee practices (including plans,
programs and practices involving the issuance of Partnership Securities or
options to purchase, or rights, warrants or appreciation rights relating to,
Partnership Securities), or cause the Partnership to issue
A-51
Partnership Securities in connection with, or pursuant to, any employee benefit
plan, employee program or employee practice maintained or sponsored by the
General Partner or any of its Affiliates, in each case for the benefit of
employees of the General Partner, any Group Member or any Affiliate, or any of
them, in respect of services performed, directly or indirectly, for the benefit
of the Partnership Group. The Partnership agrees to issue and sell to the
General Partner or any of its Affiliates any Partnership Securities that the
General Partner or such Affiliates are obligated to provide to any employees
pursuant to any such employee benefit plans, employee programs or employee
practices. Expenses incurred by the General Partner in connection with any such
plans, programs and practices (including the net cost to the General Partner or
such Affiliates of Partnership Securities purchased by the General Partner or
such Affiliates from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with Section
7.4(b). Any and all obligations of the General Partner under any employee
benefit plans, employee programs or employee practices adopted by the General
Partner as permitted by this Section 7.4(c) shall constitute obligations of the
General Partner hereunder and shall be assumed by any successor General Partner
approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to
all of the General Partner's General Partner Interest pursuant to Section 4.6.
SECTION 7.5 Outside Activities.
(a) After the Closing Date, the General Partner, for so long as it is the
General Partner of the Partnership (i) agrees that its sole business will be to
act as a general partner or managing member, as the case may be, of the
Partnership and any other partnership or limited liability company of which the
Partnership or the Operating Company is, directly or indirectly, a partner or
member and to undertake activities that are ancillary or related thereto
(including being a limited partner in the Partnership), (ii) shall not engage in
any business or activity or incur any debts or liabilities except in connection
with or incidental to (A) its performance as general partner or managing member
of one or more Group Members or as described in or contemplated by the
Registration Statement, or (B) the acquiring, owning or disposing of debt or
equity securities in any Group Member and (iii) except to the extent permitted
in the Omnibus Agreement, shall not, and shall cause its Affiliates not to,
engage in any Restricted Business.
(b) Arch Coal, Inc., Ark Land, Great Northern, New Gauley, Western
Pocahontas and certain of their respective Affiliates have entered into the
Omnibus Agreement with the General Partner, the Partnership and the Operating
Company, which agreement sets forth certain restrictions on the ability of Arch
Coal, Inc., Ark Land, Great Northern, New Gauley, Western Pocahontas and such
Affiliates to engage in Restricted Businesses.
(c) Except as specifically restricted by Section 7.5(a) and the Omnibus
Agreement, each Indemnitee (other than the General Partner) shall have the right
to engage in businesses of every type and description and other activities for
profit and to engage in and possess an interest in other business ventures of
any and every type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member, independently or with others,
including business interests and activities in direct competition with the
business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law to
any Group Member or any Partner or Assignee. Neither any Group Member, any
Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Company Agreement any other limited liability company
or partnership agreement of any other Group Member, or the partnership
relationship established hereby or thereby in any business ventures of any
Indemnitee.
(d) Subject to the terms of Section 7.5(a), Section 7.5(b), Section 7.5(c)
and the Omnibus Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive activities by any
Indemnitees (other than the General Partner) in accordance with the provisions
of this Section 7.5 is hereby approved by the Partnership and all Partners, (ii)
it shall be deemed not to be a breach of the General Partner's fiduciary duty or
any other obligation of any type whatsoever of the General Partner for the
Indemnitees (other than the General Partner) to engage in such business
interests and activities in preference to or to the exclusion of the Partnership
and (iii) except as
A-52
set forth in the Omnibus Agreement, the General Partner and the Indemnitees
shall have no obligation to present business opportunities to the Partnership.
(e) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing Date
and, except as otherwise provided in this Agreement, shall be entitled to
exercise all rights of the General Partner or Limited Partner, as applicable,
relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 7.5(a) and Section 7.5(e)
with respect to the General Partner shall not include any Group Member or any
Subsidiary of the Group Member.
(g) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of this
Agreement purport or are interpreted to have the effect of restricting the
fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited Partners
to any such restriction, such provisions shall be inapplicable and have no
effect in determining whether the General Partner has complied with its
fiduciary duties in connection with determinations made by it under this Section
7.5.
SECTION 7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the
General Partner.
(a) The General Partner or any of its Affiliates may lend to any Group
Member, and any Group Member may borrow from the General Partner or any of its
Affiliates, funds needed or desired by the Group Member for such periods of time
and in such amounts as the General Partner may determine; provided, however,
that in any such case the lending party may not charge the borrowing party
interest at a rate greater than the rate that would be charged the borrowing
party or impose terms less favorable to the borrowing party than would be
charged or imposed on the borrowing party by unrelated lenders on comparable
loans made on an arm's-length basis (without reference to the lending party's
financial abilities or guarantees). The borrowing party shall reimburse the
lending party for any costs (other than any additional interest costs) incurred
by the lending party in connection with the borrowing of such funds. For
purposes of this Section 7.6(a) and Section 7.6(b), the term "Group Member"
shall include any Affiliate of a Group Member that is controlled by the Group
Member. No Group Member may lend funds to the General Partner or any of its
Affiliates (other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders on
comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to a Group Member or to the General
Partner in the discharge of its duties as General Partner of the Partnership.
Any services rendered to a Group Member by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 7.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership Group
than those generally being provided to or available from unrelated third parties
or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership Group), is
equitable to the Partnership Group. The provisions of Section 7.4 shall apply to
the rendering of services described in this Section 7.6(c).
A-53
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this Section 7.6(e) shall be deemed to be satisfied as to (i) the
transactions effected pursuant to Sections 5.2 and 5.3, the Contribution
Agreement and any other transactions described in or contemplated by the
Registration Statement, (ii) any transaction approved by Special Approval, (iii)
any transaction, the terms of which are no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties, or (iv) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is equitable
to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Partnership Securities, the Conflicts Committee, in
determining whether the appropriate number of Partnership Securities are being
issued, may take into account, among other things, the fair market value of the
assets, the liquidated and contingent liabilities assumed, the tax basis in the
assets, the extent to which tax-only allocations to the transferor will protect
the existing partners of the Partnership against a low tax basis, and such other
factors as the Conflicts Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General Partner
and its Affiliates, except as may be provided in contracts entered into from
time to time specifically dealing with such use, nor shall there be any
obligation on the part of the General Partner or its Affiliates to enter into
such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
SECTION 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or other amounts
arising from any and all claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as an Indemnitee; provided, that in each case the Indemnitee acted in
good faith and in a manner that such Indemnitee reasonably believed to be in, or
(in the case of a Person other than the General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal proceeding,
had no reasonable cause to believe its conduct was unlawful; provided, further,
no indemnification pursuant to this Section 7.7 shall be available to the
General Partner or its Affiliates (other than a Group Member) with respect to
its or their obligations incurred pursuant to the Underwriting Agreement, the
Omnibus Agreement or the Contribution Agreement (other than obligations incurred
by the General Partner on behalf of the Partnership). The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere, or its equivalent, shall not create a presumption that
the Indemnitee acted in a manner contrary to that specified above. Any
indemnification pursuant to this Section 7.7 shall be made only out of the
assets of the Partnership, it being agreed that the General Partner shall not be
personally liable for such indemnification and shall have no obligation to
contribute or loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit
A-54
or proceeding shall, from time to time, be advanced by the Partnership prior to
the final disposition of such claim, demand, action, suit or proceeding upon
receipt by the Partnership of any undertaking by or on behalf of the Indemnitee
to repay such amount if it shall be determined that the Indemnitee is not
entitled to be indemnified as authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition
to any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests, as
a matter of law or otherwise, both as to actions in the Indemnitee's capacity as
an Indemnitee and as to actions in any other capacity (including any capacity
under the Underwriting Agreement), and shall continue as to an Indemnitee who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities
or such Person's activities on behalf of the Partnership, regardless of whether
the Partnership would have the power to indemnify such Person against such
liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 7.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership, nor
the obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 7.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
SECTION 7.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement,
no Indemnitee shall be liable for monetary damages to the Partnership, the
Limited Partners, the Assignees or any other Persons who have acquired interests
in the Partnership Securities, for losses sustained or liabilities incurred as a
result of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to it
by this Agreement and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner shall not be
A-55
responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the Partnership
or to the Partners, the General Partner and any other Indemnitee acting in
connection with the Partnership's business or affairs shall not be liable to the
Partnership or to any Partner for its good faith reliance on the provisions of
this Agreement. The provisions of this Agreement, to the extent that they
restrict or otherwise modify the duties and liabilities of an Indemnitee
otherwise existing at law or in equity, are agreed by the Partners to replace
such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors, officers
and employees under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
SECTION 7.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement, the Operating
Company Agreement, any other limited liability company or partnership agreement
of any other Group Member, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Company, any other Group Member, any Partner
or any Assignee, on the other, any resolution or course of action by the General
Partner or its Affiliates in respect of such conflict of interest shall be
permitted and deemed approved by all Partners, and shall not constitute a breach
of this Agreement, of the Operating Company Agreement, of any agreement
contemplated herein or therein, or of any duty stated or implied by law or
equity, if the resolution or course of action is, or by operation of this
Agreement is deemed to be, fair and reasonable to the Partnership. The General
Partner shall be authorized but not required in connection with its resolution
of such conflict of interest to seek Special Approval of such resolution. Any
conflict of interest and any resolution of such conflict of interest shall be
conclusively deemed fair and reasonable to the Partnership if such conflict of
interest or resolution is (i) approved by Special Approval (as long as the
material facts known to the General Partner or any of its Affiliates regarding
any proposed transaction were disclosed to the Conflicts Committee at the time
it gave its approval), (ii) on terms no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(iii) fair to the Partnership, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership). The General
Partner may also adopt a resolution or course of action that has not received
Special Approval. The General Partner (including the Conflicts Committee in
connection with Special Approval) shall be authorized in connection with its
determination of what is "fair and reasonable" to the Partnership and in
connection with its resolution of any conflict of interest to consider (A) the
relative interests of any party to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interest; (B) any
customary or accepted industry practices and any customary or historical
dealings with a particular Person; (C) any applicable generally accepted
accounting practices or principles; and (D) such additional factors as the
General Partner (including the Conflicts Committee) determines in its sole
discretion to be relevant, reasonable or appropriate under the circumstances.
Nothing contained in this Agreement, however, is intended to nor shall it be
construed to require the General Partner (including the Conflicts Committee) to
consider the interests of any Person other than the Partnership. In the absence
of bad faith by the General Partner, the resolution, action or terms so made,
taken or provided by the General Partner with respect to such matter shall not
constitute a breach of this Agreement or any other agreement contemplated herein
or a breach of any standard of care or duty imposed herein or therein or, to the
extent permitted by law, under the Delaware Act or any other law, rule or
regulation.
A-56
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a grant
of similar authority or latitude, except as otherwise provided herein, the
General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to give
any consideration to any interest of, or factors affecting, the Partnership, any
other Group Member, any Limited Partner or any Assignee, (ii) it may make such
decision in its sole discretion (regardless of whether there is a reference to
"sole discretion" or "discretion") unless another express standard is provided
for, or (iii) in "good faith" or under another express standard, the General
Partner or such Affiliate shall act under such express standard and shall not be
subject to any other or different standards imposed by this Agreement, the
Operating Company Agreement, any other limited liability company or partnership
agreement of any other Group Member, any other agreement contemplated hereby or
under the Delaware Act or any other law, rule or regulation. In addition, any
actions taken by the General Partner or such Affiliate consistent with the
standards of "reasonable discretion" set forth in the definitions of Available
Cash or Operating Surplus shall not constitute a breach of any duty of the
General Partner to the Partnership or the Limited Partners. The General Partner
shall have no duty, express or implied, to sell or otherwise dispose of any
asset of the Partnership Group other than in the ordinary course of business. No
borrowing by any Group Member or the approval thereof by the General Partner
shall be deemed to constitute a breach of any duty of the General Partner to the
Partnership or the Limited Partners by reason of the fact that the purpose or
effect of such borrowing is directly or indirectly to (A) enable distributions
to the General Partner or its Affiliates (including in their capacities as
Limited Partners) to exceed 2% of the total amount distributed to all partners
or (B) hasten the expiration of the Subordination Period or the conversion of
any Subordinated Units into Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner or member of a Group Member, to approve of actions by
the general partner or managing member of such Group Member similar to those
actions permitted to be taken by the General Partner pursuant to this Section
7.9.
SECTION 7.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other paper
or document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it, and any act taken or omitted to be taken in reliance
upon the opinion (including an Opinion of Counsel) of such Persons as to matters
that the General Partner reasonably believes to be within such Person's
professional or expert competence shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly authorized
officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified, waived
or limited, to the extent permitted by law, as required to permit the General
Partner to act under this Agreement or any other agreement contemplated by this
Agreement and to make any decision pursuant to the authority prescribed in this
Agreement, so
A-57
long as such action is reasonably believed by the General Partner to be in, or
not inconsistent with, the best interests of the Partnership.
SECTION 7.11 Purchase or Sale of Partnership Securities.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that, except as permitted pursuant to
Section 4.10, the General Partner may not cause any Group Member to purchase
Subordinated Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership Securities shall not
be considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner may also purchase or
otherwise acquire and sell or otherwise dispose of Partnership Securities for
its own account, subject to the provisions of Articles IV and X.
