NRP

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for Natural Resource Partners L.P. (NRP). NRP is a newly formed master limited partnership created to own and manage coal properties in Appalachia, the Illinois Basin, and the Western United States. The filing presents unaudited pro forma financial statements reflecting the combination of assets contributed by the WPP Group (Western Pocahontas, Great Northern, New Gauley) and Arch Coal, Inc., in connection with NRP's initial public offering (IPO) which closed in October 2002. NRP has no employees; operations are managed by its general partner and affiliates.

Key Financial Metrics (Pro Forma)

The following metrics reflect the pro forma results as if the IPO and asset contributions occurred at the beginning of the periods presented.

Note: Pro forma statements exclude general and administrative expenses of the contributing entities. NRP's pro forma balance sheet reflects the repayment of $46.5 million in debt assumed from the WPP Group using IPO proceeds.

Material Changes vs. Prior Period

• Revenue Growth: Pro forma coal royalties for the nine months ended Sept 30, 2002, were $35.6 million, compared to $31.1 million for the same period in 2001 (historical combined). This represents a 14.6% increase, driven primarily by higher production volumes and royalty rates.
• Production Volume: Pro forma production for the nine months ended Sept 30, 2002, was 21.6 million tons, an increase of 6.7% from 20.2 million tons in the prior year period.
• Debt Reduction: A material change in capital structure occurred post-period. NRP utilized $46.5 million of IPO proceeds to repay debt assumed from the WPP Group, resulting in a pro forma debt-free balance sheet at the time of the offering.
• Asset Acquisition: The pro forma balance sheet includes a $121.0 million step-up in the value of Arch Coal Contributed Properties to fair value, increasing property and equipment significantly compared to historical book values.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Management Commentary

Management expects cash generated from operations and borrowing capacity to be sufficient to meet working capital and capital expenditure needs. NRP's revenue is almost entirely dependent on lessees' ability to mine and market coal reserves. Royalties are based on the higher of a percentage of gross sales or a fixed price per ton, subject to minimums.

Risks and Contingencies

• Legal Proceedings (Kentuckians for the Commonwealth v. Rivenburgh): A federal district court ruling in May 2002 enjoined the U.S. Army Corps of Engineers from issuing permits for valley fills in the Huntington, WV district. This ruling affects properties generating approximately 50% of NRP's pro forma coal royalty revenues for the nine months ended Sept 30, 2002. The case is on appeal, and NRP cannot predict the ultimate outcome or financial impact.
• Market Risk: NRP is exposed to coal price fluctuations. While 75% of coal is sold under contracts of one year or more, spot prices have varied. A decline in coal prices or lessee bankruptcies could adversely affect royalty payments.
• Environmental Liability: While lessees are responsible for reclamation and indemnify NRP, NRP could be held liable if lessees and bonding companies fail to meet obligations.

Unusual Items

• Reversionary Interest Purchase: Western Pocahontas purchased a reversionary interest from CSX in March 2002, financed by a $45 million loan. This increased depletion and interest expenses for the period.
• Depletion Error Correction: Western Pocahontas adjusted prior period depletion expense for the quarter ended June 30, 2002, due to an erroneous application of depletion rates, reducing net income by approximately $0.5 million.

Investor Verification Checklist

• Pro Forma Adjustments: Verify the specific adjustments made to exclude retained assets (timber, surface land) and the fair value step-up of Arch Coal assets, as these significantly alter historical comparability.
• Legal Risk Exposure: Assess the potential financial impact of the Kentuckians for the Commonwealth v. Rivenburgh ruling on the 50% of revenue derived from the affected Huntington district.
• Debt Structure: Confirm the terms of the new credit facility and the extent to which the $46.5 million debt repayment was permanent versus refinanced.
• Related Party Transactions: Review the management agreements with the WPP Group and Arch Coal affiliates, including the $250,000 annual fee paid by Great Northern to Western Pocahontas and the royalty rates paid to affiliates.
• Subsequent Acquisition: Note the November 6, 2002, agreement to purchase 120 million tons of coal reserves from El Paso Corporation for $69 million, which will be financed via NRP's credit line.