-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, INlSf+wFIg4UfylCkwaYS9rZ7eZ13WqjEa3vZHs5EUt8gMlkNrpo6ou7Pm9JT0X+ mynVRZd6ob6fgmNg6lObRw== 0000950129-03-001690.txt : 20030331 0000950129-03-001690.hdr.sgml : 20030331 20030328192405 ACCESSION NUMBER: 0000950129-03-001690 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATURAL RESOURCE PARTNERS LP CENTRAL INDEX KEY: 0001171486 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE MINING [1220] IRS NUMBER: 352164875 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31465 FILM NUMBER: 03626838 BUSINESS ADDRESS: STREET 1: 601 JEFFERSON STREET STREET 2: SUITE 3600 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7137517514 MAIL ADDRESS: STREET 1: 601 JEFFERSON STREET STREET 2: SUITE 3600 CITY: HOUSTON STATE: TX ZIP: 77002 10-K 1 h04228e10vk.txt NATURAL RESOURCE PARTNERS L.P.- DECEMBER 31, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-31465 NATURAL RESOURCE PARTNERS L.P. (Exact name of registrant as specified in its charter) DELAWARE 35-2164875 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 610 JEFFERSON, SUITE 3600 77002 HOUSTON, TEXAS (Zip Code) (Address of principal executive offices)
(713) 751-7507 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Units representing limited partnership interests New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes [ ] No [X] The aggregate value of the Common Units held by non-affiliates of the registrant (treating all executive officers and directors of the registrant and holders of 10% or more of the Common Units outstanding, for this purpose, as if they were affiliates of the registrant) was approximately $89,502,660 on December 31, 2002(1) based on a price of $20.70 per unit, the closing price of the Common Units as reported on the New York Stock Exchange on that date. As of March 15, 2003, there were 11,353,658 Common Units outstanding and 11,353,658 Subordinated Units outstanding. DOCUMENTS INCORPORATED BY REFERENCE. None. (1)The registrant completed its initial public offering in October 2002. Because the registrant has not yet completed a "second fiscal quarter" it is stating the aggregate value of the Common Units as of December 31, 2002, the last business day of its most recently completed fiscal quarter. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
ITEM PAGE ---- ---- PART I 1. and 2. Business and Properties..................................... 2 3. Legal Proceedings........................................... 15 4. Submission of Matters to a Vote of Securities Holders....... 15 PART II 5. Market for Registrant's Common Units and Related Unitholder Matters..................................................... 15 6. Selected Financial Data..................................... 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 22 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 41 8. Financial Statements and Supplementary Data................. 42 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure........................................ 96 PART III 10. Directors and Executive Officers of the General Partner..... 97 11. Executive Compensation...................................... 100 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 102 13. Certain Relationships and Related Transactions.............. 103 14. Controls and Procedures..................................... 110 PART IV 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 110
1 NATURAL RESOURCE PARTNERS L.P. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES Natural Resource Partners L.P. (the "Partnership" or "NRP") is a limited partnership formed in April 2002 by the WPP Group and Arch Coal, Inc. ("Arch Coal"). We engage principally in the business of owning and managing coal properties in the three major coal-producing regions of the United States: Appalachia, the Illinois Basin and the Western United States. As of December 31, 2002, we controlled approximately 1.23 billion tons of proven and probable coal reserves in eight states. We do not operate any mines. We lease coal reserves to experienced mine operators under long-term leases that grant the operators the right to mine our coal reserves in exchange for royalty payments. Our lessees are generally required to make payments to us based on the higher of a percentage of the gross sales price or a fixed price per ton of coal sold, in addition to a minimum payment. The WPP Group includes Western Pocahontas Properties Limited Partnership, New Gauley Coal Corporation and Great Northern Properties Limited Partnership, three privately held companies that are primarily engaged in owning and managing mineral properties. Western Pocahontas Properties Limited Partnership was established in connection with the acquisition of properties located in West Virginia, Kentucky, Maryland, Indiana and Alabama from CSX Corporation in 1986. As part of Western Pocahontas Properties Limited Partnership's acquisition of the CSX properties, Western Pocahontas Properties Limited Partnership acquired New Gauley Coal Corporation, which held additional properties in West Virginia. Great Northern Properties Limited Partnership was established with the acquisition in 1992 from Burlington Resources of properties primarily located in Montana. We completed our initial public offering of 2,598,750 common units at a price of $20.00 per unit on October 17, 2002, from which we received net proceeds of approximately $48.4 million. Simultaneously, Arch Coal sold 1,901,250 common units at the same price. We did not receive any proceeds from the sale by Arch Coal of these units. At the time of the our initial public offering, the WPP Group transferred certain assets and liabilities to us in exchange for: - 3,882,485 common units; - 6,556,738 subordinated units; - 25% of the incentive distribution rights; - a 57.75% limited