SECTION 7.12 Registration Rights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate of
the General Partner at the date hereof notwithstanding that it may later cease
to be an Affiliate of the General Partner) holds Partnership Securities that it
desires to sell and (ii) Rule 144 of the Securities Act (or any successor rule
or regulation to Rule 144) or another exemption from registration is not
available to enable such holder of Partnership Securities (the "Holder") to
dispose of the number of Partnership Securities it desires to sell at the time
it desires to do so without registration under the Securities Act, then upon the
request of the General Partner or any of its Affiliates, the Partnership shall
file with the Commission as promptly as practicable after receiving such
request, and use all reasonable efforts to cause to become effective and remain
effective for a period of not less than six months following its effective date
or such shorter period as shall terminate when all Partnership Securities
covered by such registration statement have been sold, a registration statement
under the Securities Act registering the offering and sale of the number of
Partnership Securities specified by the Holder; provided, however, that the
Partnership shall not be required to effect more than three registrations
pursuant to this Section 7.12(a); and provided further, however, that if the
Conflicts Committee determines in its good faith judgment that a postponement of
the requested registration for up to six months would be in the best interests
of the Partnership and its Partners due to a pending transaction, investigation
or other event, the filing of such registration statement or the effectiveness
thereof may be deferred for up to six months, but not thereafter. In connection
with any registration pursuant to the immediately preceding sentence, the
Partnership shall promptly prepare and file (x) such documents as may be
necessary to register or qualify the securities subject to such registration
under the securities laws of such states as the Holder shall reasonably request;
provided, however, that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Partnership would become subject to
general service of process or to taxation or qualification to do business as a
foreign corporation or partnership doing business in such jurisdiction solely as
a result of such registration, and (y) such documents as may be necessary to
apply for listing or to list the Partnership Securities subject to such
registration on such National Securities Exchange as the Holder shall reasonably
request, and do any and all other acts and things that may reasonably be
necessary or advisable to enable the Holder to consummate a public sale of such
Partnership Securities in such states. Except as set forth in Section 7.12(c),
all costs and expenses of any such registration and offering (other than the
underwriting discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration statement
as the Holder shall request. If the proposed offering pursuant to this Section
7.12(b) shall be an underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the Partnership and
the Holder in writing that in their opinion the inclusion of all or some of the
Holder's Partnership Securities would adversely and materially affect the
success of the offering, the Partnership shall include in such offering
A-58
only that number or amount, if any, of securities held by the Holder which, in
the opinion of the managing underwriter or managing underwriters, will not so
adversely and materially affect the offering. Except as set forth in Section
7.12(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.12(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were registered
under the Securities Act or any state securities or Blue Sky laws, in any
preliminary prospectus (if used prior to the effective date of such registration
statement), or in any summary or final prospectus or in any amendment or
supplement thereto (if used during the period the Partnership is required to
keep the registration statement current), or arising out of, based upon or
resulting from the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements made therein
not misleading; provided, however, that the Partnership shall not be liable to
any Indemnified Person to the extent that any such claim arises out of, is based
upon or results from an untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement, such preliminary,
summary or final prospectus or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Partnership by or on
behalf of such Indemnified Person specifically for use in the preparation
thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General Partner's
Affiliates) after it ceases to be a Partner of the Partnership, during a period
of two years subsequent to the effective date of such cessation and for so long
thereafter as is required for the Holder to sell all of the Partnership
Securities with respect to which it has requested during such two-year period
inclusion in a registration statement otherwise filed or that a registration
statement be filed; provided, however, that the Partnership shall not be
required to file successive registration statements covering the same
Partnership Securities for which registration was demanded during such two-year
period. The provisions of Section 7.12(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.12 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present intent
to offer such Partnership Securities for distribution, (iii) describe the nature
or method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
SECTION 7.13 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General Partner
to act on behalf of and in the name of the Partnership has full power and
authority to encumber, sell or otherwise use in any manner any and all assets of
the Partnership and to enter into any authorized contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the
A-59
General Partner or any such officer as if it were the Partnership's sole party
in interest, both legally and beneficially. Each Limited Partner hereby waives
any and all defenses or other remedies that may be available against such Person
to contest, negate or disaffirm any action of the General Partner or any such
officer in connection with any such dealing. In no event shall any Person
dealing with the General Partner or any such officer or its representatives be
obligated to ascertain that the terms of this Agreement have been complied with
or to inquire into the necessity or expedience of any act or action of the
General Partner or any such officer or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying thereon or claiming thereunder that (a) at
the time of the execution and delivery of such certificate, document or
instrument, this Agreement was in full force and effect, (b) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the Partnership and (c)
such certificate, document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and is binding upon
the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to Section
3.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including the record of the Record Holders
and Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with U.S. GAAP.
SECTION 8.2 Fiscal Year.
The fiscal year of the Partnership shall be a fiscal year ending December
31.
SECTION 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause to
be mailed or made available to each Record Holder of a Unit as of a date
selected by the General Partner in its discretion, an annual report containing
financial statements of the Partnership for such fiscal year of the Partnership,
presented in accordance with U.S. GAAP, including a balance sheet and statements
of operations, Partnership equity and cash flows, such statements to be audited
by a firm of independent public accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed or made available to each Record Holder of a
Unit, as of a date selected by the General Partner in its discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the General Partner determines to be necessary or appropriate.
A-60
ARTICLE IX
TAX MATTERS
SECTION 9.1 Tax Returns and Information.
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within 90
days of the close of the calendar year in which the Partnership's taxable year
ends. The classification, realization and recognition of income, gain, losses
and deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
SECTION 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code
in accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. Notwithstanding any other provision herein contained, for the purposes
of computing the adjustments under Section 743(b) of the Code, the General
Partner shall be authorized (but not required) to adopt a convention whereby the
price paid by a transferee of a Limited Partner Interest will be deemed to be
the lowest quoted closing price of the Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are traded during
the calendar month in which such transfer is deemed to occur pursuant to Section
6.2(g) without regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709 of
the Code.
(c) Except as otherwise provided herein, the General Partner shall
determine whether the Partnership should make any other elections permitted by
the Code.
SECTION 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
SECTION 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the other Group Members to
comply with any withholding requirements established under the Code or any other
federal, state or local law including, without limitation, pursuant to Sections
1441, 1442, 1445 and 1446 of the Code. To the extent that the Partnership is
required or elects to withhold and pay over to any taxing authority any amount
resulting from the allocation or distribution of income to any Partner or
Assignee (including, without limitation, by reason of Section 1446 of the Code),
the amount withheld may at the discretion of the General Partner be treated by
the Partnership as a distribution of cash pursuant to Section 6.3 in the amount
of such withholding from such Partner.
A-61
ARTICLE X
ADMISSION OF PARTNERS
SECTION 10.1 Admission of Initial Limited Partners.
Upon the issuance by the Partnership of Common Units, Subordinated Units
and Incentive Distribution Rights to the General Partner, the Limited Partner
and the Underwriters as described in Section 5.3 in connection with the Initial
Offering, the General Partner shall admit such parties to the Partnership as
Initial Limited Partners in respect of the Common Units, Subordinated Units or
Incentive Distribution Rights issued to them.
SECTION 10.2 Admission of Substituted Limited Partner.
By transfer of a Limited Partner Interest in accordance with Article IV,
the transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given or
withheld in the General Partner's discretion, and (y) when any such admission is
shown on the books and records of the Partnership. If such consent is withheld,
such transferee shall be an Assignee. An Assignee shall have an interest in the
Partnership equivalent to that of a Limited Partner with respect to allocations
and distributions, including liquidating distributions, of the Partnership. With
respect to voting rights attributable to Limited Partner Interests that are held
by Assignees, the General Partner shall be deemed to be the Limited Partner with
respect thereto and shall, in exercising the voting rights in respect of such
Limited Partner Interests on any matter, vote such Limited Partner Interests at
the written direction of the Assignee who is the Record Holder of such Limited
Partner Interests. If no such written direction is received, such Limited
Partner Interests will not be voted. An Assignee shall have no other rights of a
Limited Partner.
SECTION 10.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or
the transferee of or successor to all of the General Partner Interest pursuant
to Section 4.6 who is proposed to be admitted as a successor General Partner
shall be admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the predecessor or
transferring General Partner, pursuant to Section 11.1 or 11.2 or the transfer
of the General Partner Interest pursuant to Section 4.6, provided, however, that
no such successor shall be admitted to the Partnership until compliance with the
terms of Section 4.6 has occurred and such successor has executed and delivered
such other documents or instruments as may be required to effect such admission.
Any such successor shall, subject to the terms hereof, carry on the business of
the members of the Partnership Group without dissolution.
SECTION 10.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the General
Partner
A-62
(i) evidence of acceptance in form satisfactory to the General Partner
of all of the terms and conditions of this Agreement, including the power
of attorney granted in Section 2.6, and
(ii) such other documents or instruments as may be required in the
discretion of the General Partner to effect such Person's admission as an
Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no
Person shall be admitted as an Additional Limited Partner without the consent of
the General Partner, which consent may be given or withheld in the General
Partner's discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person is
recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
SECTION 10.5 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement and,
if required by law, the General Partner shall prepare and file an amendment to
the Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
SECTION 11.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners;
(ii) The General Partner transfers all of its rights as General
Partner pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for relief
under Chapter 7 of the United States Bankruptcy Code; (C) files a petition
or answer seeking for itself a liquidation, dissolution or similar relief
(but not a reorganization) under any law; (D) files an answer or other
pleading admitting or failing to contest the material allegations of a
petition filed against the General Partner in a proceeding of the type
described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks,
consents to or acquiesces in the appointment of a trustee (but not a
debtor-in-possession), receiver or liquidator of the General Partner or of
all or any substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General Partner
of revocation of its charter without a reinstatement of its charter, under
the laws of its state of incorporation; (B) in the event the General
Partner is a partnership or a limited liability company, the dissolution
and commencement of winding up of the General Partner; (C) in the event the
General Partner is acting in such capacity by virtue of being a trustee of
a trust, the termination of the trust;
A-63
(D) in the event the General Partner is a natural person, his death or
adjudication of incompetency; and (E) otherwise in the event of the
termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A), (B),
(C) or (E) occurs, the withdrawing General Partner shall give notice to the
Limited Partners within 30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this Section 11.1 shall result
in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on June 30, 2012, the General Partner voluntarily withdraws by giving at
least 90 days' advance notice of its intention to withdraw to the Limited
Partners; provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Unitholders holding at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner and
its Affiliates) and the General Partner delivers to the Partnership an Opinion
of Counsel ("Withdrawal Opinion of Counsel") that such withdrawal (following the
selection of the successor General Partner) would not result in the loss of the
limited liability of any Limited Partner or any Group Member or cause any Group
Member to be treated as an association taxable as a corporation or otherwise to
be taxed as an entity for federal income tax purposes (to the extent not
previously treated as such); (ii) at any time after 12:00 midnight, Eastern
Standard Time, on June 30, 2012, the General Partner voluntarily withdraws by
giving at least 90 days' advance notice to the Unitholders, such withdrawal to
take effect on the date specified in such notice; (iii) at any time that the
General Partner ceases to be the General Partner pursuant to Section 11.1(a)(ii)
or is removed pursuant to Section 11.2; or (iv) notwithstanding clause (i) of
this sentence, at any time that the General Partner voluntarily withdraws by
giving at least 90 days' advance notice of its intention to withdraw to the
Limited Partners, such withdrawal to take effect on the date specified in the
notice, if at the time such notice is given one Person and its Affiliates (other
than the General Partner and its Affiliates) own beneficially or of record or
control at least 50% of the Outstanding Units. The withdrawal of the General
Partner from the Partnership upon the occurrence of an Event of Withdrawal shall
also constitute the withdrawal of the General Partner as general partner or
managing member, to the extent applicable, of the other Group Members. If the
General Partner gives a notice of withdrawal pursuant to Section 11.1(a)(i), the
holders of a Unit Majority, may, prior to the effective date of such withdrawal,
elect a successor General Partner. The Person so elected as successor General
Partner shall automatically become the successor general partner or managing
member, to the extent applicable, of the other Group Members of which the
General Partner is a general partner or a managing member. If, prior to the
effective date of the General Partner's withdrawal, a successor is not selected
by the Unitholders as provided herein or the Partnership does not receive a
Withdrawal Opinion of Counsel, the Partnership shall be dissolved in accordance
with Section 12.1. Any successor General Partner elected in accordance with the
terms of this Section 11.1 shall be subject to the provisions of Section 10.3.
SECTION 11.2 Removal of the General Partner.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such holders
for removal of the General Partner must also provide for the election of a
successor General Partner by the Unitholders holding a majority of the
outstanding Common Units voting as a class and a majority of the outstanding
Subordinated Units voting as a class (including Units held by the General
Partner and its Affiliates). Such removal shall be effective immediately
following the admission of a successor General Partner pursuant to Section 10.3.
The removal of the General Partner shall also automatically constitute the
removal of the General Partner as general partner or managing member, to the
extent applicable, of the other Group Members of which the General Partner is a
general partner or a managing member. If a Person is elected as a successor
General Partner in accordance with the terms of this Section 11.2, such Person
shall, upon admission pursuant to Section 10.3, automatically become a successor
general partner or managing member, to the extent applicable, of the other Group
Members of
A-64
which the General Partner is a general partner or a managing member. The right
of the holders of Outstanding Units to remove the General Partner shall not
exist or be exercised unless the Partnership has received an opinion opining as
to the matters covered by a Withdrawal Opinion of Counsel. Any successor General
Partner elected in accordance with the terms of this Section 11.2 shall be
subject to the provisions of Section 10.3.
SECTION 11.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders of Outstanding Units under
circumstances where Cause does not exist, if the successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, the Departing
Partner shall have the option, exercisable prior to the effective date of the
departure of such Departing Partner, to require its successor to purchase its
General Partner Interest and its general partner interest (or equivalent
interest), if any, in the other Group Members and all of its Incentive
Distribution Rights (collectively, the "Combined Interest") in exchange for an
amount in cash equal to the fair market value of such Combined Interest, such
amount to be determined and payable as of the effective date of its departure.