partner interest in NRP (GP) LP, the general partner of the Partnership; and - the assumption of $46.5 million of debt contributed by the WPP Group which was paid from the proceeds of the initial public offering. Simultaneously, Arch Coal transferred certain assets and liabilities to the Partnership in exchange for: - 4,796,920 common units (of which Arch Coal subsequently sold 1,901,250 units); - 4,796,920 subordinated units; - 10% of the incentive distribution rights; and - a 42.25% limited partner interest in NRP (GP) LP, the general partner of the Partnership. Subsequently, we sold 75,503 common units at the initial public offering price to Great Northern and New Gauley because the underwriters did not exercise their over-allotment option. Simultaneously with the initial public offering, we entered into a $100,000,000 revolving credit facility arrangement with a group of banks led by PNC Bank. As we are actively pursuing additional property acquisitions, we are currently in discussions with a group of banks to increase our revolving credit facility. 2 PARTNERSHIP STRUCTURE AND MANAGEMENT Our operations are conducted through, and our operating assets are owned by, our subsidiaries. We own our subsidiaries through an operating company, NRP (Operating) LLC. At March 1, 2003, our partnership structure is as follows: - NRP (GP) LP, our general partner, owns the 2% general partner interest in us, as well as 65% of the incentive distribution rights, which entitle the holder to receive a higher percentage of cash distributed in excess of $0.5625 per unit in any quarter; - the WPP Group owns 25% of the incentive distribution rights and Arch Coal owns the remaining 10% of the incentive distribution rights; - we own 100% of the membership interests in the operating company; and - the operating company owns 100% of the membership interests in its subsidiaries: NNG LLC, WPP LLC, GNP LLC, ACIN LLC, and CSTL LLC. Our general partner has sole responsibility for conducting our business and for managing our operations. Because our general partner is a limited partnership, its general partner, GP Natural Resource Partners LLC, will conduct its business and operations and the board of directors and officers of GP Natural Resource Partners LLC makes decisions on our behalf. Arch Coal owns a 42.25% membership interest in and is entitled to nominate three directors, including one independent director, of GP Natural Resource Partners LLC. Robertson Coal Management LLC, a limited liability company wholly owned by Corbin J. Robertson, Jr., owns a 57.75% membership interest in and is entitled to nominate five directors, including two independent directors, of GP Natural Resource Partners LLC. Corbin J. Robertson, Jr. controls each entity comprising the WPP Group. Mr. Robertson owns the general partner of Western Pocahontas Properties Limited Partnership, 85% of the general partner of Great Northern Properties Limited Partnership and is the Chairman, Chief Executive Officer and controlling stockholder of New Gauley Coal Corporation. The senior executives and other officers who currently manage the WPP Group assets also manage us. They are employees of Western Pocahontas Properties Limited Partnership and Quintana Minerals Corporation, a company controlled by Mr. Robertson, and they allocate varying percentages of their time to managing our operations. Neither our general partner, GP Natural Resource Partners LLC, nor their affiliates receive any management fee or other compensation in connection with the management of our business but are entitled to be reimbursed for all direct and indirect expenses incurred on our behalf. The offices of Western Pocahontas Properties Limited Partnership are located at P.O. Box 2827, 1035 Third Avenue, Suite 300, Huntington, West Virginia 25727 and the telephone number is (304) 522-5757. Our principal executive offices are located at 601 Jefferson Street, Suite 3600, Houston, Texas 77002 and our phone number is (713) 751-7507. OUR RELATIONSHIP WITH THE WPP GROUP AND ARCH COAL The WPP Group and Arch Coal have a significant interest in our partnership through their combined ownership of a 78.6% limited partner interest and the 2% general partner interest in our partnership. Both the WPP Group and Arch Coal have a history of successfully completing and integrating acquisitions in the coal industry. We expect to pursue acquisitions with the WPP Group and Arch Coal, as well as with other companies. We may acquire coal reserve properties, other mineral properties or producing coal properties, in which event we would expect to work with a coal producing company that would acquire the mine assets and lease the reserves from us. RECENT ACQUISITION OF COAL PROPERTIES On December 4, 2002, we acquired, through our subsidiary CSTL LLC, mineral rights to approximately 120 million tons of coal reserves from subsidiaries of El Paso Corporation for $57 million in cash. Approximately one-half of these reserves are located in Kentucky, and the remainder are in Virginia and West Virginia. Some of these reserves were leased to and mined by subsidiaries of El Paso Corporation. On some of 3 the properties, El Paso retained an overriding royalty interest. This acquisition consisted of approximately 177,000 acres of mineral property (including approximately 25,000 surface acres). Other revenue from the property will arise from timber harvests, surface leases and oil and gas royalty. We also acquired an overriding royalty interest in coal in North Dakota. Subsequent to our acquisition, El Paso sold the overriding royalty it retained to a subsidiary of Alpha Natural Resources, LLC ("Alpha"). On February 26, 2003, we acquired the override from Alpha for $11.9 million. We utilized our revolving credit facility to finance both acquisitions. MAJOR COAL PROPERTIES The following is a summary of our major coal producing properties that were contributed to NRP on October 17, 2002. Each of these properties produced more than 1.0 million tons for the entire year during 2002. We have included in this list two properties on which we acquired the reserves on December 4, 2002 and leased the reserves back to either Coastal Coal Company, LLC or Coastal Coal -- WV, LLC. APPALACHIA Evans-Laviers. The Evans-Laviers property is located in Breathitt, Floyd, Knott and Magoffin Counties, Kentucky. In 2002, 3.41 million tons were produced from our property. We lease the property to CONSOL of Kentucky Inc., a subsidiary of publicly held CONSOL Energy Inc., which operates an underground mine and contracts the operations of other mines to third-party operators. Additionally, a sublessee operates a surface and highwall mine on the property. The underground mine is on our property as well as adjacent property. The coal produced from this property is trucked to the Big Sandy River for barge transport or is transported by truck or beltline to preparation plants located on-site and on adjacent property. Coal is shipped from the preparation plants on the CSX railroad to customers such as DuPont, Virginia Electric Power, Southern Company, American Electric Power and Electric Fuels. Lynch. The Lynch property is located in Harlan and Letcher Counties, Kentucky. In 2002, 2.97 million tons were produced from our property. We primarily lease the property to Resource Development, L.L.C., an independent coal producer. Production comes from underground mines and a surface mine. Production from the mines is transported by truck to a preparation plant on the property and is shipped primarily on the CSX railroad to utility customers such as Georgia Power and Orlando Utilities. Eunice. The Eunice property is located in Raleigh and Boone Counties, West Virginia. In 2002, 2.55 million tons were produced from our property. We lease the property to Boone East Development Co., a subsidiary of publicly held Massey Energy Company. Boone East Development, through affiliates, conducts two operations on the property, including a surface operation and an underground (longwall) mine. These operations extend onto adjacent reserves and will also extend onto a portion of our nearby Y&O property. Production from this operation is generally transported by beltline and processed at two preparation plants located off the property. The preparation plants ship both metallurgical and steam coal on the CSX railroad to customers such as American Electric Power, CINergy, Louisville Gas & Electric, Virginia Electric Power, AK Steel and U.S. Steel. Lone Mountain. The Lone Mountain property is located in Harlan County, Kentucky. In 2002, 2.53 million tons were produced from our property. We lease the property to Ark Land Company, a subsidiary of publicly held Arch Coal, Inc. Production comes from underground mines. Production from the mines is transported primarily by beltline to a preparation plant on adjacent property and shipped on the Norfolk Southern or CSX railroads to utility customers such as Georgia Power and the Tennessee Valley Authority. VICC. The VICC property is located in Wise, Dickenson and Russell Counties, Virginia. In 2002, 2.5 million tons were produced from this property. We purchased this property in December 2002 from a subsidiary of El Paso Corporation and leased it to Coastal Coal Company, LLC, which had been operating this mine complex prior to the acquisition. Production comes from several underground mines. Coal is shipped on the Norfolk Southern railroad to utilities such as Southern Company, TVA and VEPCO. Subsequent to the end of 2002, this lease was acquired by Alpha Natural Resources or certain of its affiliates. 4 Kingwood. The Kingwood property is located in Preston County, West Virginia. In 2002, 2.45 million tons were produced from this property. We purchased this property in December 2002 from a subsidiary of El Paso Corporation and leased it to Coastal Coal -- WV, LLC, which had been operating this underground mine prior to the acquisition. Coal is shipped on the CSX railroad to utilities such as Mirant, Allegheny Power and VEPCO. Subsequent to the end of 2002, this lease was acquired by Alpha Natural Resources or certain of affiliates. Pardee. The Pardee property is located in Letcher County, Kentucky and Wise County, Virginia. In 2002, 1.5 million tons were produced from our property. We lease the property to Ark Land. Production comes from underground mines and a surface mine. Production from the mines is transported by truck or beltline to a preparation plant on the property and is shipped primarily on the Norfolk Southern railroad to utility customers such as Georgia Power and the Tennessee Valley Authority. Campbell's Creek. The Campbell's Creek property is located in Kanawha County, West Virginia. In 2002, 1.09 million tons were produced from our property. The property is leased to Ark Land. Production comes from an underground mine and is transported by truck to an on-site preparation plant. After preparation, the coal is trucked to various loading points for shipment by barge, or directly to customers such as Dayton Power & Light, Ohio Edison, Kentucky Utilities and Union Carbide. ILLINOIS BASIN Hocking-Wolford/Cummings. The Hocking-Wolford property and the Cummings property are both located in Sullivan County, Indiana. In 2002, 1.07 million tons were produced from our property. Both properties are under common lease to Black Beauty Coal Company, an affiliate of Peabody Energy. Production is currently from a surface mine, and a dragline is being moved onto the property. Coal is shipped by truck and railroad to customers such as Public Service of Indiana and Indianapolis Power and Light. NORTHERN POWDER RIVER BASIN Big Sky. The Big Sky property