If the General Partner is removed by the Unitholders under circumstances where
Cause exists or if the General Partner withdraws under circumstances where such
withdrawal violates this Agreement, and if a successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, such successor
shall have the option, exercisable prior to the effective date of the departure
of such Departing Partner, to purchase the Combined Interest for such fair
market value of such Combined Interest of the Departing Partner. In either
event, the Departing Partner shall be entitled to receive all reimbursements due
such Departing Partner pursuant to Section 7.4, including any employee-related
liabilities (including severance liabilities), incurred in connection with the
termination of any employees employed by the Departing Partner for the benefit
of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the
Departing Partner's Combined Interest shall be determined by agreement between
the Departing Partner and its successor or, failing agreement within 30 days
after the effective date of such Departing Partner's departure, by an
independent investment banking firm or other independent expert selected by the
Departing Partner and its successor, which, in turn, may rely on other experts,
and the determination of which shall be conclusive as to such matter. If such
parties cannot agree upon one independent investment banking firm or other
independent expert within 45 days after the effective date of such departure,
then the Departing Partner shall designate an independent investment banking
firm or other independent expert, the Departing Partner's successor shall
designate an independent investment banking firm or other independent expert,
and such firms or experts shall mutually select a third independent investment
banking firm or independent expert, which third independent investment banking
firm or other independent expert shall determine the fair market value of the
Combined Interest of the Departing Partner. In making its determination, such
third independent investment banking firm or other independent expert may
consider the then current trading price of Units on any National Securities
Exchange on which Units are then listed, the value of the Partnership's assets,
the rights and obligations of the Departing Partner and other factors it may
deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common Units
pursuant to a valuation made by an investment banking firm or other independent
expert selected pursuant to Section 11.3(a), without reduction in such
Partnership Interest (but subject to proportionate dilution by reason of the
admission of its successor). Any successor General Partner shall indemnify the
Departing Partner (or its transferee) as to all debts and liabilities of the
Partnership arising on or after the date on which the Departing Partner (or its
transferee) becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest of the Departing Partner to Common Units
will be characterized as if the Departing Partner (or its transferee)
contributed its Combined Interest to the Partnership in exchange for the newly
issued Common Units.
A-65
(c) If a successor General Partner is elected in accordance with the terms
of Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to 2/98ths of the Net Agreed Value of the
Partnership's assets on such date. In such event, such successor General Partner
shall, subject to the following sentence, be entitled to 2% of all Partnership
allocations and distributions to which the Departing Partner was entitled. In
addition, the successor General Partner shall cause this Agreement to be amended
to reflect that, from and after the date of such successor General Partner's
admission, the successor General Partner's interest in all Partnership
distributions and allocations shall be 2%.
SECTION 11.4 Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
SECTION 11.5 Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited Partner with
respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
SECTION 12.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General Partner
is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be
dissolved and such successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its
affairs shall be wound up, upon:
(a) an Event of Withdrawal of the General Partner as provided in
Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is
elected and an Opinion of Counsel is received as provided in Section
11.1(b) or 11.2 and such successor is admitted to the Partnership pursuant
to Section 10.3;
(b) an election to dissolve the Partnership by the General Partner
that is approved by the holders of a Unit Majority;
(c) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(d) the sale, exchange or disposition of all or substantially all of
the assets and properties of the Partnership Group.
SECTION 12.2 Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners
A-66
to select a successor to such Departing Partner pursuant to Section 11.1 or
11.2, then within 90 days thereafter, or (b) dissolution of the Partnership upon
an event constituting an Event of Withdrawal as defined in Section 11.1(a)(iv),
(v) or (vi), then, to the maximum extent permitted by law, within 180 days
thereafter, the holders of a Unit Majority may elect to reconstitute the
Partnership and continue its business on the same terms and conditions set forth
in this Agreement by forming a new limited partnership on terms identical to
those set forth in this Agreement and having as the successor General partner a
Person approved by the holders of a Unit Majority. Unless such an election is
made within the applicable time period as set forth above, the Partnership shall
conduct only activities necessary to wind up its affairs. If such an election is
so made, then:
(i) the reconstituted Partnership shall continue unless earlier
dissolved in accordance with this Article XII;
(ii) if the successor General Partner is not the former General
Partner, then the interest of the former General Partner shall be treated
in the manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and
the Certificate of Limited Partnership and to enter into and, as necessary,
to file a new partnership agreement and certificate of limited partnership,
and the successor General Partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 2.6; provided,
that the right of the holders of a Unit Majority to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Operating Company or any other Group Member would be treated as an
association taxable as a corporation or otherwise be taxable as an entity
for federal income tax purposes upon the exercise of such right to
continue.
SECTION 12.3 Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be entitled
to receive such compensation for its services as may be approved by holders of
at least a majority of the Outstanding Common Units and Subordinated Units
voting as a single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days' prior notice and may be
removed at any time, with or without cause, by notice of removal approved by
holders of at least a majority of the Outstanding Common Units and Subordinated
Units voting as a single class. Upon dissolution, removal or resignation of the
Liquidator, a successor and substitute Liquidator (who shall have and succeed to
all rights, powers and duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the Outstanding
Common Units and Subordinated Units voting as a single class. The right to
approve a successor or substitute Liquidator in the manner provided herein shall
be deemed to refer also to any such successor or substitute Liquidator approved
in the manner herein provided. Except as expressly provided in this Article XII,
the Liquidator approved in the manner provided herein shall have and may
exercise, without further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the terms of this
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers, other than the limitation on sale
set forth in Section 7.3(b)) to the extent necessary or desirable in the good
faith judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding up
and liquidation of the Partnership as provided for herein.
A-67
SECTION 12.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) The assets may be disposed of by public or private sale or by
distribution in kind to one or more Partners on such terms as the
Liquidator and such Partner or Partners may agree. If any property is
distributed in kind, the Partner receiving the property shall be deemed for
purposes of Section 12.4(c) to have received cash equal to its fair market
value; and contemporaneously therewith, appropriate cash distributions must
be made to the other Partners. The Liquidator may, in its absolute
discretion, defer liquidation or distribution of the Partnership's assets
for a reasonable time if it determines that an immediate sale or
distribution of all or some of the Partnership's assets would be
impractical or would cause undue loss to the Partners. The Liquidator may,
in its absolute discretion, distribute the Partnership's assets, in whole
or in part, in kind if it determines that a sale would be impractical or
would cause undue loss to the Partners.
(b) Liabilities of the Partnership include amounts owed to the
Liquidator as compensation for serving in such capacity (subject to the
terms of Section 12.3) and amounts to Partners otherwise than in respect of
their distribution rights under Article VI. With respect to any liability
that is contingent, conditional or unmatured or is otherwise not yet due
and payable, the Liquidator shall either settle such claim for such amount
as it thinks appropriate or establish a reserve of cash or other assets to
provide for its payment. When paid, any unused portion of the reserve shall
be distributed as additional liquidation proceeds.
(c) All property and all cash in excess of that required to discharge
liabilities as provided in Section 12.4(b) shall be distributed to the
Partners in accordance with, and to the extent of, the positive balances in
their respective Capital Accounts, as determined after taking into account
all Capital Account adjustments (other than those made by reason of
distributions pursuant to this Section 12.4(c)) for the taxable year of the
Partnership during which the liquidation of the Partnership occurs (with
such date of occurrence being determined pursuant to Treasury Regulation
Section 1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the
end of such taxable year (or, if later, within 90 days after said date of
such occurrence).
SECTION 12.5 Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
SECTION 12.6 Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
SECTION 12.7 Waiver of Partition.
To the maximum extent permitted by law, each Partner hereby waives any
right to partition of the Partnership property.
A-68
SECTION 12.8 Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative
balance in its Capital Account upon liquidation of the Partnership. The General
Partner shall be obligated to restore any negative balance in its Capital
Account upon liquidation of its interest in the Partnership by the end of the
taxable year of the Partnership during which such liquidation occurs, or, if
later, within 90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 13.1 Amendment to be Adopted Solely by the General Partner.
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement and execute,
swear to, acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure
that the Group Members will not be treated as associations taxable as
corporations or otherwise taxed as entities for federal income tax
purposes;
(d) a change that, in the discretion of the General Partner, (i) does
not adversely affect the Limited Partners (including any particular class
of Partnership Interests as compared to other classes of Partnership
Interests) in any material respect, (ii) is necessary or advisable to (A)
satisfy any requirements, conditions or guidelines contained in any
opinion, directive, order, ruling or regulation of any federal or state
agency or judicial authority or contained in any federal or state statute
(including the Delaware Act) or (B) facilitate the trading of the Units
(including the division of any class or classes of Outstanding Units into
different classes to facilitate uniformity of tax consequences within such
classes of Units) or comply with any rule, regulation, guideline or
requirement of any National Securities Exchange on which the Units are or
will be listed for trading, compliance with any of which the General
Partner determines in its discretion to be in the best interests of the
Partnership and the Limited Partners, (iii) is necessary or advisable in
connection with action taken by the General Partner pursuant to Section
5.10 or (iv) is required to effect the intent expressed in the Registration
Statement or the intent of the provisions of this Agreement or is otherwise
contemplated by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the General Partner, are necessary
or advisable as a result of a change in the fiscal year or taxable year of
the Partnership including, if the General Partner shall so determine, a
change in the definition of "Quarter" and the dates on which distributions
are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership, or the General Partner or its directors, officers,
trustees or agents from in any manner being subjected to the provisions of
the Investment Company Act of 1940, as amended, the Investment Advisers Act
of 1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, regardless of whether
such are substantially similar to plan asset regulations currently applied
or proposed by the United States Department of Labor;
A-69
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by
the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity, in connection with the conduct by the Partnership of
activities permitted by the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d);
(l) any other amendments substantially similar to the foregoing.
SECTION 13.2 Amendment Procedures.
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner which consent may be given or withheld in its sole discretion. A
proposed amendment shall be effective upon its approval by the holders of a Unit
Majority, unless a greater or different percentage is required under this
Agreement or by Delaware law. Each proposed amendment that requires the approval
of the holders of a specified percentage of Outstanding Units shall be set forth
in a writing that contains the text of the proposed amendment. If such an
amendment is proposed, the General Partner shall seek the written approval of
the requisite percentage of Outstanding Units or call a meeting of the
Unitholders to consider and vote on such proposed amendment. The General Partner
shall notify all Record Holders upon final adoption of any such proposed
amendments.
SECTION 13.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision
of this Agreement that establishes a percentage of Outstanding Units (including
Units deemed owned by the General Partner) required to take any action shall be
amended, altered, changed, repealed or rescinded in any respect that would have
the effect of reducing such voting percentage unless such amendment is approved
by the written consent or the affirmative vote of holders of Outstanding Units
whose aggregate Outstanding Units constitute not less than the voting
requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no amendment
to this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 13.3(c), (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable to, the General Partner or any
of its Affiliates without its consent, which consent may be given or withheld in
its sole discretion, (iii) change Section 12.1(b), or (iv) change the term of
the Partnership or, except as set forth in Section 12.1(b), give any Person the
right to dissolve the Partnership.
(c) Except as provided in Section 14.3, and without limitation of the
General Partner's authority to adopt amendments to this Agreement without the
approval of any Partners or Assignees as contemplated in Section 13.1, any
amendment that would have a material adverse effect on the rights or preferences
of any class of Partnership Interests in relation to other classes of
Partnership Interests must be approved by the holders of not less than a
majority of the Outstanding Partnership Interests of the class affected.
A-70
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by Section
14.3(b), no amendments shall become effective without the approval of the
holders of at least 90% of the Outstanding Units voting as a single class unless
the Partnership obtains an Opinion of Counsel to the effect that such amendment
will not affect the limited liability of any Limited Partner under applicable
law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
SECTION 13.4 Special Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall
be taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by Limited Partners
owning 20% or more of the Outstanding Units of the class or classes for which a
meeting is proposed. Limited Partners shall call a special meeting by delivering
to the General Partner one or more requests in writing stating that the signing
Limited Partners wish to call a special meeting and indicating the general or
specific purposes for which the special meeting is to be called. Within 60 days
after receipt of such a call from Limited Partners or within such greater time
as may be reasonably necessary for the Partnership to comply with any statutes,
rules, regulations, listing agreements or similar requirements governing the
holding of a meeting or the solicitation of proxies for use at such a meeting,
the General Partner shall send a notice of the meeting to the Limited Partners
either directly or indirectly through the Transfer Agent. A meeting shall be
held at a time and place determined by the General Partner on a date not less
than 10 days nor more than 60 days after the mailing of notice of the meeting.
Limited Partners shall not vote on matters that would cause the Limited Partners
to be deemed to be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited Partners' limited
liability under the Delaware Act or the law of any other state in which the
Partnership is qualified to do business.
SECTION 13.5 Notice of a Meeting.
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders of the class or classes of Units for which a meeting is proposed
in writing by mail or other means of written communication in accordance with
Section 16.1. The notice shall be deemed to have been given at the time when
deposited in the mail or sent by other means of written communication.
SECTION 13.6 Record Date.
For purposes of determining the Limited Partners entitled to notice of or
to vote at a meeting of the Limited Partners or to give approvals without a
meeting as provided in Section 13.11 the General Partner may set a Record Date,
which shall not be less than 10 nor more than 60 days before (a) the date of the
meeting (unless such requirement conflicts with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the Units are listed
for trading, in which case the rule, regulation, guideline or requirement of
such exchange shall govern) or (b) in the event that approvals are sought
without a meeting, the date by which Limited Partners are requested in writing
by the General Partner to give such approvals.
SECTION 13.7 Adjournment.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
A-71
SECTION 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if it had occurred at a meeting
duly held after regular call and notice, if a quorum is present either in person
or by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
SECTION 13.9 Quorum.