is located adjacent to and to the south of the Western Energy property in Rosebud County, Montana. In 2002, 1.73 million tons were produced from our property. The property is leased to Big Sky Coal Company, a subsidiary of publicly held Peabody Energy. Big Sky Coal Company produces coal by surface (dragline) mining. Coal is shipped on the Burlington Northern Santa Fe railroad to utilities such as Minnesota Power and Northern States Power. Western Energy. The Western Energy property is located in Rosebud and Treasure Counties, Montana. In 2002, 3.75 million tons were produced from our property. Western Energy Company, a subsidiary of publicly-held Westmoreland Coal Company, has two coal leases on the property with nearly identical provisions. Western Energy produces coal by surface (dragline) mining, and the coal is transported by either truck or beltline to the four-unit 2,200-megawatt Colstrip generation station located at the mine mouth. A small amount of coal is transported by truck or the Burlington Northern Santa Fe railroad to other customers. COAL ROYALTY BUSINESS Coal royalty businesses are principally engaged in the business of owning and managing coal reserves. As an owner of coal reserves, royalty businesses typically are not responsible for operating mines, but instead enter into long-term leases with third-party coal mine operators granting them the right to mine coal reserves on the owner's property in exchange for a royalty payment. A standard lease has a 5 to 10 year base term, with the lessee having an option to extend the lease for additional terms. Leases often include the right to renegotiate rents and royalties for the extended term. Coal royalty revenues are affected by changes in coal prices, lessees' supply contracts and, to a lesser extent, fluctuations in the spot market prices for coal. The prevailing price for coal depends on a number of factors, including the supply-demand relationship, the price and availability of alternative fuels, overall economic conditions and governmental regulations. In addition to their royalty obligation, lessees are often subject to pre-established minimum monthly, quarterly or annual payments. These minimum rentals reflect 5 amounts owners are entitled to receive even if no mining activity occurred during the period. Minimum rentals are often credited against future production royalties that are earned when coal production commences. Because royalty businesses do not operate any mines, they do not bear ordinary operating costs and have limited direct exposure to environmental, permitting and labor risks. As operators, the lessees are subject to environmental laws, permitting requirements and other regulations adopted by various governmental authorities. In addition, the lessees bear the labor risks, including health care legacy costs, black lung benefits and workmen's compensation costs, associated with operating the mines. Royalty businesses typically pay property taxes and then are reimbursed by the lessee for the taxes on the leased property, pursuant to the terms of the lease. Our business is not seasonal, although at times severe winter weather can cause a short-term decrease in coal production by our lessees, due to the weather's negative impact on production. We have three lessees who provided more than 10% of our revenue in 2002: Arch Coal, Massey Energy and Peabody Coal. Each of these companies has several different mines on our properties. While the loss of any one of these lessees would have a material adverse effect on us, we do not believe that the loss of any single mine would have a material adverse effect on us. COAL RESERVES AND PRODUCTION The following table sets forth 2002 and 2001 coal royalty revenues from the properties that were contributed to NRP on October 17, 2002. These coal royalties represent production from the properties, for the years ending December 31, 2002 and 2001, respectively. Coal royalty revenue was generated from the properties in each of the following areas: Appalachia, Illinois Basin and Northern Powder River Basin. COAL ROYALTY REVENUES FROM CONTRIBUTED PROPERTIES
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ (IN THOUSANDS) AREA Appalachia.................................................. $40,688 $31,719 Illinois Basin.............................................. 2,994 3,155 Northern Powder River Basin................................. 5,926 6,951 ------- ------- Total..................................................... $49,608 $41,825 ======= =======
The following table sets forth production data and reserve information for the contributed properties in each of the following areas: Appalachia, Illinois Basin and Northern Powder River Basin. PRODUCTION AND RESERVES
PRODUCTION YEAR ENDED PROVEN AND PROBABLE RESERVES AT DECEMBER 31, DECEMBER 31, 2002 --------------- --------------------------------- 2002 2001 UNDERGROUND SURFACE TOTAL(1) ------ ------ ----------- ------- --------- (TONS IN THOUSANDS) AREA Appalachia......................... 22,600 19,648 936,631 106,140 1,042,771 Illinois Basin..................... 2,433 2,659 -- 25,965 25,965 Northern Powder River Basin........ 5,474 6,683 -- 161,465 161,465 ------ ------ ------- ------- --------- Total............................ 30,507 28,990 936,631 293,570 1,230,201 ====== ====== ======= ======= =========