The holders of a majority of the Outstanding Units of the class or classes
for which a meeting has been called (including Outstanding Units deemed owned by
the General Partner) represented in person or by proxy shall constitute a quorum
at a meeting of Limited Partners of such class or classes unless any such action
by the Limited Partners requires approval by holders of a greater percentage of
such Units, in which case the quorum shall be such greater percentage. At any
meeting of the Limited Partners duly called and held in accordance with this
Agreement at which a quorum is present, the act of Limited Partners holding
Outstanding Units that in the aggregate represent a majority of the Outstanding
Units entitled to vote and be present in person or by proxy at such meeting
shall be deemed to constitute the act of all Limited Partners, unless a greater
or different percentage is required with respect to such action under the
provisions of this Agreement, in which case the act of the Limited Partners
holding Outstanding Units that in the aggregate represent at least such greater
or different percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
Limited Partners to leave less than a quorum, if any action taken (other than
adjournment) is approved by the required percentage of Outstanding Units
specified in this Agreement (including Outstanding Units deemed owned by the
General Partner). In the absence of a quorum any meeting of Limited Partners may
be adjourned from time to time by the affirmative vote of holders of at least a
majority of the Outstanding Units entitled to vote at such meeting (including
Outstanding Units deemed owned by the General Partner) represented either in
person or by proxy, but no other business may be transacted, except as provided
in Section 13.7.
SECTION 13.10 Conduct of a Meeting.
The General Partner shall have full power and authority concerning the
manner of conducting any meeting of the Limited Partners or solicitation of
approvals in writing, including the determination of Persons entitled to vote,
the existence of a quorum, the satisfaction of the requirements of Section 13.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with applicable law and this Agreement as
it may deem advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including regulations in
regard to the appointment of proxies, the appointment and duties of inspectors
of votes and approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals in writing.
SECTION 13.11 Action Without a Meeting.
If authorized by the General Partner, any action that may be taken at a
meeting of the Limited Partners may be taken without a meeting if an approval in
writing setting forth the action so taken is
A-72
signed by Limited Partners owning not less than the minimum percentage of the
Outstanding Units (including Units deemed owned by the General Partner) that
would be necessary to authorize or take such action at a meeting at which all
the Limited Partners were present and voted (unless such provision conflicts
with any rule, regulation, guideline or requirement of any National Securities
Exchange on which the Units are listed for trading, in which case the rule,
regulation, guideline or requirement of such exchange shall govern). Prompt
notice of the taking of action without a meeting shall be given to the Limited
Partners who have not approved in writing. The General Partner may specify that
any written ballot submitted to Limited Partners for the purpose of taking any
action without a meeting shall be returned to the Partnership within the time
period, which shall be not less than 20 days, specified by the General Partner.
If a ballot returned to the Partnership does not vote all of the Units held by
the Limited Partners, the Partnership shall be deemed to have failed to receive
a ballot for the Units that were not voted. If approval of the taking of any
action by the Limited Partners is solicited by any Person other than by or on
behalf of the General Partner, the written approvals shall have no force and
effect unless and until (a) they are deposited with the Partnership in care of
the General Partner, (b) approvals sufficient to take the action proposed are
dated as of a date not more than 90 days prior to the date sufficient approvals
are deposited with the Partnership and (c) an Opinion of Counsel is delivered to
the General Partner to the effect that the exercise of such right and the action
proposed to be taken with respect to any particular matter (i) will not cause
the Limited Partners to be deemed to be taking part in the management and
control of the business and affairs of the Partnership so as to jeopardize the
Limited Partners' limited liability, and (ii) is otherwise permissible under the
state statutes then governing the rights, duties and liabilities of the
Partnership and the Partners.
SECTION 13.12 Voting and Other Rights.
(a) Only those Record Holders of the Units on the Record Date set pursuant
to Section 13.6 (and also subject to the limitations contained in the definition
of "Outstanding") shall be entitled to notice of, and to vote at, a meeting of
Limited Partners or to act with respect to matters as to which the holders of
the Outstanding Units have the right to vote or to act. All references in this
Agreement to votes of, or other acts that may be taken by, the Outstanding Units
shall be deemed to be references to the votes or acts of the Record Holders of
such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such other Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 13.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions of
Section 4.3.
ARTICLE XIV
MERGER
SECTION 14.1 Authority.
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("Merger Agreement") in accordance
with this Article XIV.
SECTION 14.2 Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner shall
determine, in the exercise of its discretion, to consent to
A-73
the merger or consolidation, the General Partner shall approve the Merger
Agreement, which shall set forth:
(a) the names and jurisdictions of formation or organization of each
of the business entities proposing to merge or consolidate;
(b) the name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) the terms and conditions of the proposed merger or consolidation;
(d) the manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender
of such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) a statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) the effective time of the merger, which may be the date of the
filing of the certificate of merger pursuant to Section 14.4 or a later
date specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
SECTION 14.3 Approval by Limited Partners of Merger or Consolidation.
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of Article
XIII. A copy or a summary of the Merger Agreement shall be included in or
enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a Unit
Majority unless the Merger Agreement contains any provision that, if contained
in an amendment to this Agreement, the provisions of this Agreement or the
Delaware Act would require for its approval the vote or consent of a greater
percentage of the Outstanding Units or of any class of Limited Partners, in
which case such greater percentage vote or consent shall be required for
approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Limited Partners, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation may
be abandoned pursuant to provisions therefor, if any, set forth in the Merger
Agreement.
A-74
(d) Notwithstanding anything else contained in this Article XIV or in this
Agreement, the General Partner is permitted, in its discretion, without Limited
Partner approval, to merge the Partnership or any Group Member into, or convey
all of the Partnership's assets to, another limited liability entity which shall
be newly formed and shall have no assets, liabilities or operations at the time
of such Merger other than those it receives from the Partnership or other Group
Member if (i) the General Partner has received an Opinion of Counsel that the
merger or conveyance, as the case may be, would not result in the loss of the
limited liability of any Limited Partner or any Group Member or cause the
Partnership or any Group Member to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not previously treated as such), (ii) the sole purpose
of such merger or conveyance is to effect a mere change in the legal form of the
Partnership into another limited liability entity and (iii) the governing
instruments of the new entity provide the Limited Partners and the General
Partner with the same rights and obligations as are herein contained.
SECTION 14.4 Certificate of Merger.
Upon the required approval by the General Partner and the Unitholders of a
Merger Agreement, a certificate of merger shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with the requirements
of the Delaware Act.
SECTION 14.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities, shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and is not in any
way impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests
in property of any of those constituent business entities shall be
preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not
be deemed to result in a transfer or assignment of assets or liabilities from
one entity to another.
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
SECTION 15.1 Right to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement, if at any time
the General Partner and its Affiliates hold more than 80% of the total Limited
Partner Interests of any class then Outstanding, the General Partner shall then
have the right, which right it may assign and transfer in whole or in part to
the Partnership or any Affiliate of the General Partner, exercisable in its sole
discretion, to purchase all, but not less than all, of such Limited Partner
Interests of such class then Outstanding held by Persons other than the General
Partner and its Affiliates, at the greater of (x) the Current Market Price as of
the date three days prior to the date that the notice described in Section
15.1(b) is mailed and (y) the highest price paid by the General Partner or any
of its Affiliates for any such Limited Partner Interest of such class purchased
during the 90-day period preceding the date that the notice described in Section
15.1(b) is
A-75
mailed. As used in this Agreement, (i) "Current Market Price" as of any date of
any class of Limited Partner Interests means the average of the daily Closing
Prices (as hereinafter defined) per Limited Partner Interest of such class for
the 20 consecutive Trading Days (as hereinafter defined) immediately prior to
such date; (ii) "Closing Price" for any day means the last sale price on such
day, regular way, or in case no such sale takes place on such day, the average
of the closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such Limited
Partner Interests of such class are listed or admitted to trading or, if such
Limited Partner Interests of such class are not listed or admitted to trading on
any National Securities Exchange (other than the Nasdaq Stock Market), the last
quoted price on such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by the
Nasdaq Stock Market or such other system then in use, or, if on any such day
such Limited Partner Interests of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such Limited Partner
Interests of such class selected by the General Partner, or if on any such day
no market maker is making a market in such Limited Partner Interests of such
class, the fair value of such Limited Partner Interests on such day as
determined reasonably and in good faith by the General Partner; and (iii)
"Trading Day" means a day on which the principal National Securities Exchange on
which such Limited Partner Interests of any class are listed or admitted to
trading is open for the transaction of business or, if Limited Partner Interests
of a class are not listed or admitted to trading on any National Securities
Exchange, a day on which banking institutions in New York City generally are
open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner Interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "Notice of Election to
Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner Interests of such
class (as of a Record Date selected by the General Partner) at least 10, but not
more than 60, days prior to the Purchase Date. Such Notice of Election to
Purchase shall also be published for a period of at least three consecutive days
in at least two daily newspapers of general circulation printed in the English
language and published in the Borough of Manhattan, New York. The Notice of
Election to Purchase shall specify the Purchase Date and the price (determined
in accordance with Section 15.1(a)) at which Limited Partner Interests will be
purchased and state that the General Partner, its Affiliate or the Partnership,
as the case may be, elects to purchase such Limited Partner Interests, upon
surrender of Certificates representing such Limited Partner Interests in
exchange for payment, at such office or offices of the Transfer Agent as the
Transfer Agent may specify, or as may be required by any National Securities
Exchange on which such Limited Partner Interests are listed or admitted to
trading. Any such Notice of Election to Purchase mailed to a Record Holder of
Limited Partner Interests at his address as reflected in the records of the
Transfer Agent shall be conclusively presumed to have been given regardless of
whether the owner receives such notice. On or prior to the Purchase Date, the
General Partner, its Affiliate or the Partnership, as the case may be, shall
deposit with the Transfer Agent cash in an amount sufficient to pay the
aggregate purchase price of all of such Limited Partner Interests to be
purchased in accordance with this Section 15.1. If the Notice of Election to
Purchase shall have been duly given as aforesaid at least 10 days prior to the
Purchase Date, and if on or prior to the Purchase Date the deposit described in
the preceding sentence has been made for the benefit of the holders of Limited
Partner Interests subject to purchase as provided herein, then from and after
the Purchase Date, notwithstanding that any Certificate shall not have been
surrendered for purchase, all rights of the holders of such Limited Partner
Interests (including any rights pursuant to Articles IV, V, VI, and XII) shall
thereupon cease, except the right to receive the purchase price (determined in
accordance with Section 15.1(a)) for Limited Partner Interests therefor, without
interest, upon surrender to the Transfer Agent of the Certificates representing
such Limited Partner Interests, and such Limited Partner Interests shall
thereupon be deemed to be transferred to the General Partner, its Affiliate or
the Partnership, as the case may be, on the record books of the Transfer Agent
and the
A-76
Partnership, and the General Partner or any Affiliate of the General Partner, or
the Partnership, as the case may be, shall be deemed to be the owner of all such
Limited Partner Interests from and after the Purchase Date and shall have all
rights as the owner of such Limited Partner Interests (including all rights as
owner of such Limited Partner Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an
Outstanding Limited Partner Interest subject to purchase as provided in this
Section 15.1 may surrender his Certificate evidencing such Limited Partner
Interest to the Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL PROVISIONS
SECTION 16.1 Addresses and Notices.
Any notice, demand, request, report or proxy materials required or
permitted to be given or made to a Partner or Assignee under this Agreement
shall be in writing and shall be deemed given or made when delivered in person
or when sent by first class United States mail or by other means of written
communication to the Partner or Assignee at the address described below. Any
notice, payment or report to be given or made to a Partner or Assignee hereunder
shall be deemed conclusively to have been given or made, and the obligation to
give such notice or report or to make such payment shall be deemed conclusively
to have been fully satisfied, upon sending of such notice, payment or report to
the Record Holder of such Partnership Securities at his address as shown on the
records of the Transfer Agent or as otherwise shown on the records of the
Partnership, regardless of any claim of any Person who may have an interest in
such Partnership Securities by reason of any assignment or otherwise. An
affidavit or certificate of making of any notice, payment or report in
accordance with the provisions of this Section 16.1 executed by the General
Partner, the Transfer Agent or the mailing organization shall be prima facie
evidence of the giving or making of such notice, payment or report. If any
notice, payment or report addressed to a Record Holder at the address of such
Record Holder appearing on the books and records of the Transfer Agent or the
Partnership is returned by the United States Postal Service marked to indicate
that the United States Postal Service is unable to deliver it, such notice,
payment or report and any subsequent notices, payments and reports shall be
deemed to have been duly given or made without further mailing (until such time
as such Record Holder or another Person notifies the Transfer Agent or the
Partnership of a change in his address) if they are available for the Partner or
Assignee at the principal office of the Partnership for a period of one year
from the date of the giving or making of such notice, payment or report to the
other Partners and Assignees. Any notice to the Partnership shall be deemed
given if received by the General Partner at the principal office of the
Partnership designated pursuant to Section 2.3. The General Partner may rely and
shall be protected in relying on any notice or other document from a Partner,
Assignee or other Person if believed by it to be genuine.
SECTION 16.2 Further Action.
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
SECTION 16.3 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
SECTION 16.4 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
A-77
SECTION 16.5 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
SECTION 16.6 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
SECTION 16.7 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
SECTION 16.8 Applicable Law.
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
SECTION 16.9 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
SECTION 16.10 Consent of Partners.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
A-78
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
NRP (GP) LP
By: GP Natural Resource Partners LLC,
its general partner
By:
------------------------------------
Name:
Title:
ORGANIZATIONAL LIMITED PARTNER:
GP NATURAL RESOURCE PARTNERS LLC
By:
------------------------------------
Name:
Title:
LIMITED PARTNERS:
All Limited Partners now and hereafter
admitted as Limited Partners of the
Partnership, pursuant to powers of
attorney now and hereafter executed in
favor of, and granted and delivered to
the General Partner.
NRP (GP) LP
By: GP Natural Resource Partners LLC,
its
general partner
By:
------------------------------------
Name:
Title:
A-79
EXHIBIT A
TO THE FIRST AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
NATURAL RESOURCE PARTNERS L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS IN
NATURAL RESOURCE PARTNERS L.P.
NO. COMMON UNITS
--------------- ---------------
In accordance with Section 4.1 of the First Amended and Restated Agreement
of Limited Partnership of Natural Resource Partners L.P., as amended,
supplemented or restated from time to time (the "Partnership Agreement"),
Natural Resource Partners L.P., a Delaware limited partnership (the
"Partnership"), hereby certifies that (the "Holder") is the registered
owner of Common Units representing limited partner interests in the Partnership
(the "Common Units") transferable on the books of the Partnership, in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed and accompanied by a properly executed application for transfer of the
Common Units represented by this Certificate. The rights, preferences and
limitations of the Common Units are set forth in, and this Certificate and the
Common Units represented hereby are issued and shall in all respects be subject
to the terms and provisions of, the Partnership Agreement. Copies of the
Partnership Agreement are on file at, and will be furnished without charge on
delivery of written request to the Partnership at, the principal office of the
Partnership located at 601 Jefferson Street, Suite 3600, Houston, Texas 77002.
Capitalized terms used herein but not defined shall have the meanings given them
in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
This Certificate shall not be valid far any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: Natural Resource Partners L.P.
---------------------------------
By: NRP (GP) LP, its General Partner
Countersigned and Registered by:
By: GP Natural Resource
Partners LLC, its General
Partner
By:
--------------------------------------- ------------------------------------
as Transfer Agent and Registrar
Name:
----------------------------------
By: By:
------------------------------------ ------------------------------------
Authorized Signature Secretary
A-80
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
TEN COM -- as tenants in common UNIF GIFT/TRANSFERS MIN ACT
TEN ENT -- as tenants by the entireties
------------------ Custodian ------------------
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants in under Uniform Gifts/Transfers to CD Minors Act
common (State)
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
NATURAL RESOURCE PARTNERS L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF
NATURAL RESOURCE PARTNERS L.P.
You have acquired an interest in Natural Resource Partners L.P., 601
Jefferson Street, Suite 3600, Houston Texas 77002, whose taxpayer identification
number is 35-2164875. The Internal Revenue Service has issued Natural Resource
Partners L.P. the following tax shelter registration number: .
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN NATURAL RESOURCE PARTNERS L.P.
You must report the registration number as well as the name and taxpayer
identification number of Natural Resource Partners L.P. on Form 8271. FORM 8271
MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN NATURAL
RESOURCE PARTNERS L.P.
If you transfer your interest in Natural Resource Partners L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address and
tax shelter registration number of Natural Resource Partners L.P. If you do not
want to keep such a list, you must (1) send the information specified above to
the Partnership, which will keep the list for this tax shelter, and (2) give a
copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could result
in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal
Revenue Code of 1986, as amended, unless such failure is shown to be due to
reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, hereby assigns, conveys, sells and transfers
unto
------------------------------------------- -------------------------------------------
(Please print or typewrite name and address (Please insert Social Security or other
of Assignee) identifying number of Assignee)
A-81
Common Units representing limited partner interests evidenced by
this Certificate, subject to the Partnership Agreement, and does hereby
irrevocably constitute and appoint as its attorney-in-fact with full
power of substitution to transfer the same on the books of Natural Resource
Partners L.P.
Date: NOTE: The signature to any endorsement hereon
must correspond with the name as
written upon the face of this
Certificate in every particular,
without alteration, enlargement or
change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL ASSOCIATION
OF SECURITIES DEALERS, INC. OR BY A ---------------------------------------
COMMERCIAL BANK OR TRUST COMPANY (Signature)
SIGNATURE(S) GUARANTEED
---------------------------------------
(Signature)
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
A-82
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Natural Resource Partners L.P. (the
"Partnership"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
Date:
--------------------------
-------------------------------------------- --------------------------------------------
Social Security or other identifying number Signature of Assignee
-------------------------------------------- --------------------------------------------
Purchase Price including commissions, if any Name and Address of Assignee
Type of Entity (check one):
[ ] Individual [ ] Partnership [ ] Corporation
[ ] Trust [ ] Other (specify)
Nationality (check one):
[ ] U.S. Citizen, Resident or Domestic Entity
[ ] Foreign Corporation [ ] Non-resident Alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
________________________________.
3. My home address is _______________________________________________.
A-83
B. Partnership, Corporation or Other Interestholder
1. _____________ is not a foreign corporation, foreign partnership, foreign
trust (Name of Interestholder) or foreign estate (as those terms are
defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
______________________________________.
3. The interestholder's office address and place of incorporation (if
applicable) is
__________________________________________________________________.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
------------------------------------------
Name of Interestholder
------------------------------------------
Signature and Date
------------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-84
APPENDIX B
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Natural Resource Partners L.P. (the
"Partnership"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as its attorney-in-fact to execute, swear to, acknowledge and file
any document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Partnership
and any amendment thereto, necessary or appropriate for the Assignee's admission
as a Substituted Limited Partner and as a party to the Partnership Agreement,
(d) gives the powers of attorney provided for in the Partnership Agreement, and
(e) makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date:
-----------------------------------------------
---------------------------------------------------- -----------------------------------------------------
Signature of Assignee Social Security or other identifying number
----------------------------------------------------- -----------------------------------------------------
Purchase Price including commissions, if any Name and Address of Assignee
Type of Entity (check one):
[ ] Individual [ ] Partnership [ ] Corporation
[ ] Trust [ ] Other (specify)
Nationality (check one):
[ ] U.S. Citizen, Resident or Domestic Entity
[ ] Foreign Corporation [ ] Non-resident Alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
(1) I am not a non-resident alien for purposes of U.S. income taxation
(2) My U.S. taxpayer identification number (Social Security Number) is
_________________________________.
(3) My home address is ___________________________________________________.
B-1
B. Partnership, Corporation or Other Interestholder
(1) _____________________________________ is not a foreign corporation,
foreign partnership, foreign trust or foreign estate (as those terms
are defined in the Code and Treasury Regulations).
(2) The interest holder's U.S. employer identification number is
____________________________________________________________________
(3) The interest holder's office address and place of incorporation (if
applicable) is
____________________________________________________________________
The interest holder agrees to notify the Partnership within sixty (60) days
of the date the interest holder becomes a foreign person.
The interest holder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
--------------------------------------
Name of Interestholder
--------------------------------------
Signature and Date
--------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
in the case of any other nominee holder, a person performing a similar function.
If the Assignee is a broker, dealer, bank, trust company, clearing corporation,
other nominee owner or an agent of any of the foregoing, the above certification
as to any person for whom the Assignee will hold the Common Units shall be made
to the best of the Assignee's knowledge.
B-2
APPENDIX C
GLOSSARY OF TERMS
"adjusted operating surplus" means for any period, operating surplus
generated during that period as adjusted to:
(a) decrease operating surplus by:
(1) any net increase in working capital borrowings with respect to
that period; and
(2) any net reduction in cash reserves for operating expenditures
with respect to that period not relating to an operating expenditure
made with respect to that period; and
(b) increase operating surplus by:
(1) any net decrease in working capital borrowings with respect to
that period; and
(2) any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for the
repayment of principal, interest or premium.
Adjusted operating surplus does not include that portion of operating
surplus included in clause (a)(1) of the definition of operating surplus.
"anthracite" means the highest rank of economically usable coal with
moisture content less than 15% by weight and heat value as high as 14,000 Btus
per pound.
"ash" means impurities consisting of incombustible matter that are
contained in coal. Since ash increases the weight of coal, it adds to the cost
of transportation and handling and can affect the burning characteristics of
coal. Coal with a higher percentage of ash will have a lower heating value.
"as received" means that the weight of coal includes both moisture and
other mineral matter.
"available cash" means for any quarter prior to liquidation:
(a) the sum of:
(1) all cash and cash equivalents of Natural Resource Partners and
its subsidiaries on hand at the end of that quarter; and
(2) all additional cash and cash equivalents of Natural Resource
Partners and its subsidiaries on hand on the date of determination of
available cash for that quarter resulting from working capital
borrowings made after the end of that quarter;
(b) less the amount of cash reserves that is necessary or appropriate
in the reasonable discretion of the general partner to:
(1) provide for the proper conduct of the business of Natural
Resource Partners and its subsidiaries (including reserves for future
capital expenditures and for anticipated future credit needs of Natural
Resource Partners and its subsidiaries) after that quarter;
(2) comply with applicable law or any debt instrument or other
agreement or obligation to which Natural Resource Partners or any of its
subsidiaries is a party or by which it is bound or its assets are
subject;
(3) provide funds for distributions to unitholders for any one or
more of the next four quarters; and
provided, however, that the general partner may not establish cash reserves
pursuant to clause (b)(3) immediately above if the effect of such reserves would
be that Natural Resource Partners is unable to distribute the minimum quarterly
distribution on all common units and any cumulative common unit arrearages
thereon for that quarter; and
C-1
provided, further, that disbursements made by Natural Resource Partners or
any of its subsidiaries of cash reserves established, increased or reduced after
the end of that quarter but on or before the date of determination of available
cash for that quarter shall be deemed to have been made, established, increased
or reduced, for purposes of determining available cash, within that quarter if
the general partner so determines.
"base load electricity demand" means the amount of power that is
consistently required 24 hours per day.
"bituminous coal" means a soft black coal with a heat content that ranges
from 10,500 to 14,000 Btus per pound, as received. This coal is located
primarily in Appalachia, Arizona, the Midwest, Colorado and Utah, and is the
type most commonly used for electricity generation in the United States.
Bituminous coal is also used for industrial steam purposes and as metallurgical
coal used in steel production.
"British thermal unit, or Btu" means a measure of the energy required to
raise the temperature of one pound of water one degree Fahrenheit.
"capital account" means the capital account maintained for a partner under
the partnership agreement. The capital account of a partner for a general
partner interest, a common unit, a subordinated unit, an incentive distribution
right or any other partnership interest will be the amount which that capital
account would be if that general partner interest, common unit, subordinated
unit, incentive distribution right or other partnership interest were the only
interest in Natural Resource Partners held by such partner from and after the
date on which it was first issued.
"capital surplus" means all available cash distributed by Natural Resource
Partners from any source will be treated as distributed from operating surplus
until the sum of all available cash distributed since the closing of the initial
public offering equals the operating surplus as of the end of the quarter
immediately before that distribution. Any excess available cash distributed by
Natural Resource Partners will be deemed to be capital surplus.
"Clean Air Act" means the federal law enacted to regulate air emissions, as
amended to date.
"closing price" means the last sale price on a day, regular way, or in case
no sale takes place on that day the average of the closing bid and asked prices
on that day, regular way, in either case, as reported in the principal
consolidated transaction reporting system for securities listed or admitted to
trading on the principal national securities exchange on which the units of that
class are listed or admitted to trading, or if the units of that class are not
listed or admitted to trading on any national securities exchange, the last
quoted price on that day. If no quoted price exists, the average of the high bid
and low asked prices on that day in the over-the-counter market, as reported by
the Nasdaq Stock Market or any other system then in use. If on any day the units
of that class are not quoted by any organization of that type, the average of
the closing bid and asked prices on that day as furnished by a professional
market maker making a market in the units of the class selected by the board of
directors of the general partner. If on that day no market maker is making a
market in the units of that class, the fair value of the units on that day as
determined reasonably and in good faith by the board of directors of the general
partner.
"coal seam" means a layered coal deposit typically separated by rock. Each
layer is called a "seam."
"coke" means a hard, dry carbon substance produced by heating coal to a
very high temperature in the absence of air. Coke is used in the manufacture of
iron and steel. Its production results in a number of useful by-products.
"common unit arrearage" means the amount by which the minimum quarterly
distribution for a quarter during the subordination period exceeds the
distribution of available cash from operating surplus actually made for that
quarter on a common unit, cumulative for that quarter and all prior quarters
during the subordination period.
"compliance coal" means coal which, when burned, emits less than 1.2 pounds
of sulfur dioxide per million Btus. Compliance coal meets sulfur emission
standards imposed by Title IV of the Clean Air Act.
C-2
"continuous mining" means a form of underground room and pillar mining,
which involves the excavation of a series of "rooms" into the coal seam leaving
"pillars" or columns of coal to help support the mine roof. A specialized
cutting machine, the continuous miner, mechanizes the extraction procedure.
Continuous miners tear the coal from the seam and load it onto conveyors or into
shuttle cars in a continuous operation.
"contract mining" means the contractual engagement of a third-party mining
company by the mineral rights holder to mine coal. Contract mining companies are
typically paid on a set price per ton of coal mined. Under most contract mining
agreements the mineral rights holder is responsible for the permitting of the
mine site. The contract miner is generally responsible for providing all
equipment, financing for its operation, internal mine capital needs, employee
salary and benefits and all other requirements associated with an independent
business.
"current market price" means with respect to any class of units as of any
date, the average of the daily closing prices per unit of such class for the 20
consecutive trading days immediately prior to the date.
"dragline" means a large machine used in the surface mining process to
remove the overburden, or layers of earth and rock, covering a coal seam. The
dragline has a large bucket suspended from the end of a huge boom. The bucket,
which is suspended by cables, is able to scoop up great amounts of overburden as
it is dragged across the excavation area.
"highwall mining" means a method of mining generally utilized in
conjunction with truck-and-shovel surface mining. At the highwall exposed by the
truck-and-shovel operation a modified continuous miner with an attached
conveying system cuts horizontal passages from the surface into a seam.
"high sulfur coal" means coal with a sulfur content of greater than 1.5%.
"high-volatile metallurgical coal" means metallurgical coal that contains
more than 31% volatile matter. Volatile matter consists of the products,
exclusive of moisture, given off as gas and vapor when the coal is heated under
specified conditions.
"incentive distribution right" means a non-voting limited partner interest
issued to the general partner or one of its affiliates conferring upon it the
right to receive increasing percentages, up to 48%, of the cash we distribute
each quarter in excess of $0.55 per unit.