6 - --------------- (1) Of the 1.23 billion tons of reserves, we control approximately 20.2 million tons in Southern West Virginia under paid-up leases for which we have paid royalties sufficient to allow us to mine all of the coal reserves attributable to the properties without further payment. We classify low sulfur coal as coal with a sulfur content of less than 1.0%, medium sulfur coal as coal with a sulfur content between 1.0% and 1.5% and high sulfur coal as coal with a sulfur content of greater than 1.5%. Compliance coal is that portion of low sulfur coal that, when burned, emits less than 1.2 pounds of sulfur dioxide per million Btu. As of December 31, 2002, approximately 25% of our reserves were compliance coal which met the standards for Phase II of the Clean Air Act. Unless otherwise indicated, we present the quality of the coal throughout this Form 10-K on an as-received basis, which assumes 6% moisture for Appalachian reserves, 12% moisture for Illinois Basin reserves and 25% moisture for Northern Powder River Basin reserves. We own both steam and metallurgical coal reserves in Central and Southern Appalachia, and we own steam coal reserves in Northern Appalachia, the Illinois Basin and the Northern Powder River Basin. In 2002, approximately 16.2% of the coal production from our properties was metallurgical coal. The following table sets forth our estimate of the sulfur content, the typical quality of our coal reserves and the type of coal in each area as of December 31, 2002. SULFUR CONTENT, TYPICAL QUALITY AND TYPE OF COAL
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.................. 306,073 626,887 205,153 210,731 1,042,771 12,384 1.20 Illinois Basin.............. -- -- 8,797 17,168 25,965 11,458 2.45 Northern Powder River Basin..................... -- 161,465 -- -- 161,465 8,443 0.75 ------- ------- ------- ------- --------- Total................... 306,073 788,352 213,950 227,899 1,230,201 ======= ======= ======= ======= ========= TYPE OF COAL ---------------------------- AREA STEAM METALLURGICAL(2) - ---- --------- ---------------- (TONS IN THOUSANDS) Appalachia.................. 877,162 165,608 Illinois Basin.............. 25,965 -- Northern Powder River Basin..................... 161,465 -- --------- ------- Total................... 1,064,592 165,608 ========= =======
- --------------- (1) Compliance coal meets the sulfur dioxide emission standards imposed by Phase II of the Clean Air Act without blending with other coals or using sulfur dioxide reduction technologies. Compliance coal is a subset of low sulfur coal and is, therefore, also reported within the amounts for low sulfur coal. (2) For purposes of this table, we have defined metallurgical coal reserves as reserves located in those seams that historically have been of sufficient quality and characteristics to be able to be used in the steel making process. Some of the reserves in the metallurgical category can also be used as steam coal. We prepare our reserve estimate from geologic data assembled and analyzed by our staff of geologists and engineers. The geologic data is taken from thousands of drill holes, adjacent mine workings, outcrop prospect openings and other sources, including from third parties. These estimates also take into account legal, technical and economic limitations that may keep coal from being mined. Reserve estimates will change from time to time due to mining activities, analysis of new engineering and geologic data, acquisition or divestment of reserve holdings, modification of mining plans or mining methods, and other factors. As of December 31, 2002 our reserves were estimated internally by our geologists and engineers. COMPETITION Numerous producers in the coal industry make the industry intensely competitive. Our lessees compete with coal producers in various regions of the United States for domestic sales. The industry has undergone significant consolidation since 1976. The top ten producers have increased their share of total domestic coal production from 38% in 1976 to 63% in 2001. This consolidation has led to a number of our lessees' parent companies having significantly larger financial and operating resources than their competitors. Our lessees compete with both large and small producers nationwide on the basis of coal price at the mine, coal quality, transportation cost from the mine to the customer and the reliability of supply. Continued demand for our coal 7 and the prices that our lessees obtain are also affected by demand for electricity and steel, as well as environmental and government regulations, technological developments and the availability and price of alternative fuel supplies, including nuclear, natural gas, oil and hydroelectric power. REGULATION The coal mining industry is subject to regulation by federal, state and local authorities on matters such as: - the discharge of materials into the environment; - employee health and safety; - mine permits and other licensing requirements; - reclamation and restoration of mining properties after mining is completed; - management of materials generated by mining operations; - surface subsidence from underground mining; - water pollution; - legislatively mandated benefits for some current and retired coal miners; - air quality standards; - protection of wetlands; - endangered plant and wildlife protection; - limitations on land use; - storage of petroleum products and substances that are regarded as hazardous under applicable laws; and - management of electrical equipment containing polychlorinated biphenyls, or PCBs. In addition, the electricity generation industry, which is the most significant end-user of coal, is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for our lessees' coal. New legislation or regulations may be adopted or enforcement of existing laws could become more stringent, either of which may have a significant impact on the mining operations of our lessees or their customers' ability to use coal. Potential regulation may require our lessees or their customers to change operations significantly or incur substantial costs. Our lessees are obligated to conduct mining operations in compliance with all applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements, violations during mining operations are not unusual in the industry