"interim capital transactions" means the following transactions if they
occur prior to liquidation:
(a) borrowings, refinancings or refundings of indebtedness and sales
of debt securities (other than working capital borrowings and other than
for items purchased on open account in the ordinary course of business) by
Natural Resource Partners or any of its subsidiaries;
(b) sales of equity interests (including any common units sold to the
underwriters pursuant to their over-allotment option by Natural Resource
Partners or any of its subsidiaries); and
(c) sales or other voluntary or involuntary dispositions of any assets
of Natural Resource Partners or any of its subsidiaries (other than sales
or other dispositions of inventory, accounts receivable and other assets in
the ordinary course of business, and sales or other dispositions of assets
as a part of normal retirements or replacements).
"lignite" means a brownish-black coal with a heat content that generally
ranges from 5,000 to 8,300 Btus per pound.
"longwall mining" means a form of underground mining in which two sets of
parallel entries, that can be up to 1,000 feet apart, are joined together at
their far ends by a crosscut, called the longwall. The longwall machine consists
of a rotating drum that moves back and forth across the longwall. The loosened
coal falls onto a conveyor for removal from the mine.
"low sulfur coal" means coal with a sulfur content of less than 1.0%.
C-3
"low-volatile metallurgical coal" means metallurgical coal that contains
less than 23% volatile matter. Volatile matter consists of the products,
exclusive of moisture, given off as gas and vapor when the coal is heated under
specified conditions.
"medium sulfur coal" means coal with a sulfur content greater than or equal
to 1.0% but less than or equal to 1.5%.
"medium-volatile metallurgical coal" means metallurgical cola that contains
between 23% and 31% volatile matter. Volatile matter consists of the products,
exclusive of moisture, given off as gas and vapor when the coal is heated under
specified conditions.
"metallurgical coal" means the various grades of coal suitable for
carbonization to make coke for the manufacture of steel. Also known as "met"
coal, it possesses four important qualities; volatility, which affects coke
yield; the level of impurities, which affects coke quality; composition, which
affects coke strength; and expansion characteristics, which affect coke oven
safety.
"nitrogen oxide" means a gas formed in high temperature environments such
as coal combustion. It is reported to contribute to ground level ozone and
visibility degradation.
"operating expenditures" means all expenditures of Natural Resource
Partners and its subsidiaries including, but not limited to, taxes,
reimbursements of the general partner, repayment of working capital borrowings,
debt service payments and capital expenditures, subject to the following:
(a) payments (including prepayments) of principal of and premium on
indebtedness other than working capital borrowings will not constitute
operating expenditures; and
(b) operating expenditures will not include:
(1) capital expenditures made for acquisitions or for capital
improvement;
(2) payment of transaction expenses relating to interim capital
transactions; or
(3) distributions to partners.
"operating surplus" means, with respect to any period before liquidation,
on a cumulative basis and without duplication:
(a) the sum of:
(1) $15.0 million plus all the cash and cash equivalents of Natural
Resource Partners and its subsidiaries on hand as of the closing of
Natural Resource Partners' initial public offering;
(2) all the cash receipts of Natural Resource Partners and its
subsidiaries for the period beginning on the closing date of the initial
public offering and ending with the last day of that period, other than
cash receipts from interim capital transactions; and
(3) all cash receipts of Natural Resource Partners and its
subsidiaries after the end of that period but on or before the date of
determination of operating surplus for the period resulting from working
capital borrowings; less
(b) the sum of:
(1) operating expenditures for the period beginning on the date, of
the closing date of Natural Resource Partners' initial public offering
and ending with the last day of that period; and
(2) the amount of cash reserves that are necessary or advisable in
the reasonable discretion of the general partner to provide funds for
future operating expenditures; provided, however, that disbursements
made (including contributions to Natural Resource Partners or any of its
subsidiaries or disbursements on behalf of Natural Resource Partners or
any of its subsidiaries) or cash reserves established, increased or
reduced after the end of that period but on or before the date of
determination of available cash for that period shall be deemed to have
been made,
C-4
established, increased or reduced for the purposes of determining
operating surplus within such period, if the general partner so
determines.
"overburden" means layers of earth and rock covering a coal seam. In
surface mining operations, overburden is removed prior to coal extraction.
"peak electricity demand" means the maximum level of power that is required
during a 24-hour period.
"preparation plant" means a facility for sizing and washing coal to prepare
it for use by customers. The washing process removes ash from the coal and has
the added benefit of reducing the coal's sulfur content.
"probable reserves" means reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven reserves,
but the sites for inspection, sampling and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although lower than
that for proven reserves, is high enough to assume continuity between points of
observation.
"proven reserves" means reserves for which: (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling; and (b) the sites
for inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established.
"reclamation" means the restoration of a mining site to its approximate
original contour after the coal is extracted following the requirement of mining
permits and approved restoration plans. Reclamation operations are usually
underway where the coal has already been taken from a mine even as mining
operations are taking place elsewhere at the site. The process commonly includes
"recontouring" or reshaping the land to its approximate original appearance
restoring topsoil and planting native grass and ground covers. Reclamation is
closely regulated by both state and federal law.
"reserves" means that part of a mineral deposit that could be economically
and legally extracted or produced at the time of the reserve determination.
"room and pillar mining" means a system of coal mining commonly used in the
U.S. in which rooms are driven off the entries with pillars of coal left
standing between them for temporary or permanent roof support.
"scrubber" means any of several forms of chemical/physical devices that
operate to neutralize sulfur compounds formed during coal combustion. These
devices combine the sulfur in gaseous emissions with other chemicals to form
inert compounds, such as gypsum, that must then be removed for disposal.
"spot market" means sales of coal pursuant to an agreement for shipments
over a period of one year or less. Spot market sales are generally obtained via
a competitive bidding process.
"steam coal" means coal used by power plants and industrial boilers to
produce steam for the generation or heating processes. It generally is lower in
Btu heat content and higher in volatile matter than metallurgical coal.
"subbituminous coal" means a black coal with a heat content that ranges
from 8,300 to 11,500 Btus per pound, as received. Most subbituminous reserves
are located in Alaska, Colorado, Montana, New Mexico, Washington and Wyoming.
Subbituminous coal is used almost exclusively by electricity generators and some
industrial consumers.
C-5
"subordination period" means the period of time that will generally extend
from the date of the closing of the initial public offering until the first to
occur of the following:
(a) the first day of any quarter beginning on or after June 30, 2007
for which:
(1) distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled or
exceeded the minimum quarterly distribution on all of the outstanding
common units and subordinated units for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
(2) the adjusted operating surplus generated during each of the
three consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum quarterly
distribution on all of the common units and subordinated units that were
outstanding during these periods on a fully diluted basis, plus the
related distribution on the general partner interest in Natural Resource
Partners; and
(3) there are no outstanding cumulative common unit arrearages.
(b) the date on which the general partner is removed as general
partner of Natural Resource Partners upon the requisite vote by limited
partners under circumstances where cause does not exist and units held by
the general partner and its affiliates are not voted in favor of removal.
"sulfur" means one of the elements present in varying quantities in coal.
Sulfur dioxide is produced as a gaseous by-product of coal combustion.
"tons" means a "short" or net ton, which is equal to 2,000 pounds.
"units" means both common units and subordinated units, but not the general
partner interest.
"volatile matter" means combustible matter which is vaporized in the
combustion process. Power plant boilers are designed to burn coal containing
specific amounts of volatile matter.
"working capital borrowings" means borrowings solely for working capital
purposes or to pay distributions to partners made pursuant to a credit facility
or other arrangement to the extent such borrowings are required to be reduced to
a relatively small amount each year for an economically meaningful period of
time.
C-6
APPENDIX D
ESTIMATED AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of estimated available cash from
operating surplus and should be read in conjunction with "Cash Available for
Distribution," and the Natural Resource Partners L.P. Unaudited Pro Forma
Financial Statements.
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
2001 MARCH 31, 2002
------------ --------------
Pro forma excess of revenues over direct costs and
expenses(a).............................................. $24,676 $ 6,068
Add:
Pro forma depreciation, depletion and amortization....... 20,103 5,363
------- -------
Pro forma available cash from operating surplus............ $44,779 $11,431
Less:
Estimated general and administrative expenses(b)......... 4,400 1,100
------- -------
Estimated available cash from operating surplus(a)(c)...... $40,379 $10,331
======= =======
---------------
(a) Pro forma excess of revenues over direct costs and expenses comes from our
pro forma financial statements and excludes any expenses associated with
the reversionary interest purchased by Western Pocahontas Properties
Limited Partnership in December 2001 and March 2002 and eliminates general
and administrative expenses in order to reflect only the direct costs and
expenses for operations. The pro forma financial statements do not purport
to present our financial position or results of operations had the
transactions to be effected at the closing of this offering actually been
completed as of the date indicated. Furthermore, the pro forma financial
statements are based on accrual accounting concepts whereas available cash
from operating surplus is defined in the partnership agreement on a cash
accounting basis. As a consequence, the amount of estimated cash available
from operating surplus shown in the table should only be viewed as a
general indication of the amounts of available cash from operating surplus
that we might have generated had we been formed in earlier periods.
(b) Estimated general and administrative expenses include our estimates of the
costs of operating the properties contributed to us by the WPP Group and
Arch Coal ($2.9 million) and the costs of being a publicly traded
partnership ($1.5 million). We base these estimates upon currently
available information and they are subject to change. Please read "Cash
Distribution Policy." To the extent our general partner and its affiliates
incur these costs on our behalf, we will reimburse them prior to making any
distribution on the common units.
(c) The amounts of available cash from operating surplus needed to distribute
the minimum quarterly distribution for one quarter and for four quarters on
the common units, subordinated units and the 2% general partner interest
are approximately:
FOUR ONE
QUARTERS QUARTER
--------- ---------
(IN THOUSANDS)
Common units................................................ $24,010.0 $ 6,002.5
Subordinated units.......................................... 24,010.0 6,002.5
General partner............................................. 980.0 245.0
--------- ---------
Total..................................................... $49,000.0 $12,250.0
========= =========
The amount of estimated available cash from operating surplus generated
during 2001 would have been sufficient to allow us to pay the full minimum
quarterly distribution on the common units and approximately 64.8% of the
minimum quarterly distribution on the subordinated units.
The amount of estimated available cash from operating surplus generated
during the three months ended March 31, 2002 would have been sufficient to allow
us to pay the full minimum quarterly distribution on the common units and
approximately 68.7% of the minimum quarterly distribution on the subordinated
units.
D-1
APPENDIX E
WEIR INTERNATIONAL MINING CONSULTANTS
2340 River Road, Suite 203, Des Plaines, Illinois 60018-3223, USA
Tel: 847-297-3500 Fax: 847-297-0217 e-mail: wimc@weirimc.com
April 3, 2002
Job No. 4568.3
Mr. David B. Peugh
Vice President -- Business Development
Arch Coal, Inc.
CityPlace One, Suite 300
St. Louis, Missouri 63141
Reference: Audit of Selected Proven and Probable Coal Reserves
Controlled by Arch Coal, Inc.
Dear Dave:
Weir International Mining Consultants (WIMC) has completed an overview
audit of the proven and probable reserves, as of December 31, 2001, for selected
coal mining properties (Contributed Properties) of Arch Coal, Inc. (Arch)
located in Illinois, Kentucky and West Virginia.
By assignment, the objective of this summary report is to express an
independent opinion on Arch's estimates of proven and probable reserves based on
WIMC's detailed audit review, familiarity with the Arch properties and knowledge
of the coal mining industry in the regions of this study.
This summary report addresses the following areas:
- Summary and conclusions of our coal reserve audit.
- Definitions relating to the coal reserve audit.
- WIMC's qualifications to conduct the coal reserve audit.
SUMMARY AND CONCLUSIONS
Based on the scope and process of our audit of Arch's proven and probable
coal reserve estimates, it is our professional opinion that:
- Based on WIMC's audit of selected coal mining properties as of December
31, 2001, Arch controlled by lease and fee ownership of the Contributed
Properties an estimated 454 million tons of recoverable proven and
probable coal reserves summarized as follows:
RECOVERABLE COAL RESERVES -- TONS (000)
-----------------------------------------------------------------------
BY CLASSIFICATION BY MINING METHOD BY CONTROL
---------------------------- --------------------- ----------------
TOTAL PROVEN PROBABLE UNDERGROUND SURFACE OWNED LEASED
------- ------- -------- ----------- ------- ------- ------
CENTRAL APPALACHIA
Eastern Kentucky............... 389,889 231,116 158,773 379,472 10,417 389,889 --
Southern West Virginia......... 57,659 40,987 16,672 52,820 4,839 36,760 20,898
------- ------- ------- ------- ------ ------- ------
Sub-total Central Appalachia... 447,548 272,103 175,444 432,292 15,255 426,649 20,898
ILLINOIS BASIN................. 6,449 6,449 -- -- 6,449 6,449 --
------- ------- ------- ------- ------ ------- ------
Total.......................... 453,997 278,552 175,444 432,292 21,704 433,098 20,898
======= ======= ======= ======= ====== ======= ======
RECOVERABLE COAL RESERVES -- TONS (000)
---------------------------------------------- TYPICAL
BY SULFUR CONTENT (AS QUALITY (AS
RECEIVED)(2) RECEIVED)
---------------------------------- ---------------
COMPLIANCE (less than) (less than) SULFUR
COAL(1) 1.0% 1.0-1.5% 1.5% BTU/LB (%)
---------- ----------- -------- ----------- ------ ------
CENTRAL APPALACHIA
Eastern Kentucky............... 163,567 355,643 18,968 15,278 13,332 0.86
Southern West Virginia......... 14,475 34,845 21,333 1,481 13,147 0.99
------- ------- ------ ------ ------ ----
Sub-total Central Appalachia... 178,042 390,487 40,301 16,759 13,308 0.88
ILLINOIS BASIN................. -- -- 4,300 2,149 11,477 1.89
------- ------- ------ ------ ------ ----
Total.......................... 178,042 390,487 44,601 18,908 13,282 0.89
======= ======= ====== ====== ====== ====
E-1
Notes:
(1) Compliance coal meets the sulfur dioxide emission standards (1.2 lbs
SO2/Mbtu) imposed by Phase II of the Clean Air Act without blending with
other coals or using sulfur dioxide reduction technologies. Compliance coal
is a sub-set of <1.0% sulfur coal and is, therefore, also reported within
the amounts for <1.0% sulfur coal.