and, notwithstanding compliance efforts, we do not believe violations by our lessees can be eliminated completely. We do not currently expect that future compliance will have a material adverse effect on us, our unitholders or our minimum quarterly distributions. While it is not possible to quantify the expenditures incurred by our lessees to maintain compliance with all applicable federal and state laws, those costs have been and are expected to continue to be significant. Our lessees post performance bonds pursuant to federal and state mining laws and regulations for the estimated costs of reclamation and mine closing, including the cost of treating mine water discharge when necessary. Compliance with these laws substantially increases the cost of coal mining for all domestic coal producers. SPECIFIC REGULATORY AND LITIGATION MATTERS West Virginia Mountaintop Mining/Valley Fill Litigation. Bragg v. Robertson was filed in federal court by the West Virginia Highlands Conservancy and several citizens in July 1998 against the West Virginia Department of Environmental Protection and the U.S. Army Corp of Engineers. Bragg generally targeted 8 mountaintop mining operations utilizing valley fills for mine overburden disposal. The plaintiffs in this case alleged that the procedures used by the West Virginia Department of Environmental Protection and the U.S. Army Corps of Engineers for issuing permits for valley fills used in mountaintop removal violated SMCRA, the Clean Water Act and the National Environmental Policy Act. In its ruling on the SMCRA claims, the district court enjoined the West Virginia Department of Environmental Protection from issuing mining permits for the construction of valley fills over both intermittent and perennial stream segments. The Fourth Circuit Court of Appeals vacated the district court's injunction in April 2001, ruling that the Eleventh Amendment to the U.S. Constitution barred suit against the state in federal court for alleged violations of state mining law. The plaintiffs appealed the Fourth Circuit's decision to the U.S. Supreme Court. In January 2002, the U.S. Supreme Court refused to hear the appeal. Because virtually all mining operations in West Virginia, including those of our lessees, utilize valley fills, all or a portion of our lessees' mining operations could have been affected by the permanent injunction. The plaintiffs could file a new lawsuit in state court challenging the West Virginia Department of Environmental Protection's practice of permitting valley fills. If a state court were to enjoin the construction of valley fills, our lessees might not be able to continue mining those reserves in West Virginia that are only accessible through mining techniques that use valley fills, unless such a decision were overturned or if a legislative or other solution were not achieved. The issuance of an injunction by a state court could have a material adverse effect on our lessees and on our acquisition and use of future reserves that require valley fills. Before Bragg was filed, the federal defendants had previously reached a settlement with the plaintiffs in December 1998 regarding the Clean Water Act and the National Environmental Policy Act claims. Under the agreement, the U.S. Army Corps of Engineers, in cooperation with other agencies, must prepare a programmatic environmental impact statement regarding the effects of valley fills on the environment. This environmental impact statement was to have been completed by January 2001. At this time, however, the environmental impact statement has not been completed, and it is uncertain when it will be completed. Until the environmental impact statement is completed, an individual Clean Water Act Section 404 dredge and fill permit is required prior to the construction of any valley fill greater than 250 acres in size. On May 8, 2002, the United States District Court for the Southern District of West Virginia issued an order in Kentuckians for the Commonwealth v. Rivenburgh enjoining the Huntington, West Virginia office of the U.S. Army Corps of Engineers from issuing permits under Section 404 of the Clean Water Act for the construction of valley fills for the disposal of overburden from mountaintop mining operations solely for the purpose of waste disposal. These valleys typically contain streams that, under the Clean Water Act, are considered navigable waters of the United States. The court held that the filling of these waters solely for waste disposal is a violation of the Clean Water Act. The effect of this injunction would have been to make mountaintop mining uneconomical in those areas subject to the injunction. We would be materially affected by this injunction because a substantial number of mountaintop mining valley fill permits required to be obtained by our lessees are issued by the Huntington, West Virginia office of the U.S. Army Corps of Engineers. On December 4, 2002, the Fourth Circuit Court of Appeals heard oral arguments in the Corps of Engineers' appeal from the District Court's decision in Kentuckians and issued a 2-1 opinion on January 29, 2003, which vacated the injunction issued by the District Court. The Court of Appeals also reversed the District Court's interpretation of the meaning of "fill material" as used in Section 404 to mean "material deposited for some beneficial primary purpose, not waste material discharged solely to dispose of waste" and remanded the case to the District Court for further proceedings. Based on this ruling, the Corps of Engineers appears to have the authority under Section 404 of the Clean Water Act to issue permits, and our lessees can apply for these permits and expect to receive them so long as they comply with all the requirements of the application. The Fourth Circuit ruling is subject to further appellate review by either the Fourth Circuit itself or the Supreme Court. Because additional appellate review is entirely discretionary, we are unable to predict whether such review will be allowed. 9 Surface Mining Control And Reclamation Act. SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of deep mining. SMCRA requires that comprehensive environmental protection and reclamation standards be met during the course of and upon completion of mining activities. In conjunction with mining the property, our lessees are contractually obligated under the terms of their leases to comply with all laws, including SMCRA and similar state and local laws. SMCRA also requires our lessees to submit a bond or otherwise financially secure the performance of their reclamation obligations. The earliest a reclamation bond can be completely released is five years after reclamation is complete. In addition, the Abandoned Mine Lands Act, which is part of SMCRA, imposes a tax on all current mining operations, the proceeds of which are used to restore mines closed before 1977. Since our lessees are responsible for these obligations and any related liabilities, we do not accrue the estimated costs of reclamation or mine closing, and we do not pay the tax described above. Under SMCRA, responsibility for unabated violations, unpaid civil penalties and unpaid reclamation fees of independent mine lessees and other third parties could potentially be imputed to other companies that are deemed to have "owned" or "controlled" the mine operator. Sanctions against the "owner" or "controller" are quite severe and can include civil penalties, reclamation fees and reclamation costs. We are not aware of any currently pending or asserted claims against us asserting that we "own" or "control" our lessees. We believe our lessees are generally in compliance with all operational, reclamation and closure requirements under their SMCRA permits. On March 29, 2002, the U.S. District Court for the District of Columbia issued a ruling that could restrict underground mining activities conducted in the vicinity of public roads or occupied dwellings, or within a variety of federally protected lands or national forests. Citizens Coal Council v. Norton was filed in February 2000 to challenge regulations issued by the Department of Interior that provide, among other things, that subsidence and underground activities that may lead to subsidence are not surface mining activities within the meaning of SMCRA. SMCRA generally contains restrictions and certain prohibitions on the locations where surface mining activities can be conducted. The District Court entered summary judgment upon the plaintiff's claims that the Secretary of the Interior's determination violated SMCRA. By order dated April 9, 2002, the court remanded the regulations to the Secretary of the Interior for reconsideration. None of the deep mining activities undertaken on our properties are within federally protected lands or national forests where SMCRA restricts surface mining, even though several are within proximity to occupied dwellings. However, this case poses a potential restriction on underground mining within 100 feet of a public road. If these SMCRA restrictions ultimately apply to underground mining, considerable uncertainty would exist about the nature and extent of these restrictions. The significance of this decision for the coal mining industry remains unclear because this ruling is subject to appellate review. The Department of Interior and the National Mining Association, a trade group that intervened in this action, have appealed the ruling and sought a stay of the order pending appeal to the District of Columbia Circuit Court of Appeals, and the stay was granted. Oral argument before the District of Columbia Circuit is scheduled for April 7, 2003. If the District Court's decision is not overturned or if some legislative solution is not enacted, this ruling could have a material adverse effect on all coal mine operations that utilize underground mining techniques, including those of our lessees. While it still may be possible to obtain permits for underground mining operations in these areas, the time and expense of that permitting process are likely to increase significantly. West Virginia Cumulative Hydrologic Impact Analysis Litigation. In a lawsuit unrelated to Bragg, two environmental groups sued the West Virginia Department of Environmental Protection in January 2000, and later added the U.S. Secretary of the Interior in federal court, alleging various violations of the Clean Water Act and SMCRA. The U.S. Office of Surface Mining is a division within the Department of Interior. Ohio Valley Environmental Coalition, Inc. v. Castle specifically alleges that the West Virginia Department of Environmental Protection has violated its non-discretionary duty to require all surface and underground mining permit applications to include certain stream flow and water quality data and an analysis of the probable hydrologic consequences of the proposed mine, and that the West Virginia Department of 10 Environmental Protection failed to conduct SMCRA-required cumulative hydrologic impact analysis prior to issuing mining permits. The lawsuit also alleges that the Office of Surface Mining has a non-discretionary duty to apply the federal SMCRA law in West Virginia due to the deficiencies in the state program. In March 2001, the district court denied the plaintiff's motion for a preliminary injunction on its claims against the West Virginia Department of Environmental Protection. In September 2001, the district court denied a motion to dismiss filed by defendant Michael Callaghan, Secretary of the West Virginia Department of Environmental Protection. Callaghan filed an interlocutory appeal of this decision in October 2001. The Fourth Circuit Court of Appeals