(2) As received quality is based on 12% moisture for the Illinois reserves and
6% moisture for the Kentucky and West Virginia reserves.
The reserves are shown in detail on Table 1.
- Proven and probable reserve estimates presented by Arch are properly
calculated in accordance with Arch's standard procedures and parameters.
These procedures and parameters comply with practices and standards
generally employed by and within the coal mining industry and are
consistent with the requirements of the Item 102 of Regulation S-K as
well as Industry Guide 7, both of which are promulgated pursuant to the
Securities Act of 1933, as amended.
DEFINITIONS RELATING TO THE COAL RESERVE AUDIT
Definitions of terms and criteria applied in our report based on U.S.
Geological Circular 891, "Coal Resource Classification of U.S. Geological
Survey," 1983, are summarized as follows:
Reserve Classification: Refers to the reliability or accuracy of the
reserve estimate. This report is limited to two reserve classifications:
proven (measured) and probable (indicated), in decreasing order of geologic
assurance.
Proven (Measured) Reserves: Reserves for which (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings or drill
holes; grade and/or quality are computed from the results of detailed
sampling and (b) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is so well defined that size,
shape, depth and mineral contents of reserves are well-established.
Probable (Indicated) Reserves: Reserves for which quantity and grade
and/or quality are computed from information similar to that used for
proven (measured) reserves, but the sites for inspection, sampling and
measurement are farther apart or are otherwise less adequately spaced. The
degree of assurance, although lower than that for proven (measured)
reserves, is high enough to assume continuity between points of
observation.
Additional definitions include:
Recoverable Reserves (Reserves): Tons mined and prepared for sale;
can include both tonnage cleaned and processed in a preparation plant and
ROM tonnage that can be sold without cleaning.
ROM: Run-of-mine tons. Tonnage as mined, including in-seam rock and
out-of-seam dilution (top and bottom rock).
In computing reserves, legal, technical and economic constraints are
taken into account. Reserves are the sum of coal tons classified as proven
and probable. It is emphasized that use of the term reserve implies
assurance of coal tonnage estimates based on industry-standard parameters
of existence, continuity and situational suitability for permitting and
mining related to legal, economic and technical standards. The reserve
estimates prepared by Arch and audited by WIMC adequately account for
mining limitations, including coal in roof and barrier pillars and coal
under railroads, roads, buildings, power lines, or other structures
protected by state restrictions including restrictions on surface
disturbance. These limitations are taken into account by the application of
a mining recovery factor and the exclusion of reserves in areas encumbered
by restrictions.
E-2
WIMC QUALIFICATIONS
WIMC has provided consulting services to the United States and
International mining industries continuously for over 65 years. The company was
founded in 1936 in Chicago, Illinois, as the Paul Weir Company, where the firm
continues to maintain its principal office. WIMC provides independent
professional advice to the mining industry and enjoys an unrivalled reputation
for objectively.
WIMC operates independently from equipment manufacturers, government
agencies and producing companies to ensure total independence.
WIMC is a member of the International Mining Consultants Group, and thus
has access to the resources of the world's largest specialized consulting
company serving the needs of the mining and minerals industries through 400
staff and 34 offices worldwide. WIMC provides a complete range of consulting and
engineering services in mining, geology, geotechnical and hydrogeologic
engineering, environmental investigations, economics, and coal beneficiation,
combustion and utilization. WIMC has been involved in over 4,000 assignments for
clients in all significant geographical areas across the United States and in
many foreign countries.
WIMC is familiar with Arch's fee coal holdings in the Contributed
Properties and has visited many of Arch's operations at the Contributed
Properties in the past six months. Our audit was planned and performed to obtain
a reasonable assurance of the reserve estimates of Arch for the Contributed
Properties. The audit process included a review and examination of exploration
data that supports the reserve estimates as well as assessing the methodology
and practices applied by Arch in formulating the reserve estimates.
In preparing this overview reserve audit report, we have relied on real
property information and other data provided by Arch. We have not independently
investigated real property ownership, verified such data or other information,
or examined any agreements or documents in regard to Arch's reserve ownership or
control.
Based on the foregoing, we believe our findings are reasonable and
realistic and have been developed using accepted engineering practices. All
findings are subject to the accuracy and reliability of the source data used as
the basis of this report.
WIMC is an independent mining consulting firm, and it does not own any
interest in Arch Coal, Inc., Natural Resource Partners L.P., Western Pocahontas
Properties Limited Partnership, Great Northern Properties Limited Partnership or
New Gauley Coal Corporation, or any of their respective affiliates, or in the
Contributed Properties. No employee, officer or director of WIMC is an employee,
officer or director of Arch or any of their respective affiliates. Neither the
employment nor the compensation received by WIMC was contingent upon providing
any of the summary information about the selected coal mining properties.
We appreciate the opportunity to provide Arch with this audit of the
Contributed Properties. If we can be of further assistance, please contact us.
Sincerely,
Weir International Mining Consultants
/s/ DENNIS N. KOSTIC /s/ JOHN W. SABO
----------------------------------------------------- -----------------------------------------------------
Dennis N. Kostic John W. Sabo
President and CEO Senior Vice President
Enclosures
cc: Scott Stewart, Arch Coal, Inc.
E-3
Mr. Nick Carter
April 16, 2002
APPENDIX F
(304) 776-6660
Fax: (304) 776-7867
[STAGG LOGO] Url: www.staggusa.com
E-mail: stagg@charterbn.com
April 16, 2002
Mr. Nick Carter
President
Western Pocahontas Properties Limited Partnership
Suite 300
1035 Third Avenue
P.O. Box 2827
Huntington, West Virginia 25727
Project: Coal Reserve Audit of Selected Properties
Western Pocahontas Properties Limited Partnership,
New Gauley Coal Corporation, and
Great Northern Properties Limited Partnership
United States
Job No. E410-100-122
Dear Nick:
As you requested, Stagg Resource Consultants, Inc. ("STAGG") has conducted
an audit of the reserves at specified properties for which the coal estate was
controlled variously by Western Pocahontas Properties Limited Partnership
("WPPLP"), New Gauley Coal Corporation ("NGCC"), or Great Northern Properties
Limited Partnership ("GNPLP") at December 31, 2001 (respectively, the "Audit"
and the "Audit Date"). The properties included in the Audit are those specified
by you (collectively, the "Audit Properties").
As a result of the work conducted in the Audit, it is our opinion that at
the Audit Date the Audit Properties contained a total of 699.92 million tons of
recoverable coal classified as a reserve. All tonnage is in the proven and
probable categories.
The Audit Properties are located in the following five coal producing
regions of the U.S.
- NORTHERN APPALACHIA -- that portion of the Appalachian Region of the
Eastern Coal Province lying in Maryland, Ohio, Pennsylvania, and northern
West Virginia. Coal rank is bituminous.
- CENTRAL APPALACHIA -- that portion of the Appalachian Region of the
Eastern Coal Province lying in eastern Kentucky, southern West Virginia,
and southwestern Virginia. Coal rank is bituminous.
- SOUTHERN APPALACHIA -- that portion of the Appalachian Region of the
Eastern Coal Province lying in eastern Tennessee, northwestern Georgia,
and Alabama. Coal rank is bituminous.
- ILLINOIS BASIN -- that portion of the Interior Coal Province lying in
Illinois, Indiana, and western Kentucky. Coal rank is bituminous.
- POWDER RIVER BASIN -- that portion of the Northern Great Plains Coal
Province containing subbituminous coal and lying in Montana and Wyoming.
In the Audit, coal quality is reported on an imputed as-received basis,
assuming 6 percent moisture content for coal in the Appalachian regions, 12
percent for coal in the Illinois Basin, and 25 percent for coal in the Powder
River Basin.
STAGG RESOURCE CONSULTANTS, INC.
5457 Big Tyler Road - P.O. Box 7028 - Cross Lanes, West Virginia 25356
F-1
Mr. Nick Carter
April 16, 2002
The distribution of tonnage is presented by region and state in Table 1.
TABLE 1
ASSIGNED PROVEN AND PROBABLE RESERVES
AS OF DECEMBER 31, 2001
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NEW GAULEY COAL CORPORATION
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
---------------------------------------------------
(000'S SHORT TONS)
RECOVERABLE COAL BY RECOVERABLE COAL
RECOVERABLE COAL MINING METHOD BY CONTROL
------------------ --------------------- ---------------- COMPLIANCE
REGION TOTAL PROVEN PROBABLE UNDERGROUND SURFACE OWNED LEASED COAL(1)
------ ------- ------- -------- ----------- ------- ------- ------ ----------
Northern Appalachia.......... 184,661 123,665 60,995 179,315 5,346 184,661 0 12,735
Central Appalachia
Eastern Kentucky............ 120,606 65,477 55,129 75,365 45,241 120,606 0 5,116
Southern West Virginia...... 193,837 135,125 58,712 168,453 25,384 193,756 81 80,711
------- ------- ------- ------- ------- ------- -- -------
Sub-Total.................... 314,443 200,602 113,841 243,818 70,624 314,362 81 85,827
Southern Appalachia.......... 11,929 10,726 1,203 0 11,929 11,929 0 11,929
Illinois Basin............... 21,949 21,949 0 0 21,949 21,949 0 0
Northern Powder River
Basin....................... 166,939 166,939 0 0 166,939 166,939 0 0
------- ------- ------- ------- ------- ------- -- -------
Total........................ 699,921 523,882 176,039 423,134 276,787 699,840 81 110,491
SULFUR CONTENT HEAT CONTENT
----------------------------------- ------------------------
(AS-RECEIVED BASIS) (AS-RECEIVED BASIS)
----------------------------------- ------------------------
REGION LOW MEDIUM HIGH SULFUR BTU'S/LB.
------ --------- ----------- --------- --------- ------------
(< 1.0%) (1.0%-1.5%) (> 1.5%) (%)
Northern Appalachia.......... 21,029 10,986 152,646 2.92 13,232
Central Appalachia
Eastern Kentucky............ 13,987 75,650 30,969 1.41 12,675
Southern West Virginia...... 150,526 2,237 11,074 0.88 18,914
------- ------- -------
Sub-Total.................... 164,513 107,887 42,043 0.69 13,959
Southern Appalachia.......... 11,929 0 0 2.56 11,451
Illinois Basin............... 0 5,803 16,146
Northern Powder River
Basin....................... 166,930 0 0.72 8,444
------- ------- -------
Total........................ 364,410 124,675 210,836
---------------
(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.
F-2
Mr. Nick Carter
April 16, 2002
The distribution of tonnage is presented by controlling entity in Tables 2
through 4.
TABLE 2
ASSIGNED PROVEN AND PROBABLE RESERVES
AS OF DECEMBER 31, 2001
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
-------------------------------------------------------
(000'S SHORT TONS)
RECOVERABLE COAL BY RECOVERABLE COAL
RECOVERABLE COAL MINING METHOD BY CONTROL
------------------ --------------------- ---------------- COMPLIANCE
REGION TOTAL PROVEN PROBABLE UNDERGROUND SURFACE OWNED LEASED COAL(1)
------ ------- ------- -------- ----------- ------- ------- ------ ----------
Northern Appalachia........ 176,745 115,749 60,995 171,399 5,346 176,745 0 4,819
Central Appalachia
Eastern Kentucky.......... 120,606 65,477 55,129 75,365 45,241 120,606 0 5,116
Southern West Virginia.... 193,837 135,125 58,712 168,453 25,384 193,756 81 80,711
------- ------- ------- ------- ------- ------- -- ------
Sub-Total.................. 314,443 200,602 113,841 243,818 70,624 314,362 81 85,827
Illinois Basin............. 21,949 21,949 0 0 21,949 21,949 0 0
------- ------- ------- ------- ------- ------- -- ------
Total...................... 513,136 338,300 174,836 415,217 97,919 513,055 81 90,646
SULFUR CONTENT HEAT CONTENT
----------------------------------- ------------------------
(AS-RECEIVED BASIS) (AS-RECEIVED BASIS)
----------------------------------- ------------------------
REGION LOW MEDIUM HIGH SULFUR BTU'S/LB.
------ --------- ----------- --------- --------- ------------
(< 1.0%) (1.0%-1.5%) (> 1.5%) (%)
Northern Appalachia........ 13,113 10,986 152,646 2.36 13,206
Central Appalachia
Eastern Kentucky.......... 13,987 75,650 30,969 1.41 12,675
Southern West Virginia.... 150,526 32,237 11,074 0.88 13,185
------- ------- -------
Sub-Total.................. 164,513 107,887 42,043 2.56 11,451
Illinois Basin............. 0 5,803 16,146
------- ------- -------
Total...................... 177,626 124,675 210,836
---------------
(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.
TABLE 3
ASSIGNED PROVEN AND PROBABLE RESERVES
AS OF DECEMBER 31, 2001
NEW GAULEY COAL CORPORATION
---------------------------------
(000'S SHORT TONS)
RECOVERABLE COAL BY RECOVERABLE
RECOVERABLE COAL MINING METHOD COAL BY CONTROL
----------------- --------------------- --------------- COMPLIANCE
REGION TOTAL PROVEN PROBABLE UNDERGROUND SURFACE OWNED LEASED COAL(1)
------ ------ ------ -------- ----------- ------- ------ ------ ----------
Northern Appalachia.............. 7,917 7,917 0 7,917 0 7,917 0 7,917
Southern Appalachia.............. 11,929 10,726 1,203 0 11,929 11,929 0 11,929
------ ------ ----- ----- ------ ------ -- ------
Total............................ 19,846 18,643 1,203 7,917 11,929 19,846 0 19,846
SULFUR CONTENT HEAT CONTENT
----------------------------------- ------------------------
(AS-RECEIVED BASIS) (AS-RECEIVED BASIS)
----------------------------------- ------------------------
REGION LOW MEDIUM HIGH SULFUR BTU'S/LB.
------ --------- ----------- --------- --------- ------------
(< 1.0%) (1.0%-1.5%) (> 1.5%) (%)
Northern Appalachia.............. 7,917 0 0 0.67 13,829
Southern Appalachia.............. 11,929 0 0 0.69 13,959
------ -- --
Total............................ 19,846 0 0
---------------
(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.
F-3
Mr. Nick Carter
April 16, 2002
TABLE 4
ASSIGNED PROVEN AND PROBABLE RESERVES
AS OF DECEMBER 31, 2001
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
-------------------------------------------------------
(000'S SHORT TONS)
RECOVERABLE
RECOVERABLE COAL BY COAL BY
RECOVERABLE COAL MINING METHOD CONTROL
------------------ --------------------- -------------- COMPLIANCE
REGION TOTAL PROVEN PROBABLE UNDERGROUND SURFACE OWNED LEASED COAL(1)
------ ------- ------- -------- ----------- ------- ----- ------ ----------
Northern Powder River
Basin..................... 166,939 166,939 0 0 166,939 0 0 0
------- ------- -- -- ------- -- -- --
Total...................... 166,939 166,939 0 0 166,939 0 0 0
SULFUR CONTENT HEAT CONTENT
----------------------------------- ------------------------
(AS-RECEIVED BASIS) (AS-RECEIVED BASIS)
----------------------------------- ------------------------
REGION LOW MEDIUM HIGH SULFUR BTU'S/LB.
------ --------- ----------- --------- --------- ------------
(< 1.0%) (1.0%-1.5%) (> 1.5%) (%)
Northern Powder River
Basin..................... 166,930 0 0 0.72 8,444
------- -- --
Total...................... 166,930 0 0
---------------
(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.
The objective of the Audit is to provide an independent assessment and
opinion of the reserves present on the Audit Properties in accordance with sound
professional practices currently accepted for use in estimating coal reserves.
Reserve estimates can be classified according to the relative degree of geologic
assurance of the estimates, a function of varying distances from points of
control or reliability. In the Audit, only those reserves in the proven
(measured) and probable (indicated) classifications are included. The
definitions of these terms as set forth in Securities Act Industry Guide 7
issued by the United States Security and Exchange Commission are as follows.
- Reserve -- That part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve determination.
Note: Reserves are customarily stated in terms of "ore" when dealing with
metalliferous minerals; when other materials such as coal, oil, shale,
tar, sands, limestone, etc. are involved, an appropriate term such as
"recoverable coal" may be substituted.
- Proven (Measured) Reserves -- Reserves for which (a) quantity is computed
from dimensions revealed in outcrops, trenches, workings or drill holes;
grade and/or quality are computed from the results of detailed sampling
and (b) the sites for inspection, sampling and measurement are spaced so
closely and the geologic character is so well defined that size, shape,
depth and mineral content of reserves are well-established.
- Probable (Indicated) Reserves -- Reserves for which quantity and grade
and/or quality are computed from information similar to that used for
proven (measured) reserves, but the sites for inspection, sampling, and
measurement are farther apart or are otherwise less adequately spaced.
The degree of assurance, although lower than that for proven (measured)
reserves, is high enough to assume continuity between points of
observation.
In estimating reserves, legal, technical, and economic constraints are
taken into account. In the Audit, reserves are the sum of the tons of
recoverable coal classified as proven (measured) and probable (indicated), as
defined above. It is emphasized that the use of the term reserve in the Audit
implies assurance of coal tonnage estimates based on industry-standard
parameters of existence, continuity, and situational suitability for permitting
and mining related to legal, economic, and technical standards.
The reserve estimates prepared by WPPLP, NGCC, and GNPLP, its lessees, and
consultants and audited by STAGG, as well as those estimates prepared by STAGG,
adequately account for mining limitations, including coal in roof and barrier
pillars and coal under railroads, roads, buildings, power lines,
F-4
Mr. Nick Carter
April 16, 2002
or other structures protected by state restrictions including restrictions on
surface disturbance. These limitations are taken into account by the application
of mining recovery factors and the exclusion of tonnage in areas encumbered by
restrictions.
In the Audit, detailed reviews of material in the files of WPPLP, NGCC, and
GNPLP were conducted in conjunction with interviews of WPPLP's and NGCC's mine
inspectors assigned to the various properties. The material reviewed included
reserve studies prepared both internally by a number of lessees and by
consulting firms, as well as mine maps, production records, and quality data.
Regarding GNPLP's properties, a review of material in GNPLP's files and a review
of mine maps with a representative of the principal producing lessee were
conducted. During the latter review, the configuration of the various surface
mine pits at the Audit Date was established, and discussions of geologic and
operating conditions were conducted. For each of the three controlling entities,
considerable reliance was placed on reserve estimates prepared previously by
STAGG at the following dates:
- Western Pocahontas Properties Limited Partnership......... February 1, 1998
- New Gauley Coal Corporation............................... February 1, 1998
- Great Northern Properties Limited Partnership............. December 1, 1998
In some instances, reserve estimates were prepared by STAGG in the Audit.
STAGG is familiar with the Audit Properties on a continuing basis by virtue
of annual reviews of WPPLP's and NGCC's lessees it conducts for these entities'
lender.
In the Audit, STAGG relied solely on maps provided by WPPLP, NGCC, and
GNPLP in establishing property control and boundaries, and makes no
representation regarding either WPPLP's, NGCC's, or GNPLP's interests in the
Audit Properties, nor to the current status or validity of any deed, lease,
sublease, or lease assignment affecting the Audit Properties. All property lines
were taken from the best available information and are assumed to be accurate
for the purpose of the Audit.
STAGG is a natural resource consulting firm that has provided services to
the mining industry for 27 years, with the majority of its work involving coal.
All work in the Audit was jointly supervised by Alan Stagg and Joe Norris, who
have 38 and 27 years experience, respectively, in the mining industry. Both are
variously registered, certified, or licensed professional geologists in a number
of states as applicable and both have worked in virtually every coal basin of
any significance in the United States.
STAGG's compensation is not contingent upon the reporting of predetermined
estimates of tonnage. Additionally, neither STAGG nor any employee of STAGG has
any ownership interest in WPPLP; NGCC; GNPLP; Arch Coal, Inc.; or Natural
Resource Partners L.P. or any Audit Property; nor is any employee of STAGG an
employee, officer, or director of any of these entities or of an affiliated
entity thereof.
All background material, work notes, maps, and documents that were used in
developing the tonnage estimates contained herein are retained in STAGG's files.
F-5
Mr. Nick Carter
April 16, 2002
Sincerely yours,
STAGG RESOURCE CONSULTANTS, INC.
/s/ JOE G. NORRIS
--------------------------------------
Joe G. Norris, C.P.G.
Vice President -- Geology and
Principal Mine Geologist
AIPG Certified Professional Geologist
No. 8002
/s/ ALAN K. STAGG
--------------------------------------
Alan K. Stagg, R.P.G.
President and Principal Economic
Geologist
Alabama Registered Professional
Geologist No. 623
Indiana Licensed Geologist No. 2059
Kentucky Registered Professional
Geologist No. 953
:aks/jgn
Attachments
F-6
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,576,890 COMMON UNITS
NATURAL RESOURCE PARTNERS L.P.
REPRESENTING
LIMITED PARTNER INTERESTS
(NATURAL RESOURCE PARTNERS L.P. LOGO)
------------
PROSPECTUS
, 2002
------------
SALOMON SMITH BARNEY
LEHMAN BROTHERS
A.G. EDWARDS & SONS, INC.
FRIEDMAN BILLINGS RAMSEY
RBC CAPITAL MARKETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NYSE filing fee, the amounts set forth below are estimates.
Registration fee............................................ $ 9,999
NASD filing fee............................................. 11,368
NYSE listing fee............................................ 151,100
Printing and engraving expenses............................. 700,000
Fees and expenses of legal counsel.......................... 1,500,000
Accounting fees and expenses................................ 1,000,000
Transfer agent and registrar fees and expenses.............. 4,000
Miscellaneous............................................... 248,533
----------
Total..................................................... $3,625,000
---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The section of the prospectus entitled "The Partnership
Agreement -- Indemnification" discloses that we will generally indemnify
officers, directors and affiliates of the general partner to the fullest extent
permitted by law against all losses, claims, damages or similar events and is
incorporated herein by this reference. Reference is also made to Section 8 of
the Underwriting Agreement to be filed as an exhibit to this registration
statement, in which the WPP Group, Arch Coal and their affiliates will agree to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, and to contribute to payments that
may be required to be made in respect of these liabilities. Subject to any
terms, conditions or restrictions set forth in the partnership agreement,
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers
a Delaware limited partnership to indemnify and hold harmless any partner or
other person from and against all claims and demands whatsoever.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In April 2002, in connection with the formation of the partnership, Natural
Resource Partners L.P. issued to (i) NRP (GP) LP the 2% general partner interest
in the partnership for $20 and (ii) GP Natural Resource Partners LLC the 98%
limited partner interest in the partnership for $980 in an offering exempt from
registration under Section 4(2) of the Securities Act. There have been no other
sales of unregistered securities within the past three years.
ITEM 16. EXHIBITS
The following documents are filed as exhibits to this registration
statement:
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------
1.1 -- Form of Underwriting Agreement
3.1** -- Certificate of Limited Partnership of Natural Resource
Partners L.P.
II-1
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------
3.2 -- Form of First Amended and Restated Agreement of Limited
Partnership of Natural Resource Partners L.P. (included as
Appendix A to the Prospectus)
3.3** -- Certificate of Formation of NRP (Operating) LLC
3.4** -- Form of First Amended and Restated Limited Liability Company
Agreement of NRP (Operating) LLC
3.5** -- Certificate of Limited Partnership of NRP (GP) LP
3.6 -- Form of First Amended and Restated Agreement of Limited
Partnership of NRP (GP) LP
3.7** -- Certificate of Formation of GP Natural Resource Partners LLC
3.8 -- Form of Second Amended and Restated Limited Liability
Company Agreement of GP Natural Resource Partners LLC
5.1 -- Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities being registered
8.1 -- Opinion of Vinson & Elkins L.L.P. relating to tax matters
10.1* -- Form of Credit Facility
10.2 -- Form of Contribution, Conveyance and Assumption Agreement
10.3** -- Form of Natural Resource Partners Long-Term Incentive Plan
10.4** -- Form of Natural Resource Partners Annual Incentive Plan
10.5 -- Form of Omnibus Agreement
21.1** -- List of subsidiaries of Natural Resource Partners L.P.
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Ernst & Young LLP
23.3 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1)
23.4 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit 8.1)
23.5** -- Consent of Weir International Mining Consultants
23.6** -- Consent of Stagg Resource Consultants, Inc.
24.1** -- Powers of Attorney
---------------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on July 2, 2002.
NATURAL RESOURCE PARTNERS L.P.
By: NRP (GP) LP
its General Partner
By: GP Natural Resource Partners LLC
its General Partner
By: /s/ DWIGHT L. DUNLAP
------------------------------------
Name: Dwight L. Dunlap
Title: Chief Financial Officer
and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CORBIN J. ROBERTSON, JR.* Chief Executive Officer and July 2, 2002
------------------------------------------------ Chairman of the Board of
Corbin J. Robertson, Jr. Directors (Principal Executive
Officer)
/s/ DWIGHT L. DUNLAP Chief Financial Officer (Principal July 2, 2002
------------------------------------------------ Financial Officer)
Dwight L. Dunlap
/s/ KENNETH HUDSON* Controller (Principal Accounting July 2, 2002
------------------------------------------------ Officer)
Kenneth Hudson
/s/ STEVEN F. LEER* Director July 2, 2002
------------------------------------------------
Steven F. Leer
/s/ S. REED MORIAN* Director July 2, 2002
------------------------------------------------
S. Reed Morian
/s/ DAVID B. PEUGH* Director July 2, 2002
------------------------------------------------
David B. Peugh
/s/ W. W. SCOTT, JR.* Director July 2, 2002
------------------------------------------------
W. W. Scott, Jr.
*By: /s/ DWIGHT L. DUNLAP
-----------------------------------------
Dwight L. Dunlap
Attorney-in-Fact
II-4
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------
1.1 -- Form of Underwriting Agreement
3.1** -- Certificate of Limited Partnership of Natural Resource
Partners L.P.
3.2 -- Form of First Amended and Restated Agreement of Limited
Partnership of Natural Resource Partners L.P. (included as
Appendix A to the Prospectus)
3.3** -- Certificate of Formation of NRP (Operating) LLC
3.4** -- Form of Amended and Restated Limited Liability Company
Agreement of NRP (Operating) LLC
3.5** -- Certificate of Limited Partnership of NRP (GP) LP
3.6 -- Form of First Amended and Restated Agreement of Limited
Partnership of NRP (GP) LP
3.7** -- Certificate of Formation of GP Natural Resource Partners LLC
3.8 -- Form of Second Amended and Restated Limited Liability
Company Agreement of GP Natural Resource Partners LLC
5.1 -- Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities being registered
8.1 -- Opinion of Vinson & Elkins L.L.P. relating to tax matters
10.1* -- Form of Credit Facility
10.2 -- Form of Contribution, Conveyance and Assumption Agreement
10.3** -- Form of Natural Resource Partners Long-Term Incentive Plan
10.4** -- Form of Natural Resource Partners Annual Incentive Plan
10.5 -- Form of Omnibus Agreement
21.1** -- List of subsidiaries of Natural Resource Partners L.P.
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Ernst & Young LLP
23.3 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1)
23.4 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit 8.1)
23.5** -- Consent of Weir International Mining Consultants
23.6** -- Consent of Stagg Resource Consultants, Inc.
24.1** -- Powers of Attorney
---------------
* To be filed by amendment.
** Previously filed.