dismissed this appeal in part and has denied a motion filed by the plaintiffs to dismiss the remaining claims. During the pendency of this appeal, on August 30, 2002, the district court dismissed some of the plaintiffs' claims. If the plaintiffs are eventually successful in this lawsuit, the West Virginia Department of Environmental Protection will have to modify its procedures and requirements for the content and review of mining permit applications, or the federal government will be ordered to assume control over mining permits in West Virginia. Any of these changes is likely to increase the cost of preparing applications and the time required for their review and may entail additional operating expenditures and, possibly, restrictions on operating that could reduce our coal royalty revenues. Green Valley Coal Company, one of our lessees and a subsidiary of Massey Energy Company, intervened as a defendant in this lawsuit because a permit issued to Green Valley is alleged to have been improperly issued, and because several pending Green Valley permit applications are also alleged to be deficient. West Virginia Antidegradation Policy. In January 2002, a number of environmental groups and individuals filed suit in the U.S. District Court for the Southern District of West Virginia to challenge the EPA's approval of West Virginia's antidegradation implementation policy. Under the federal Clean Water Act, state regulatory authorities must conduct an antidegradation review before approving permits for the discharge of pollutants to waters that have been designated as high quality by the state. Antidegradation review involves public and intergovernmental scrutiny of permits and requires permittees to demonstrate that the proposed activities are justified in order to accommodate significant economic or social development in the area where the waters are located. The plaintiffs in Ohio Valley Environmental Coalition v. Whitman challenge provisions in West Virginia's antidegradation implementation policy that exempt current holders of National Pollutant Discharge Elimination System (NPDES) permits and Section 404 permits, among other parties, from the antidegradation-review process. Our lessees are current NPDES or Section 404 permit holders that are exempt from antidegradation review under these provisions. Revoking this exemption and subjecting our lessees to the antidegradation review process could delay the issuance or reissuance of Clean Water Act permits to our lessees or cause these permits to be denied. If the plaintiffs are successful and our lessees discharge into waters that have been designated as high-quality by the state, the costs, time and difficulty associated with obtaining and complying with Clean Water Act permits for surface mining of operations could increase, which could in turn increase the costs of coal production, potentially reducing our royalty revenues. Massey Energy Show Cause Order. In January 2002, the West Virginia Department of Environmental Protection entered an order finding a pattern of violations relating to water quality by Marfork Coal Company, a subsidiary of Massey Energy, and suspending its permit for operations adjacent to the Dorothy-Sarita property for 14 days. Marfork Coal filed an appeal and obtained a stay of enforcement of this order. The Surface Mining Board heard the appeal and reduced the suspension to nine days. Marfork Coal has appealed this decision to the circuit court, which held a hearing on November 22, 2002. On December 23, 2002, the Circuit Court reversed the order of the West Virginia Department of Environmental Protection. The court found that the show cause hearing was not conducted in an impartial manner and caused a violation of Marfork Coal's due process rights. The matter was remanded to the West Virginia Department of Environmental Protection for an impartial hearing. If this show cause order had been upheld, the permits issued to Massey Energy and its subsidiaries could be suspended or revoked and production could be decreased at the mines on the Dorothy-Sarita property and at the longwall mine operated by Performance Coal at the Eunice property, reducing our coal royalty revenues on that property. 11 Mine Health and Safety Laws. Stringent safety and health standards have been imposed on the coal mining industry by federal legislation since the adoption of the Mine Health and Safety Act of 1969. The Mine Health and Safety Act of 1969 resulted in increased operating costs and reduced productivity. The Mine Safety and Health Act of 1977, which significantly expanded the enforcement of health and safety standards of the Mine Health and Safety Act of 1969, imposes comprehensive safety and health standards on all mining operations. In addition, as part of the Mine Health and Safety Acts of 1969 and 1977, the Black Lung Act requires payments of benefits by all businesses conducting current mining operations to coal miners with black lung and to some survivors of miners who die from this disease. Because the regulatory requirements imposed by mine worker health and safety laws are comprehensive and ongoing in nature, non-compliance cannot be eliminated completely. We believe our lessees have made all payments under the Black Lung Act and are generally in compliance with all applicable mine health and safety laws. Clean Air Act. The federal Clean Air Act and similar state and local laws, which regulate emissions into the air, affect coal mining and processing operations primarily through permitting and emissions control requirements. The Clean Air Act also indirectly affects coal mining operations by extensively regulating the emissions from coal-fired industrial boilers and power plants, which are the largest end-users of our coal. These regulations can take a variety of forms, as explained below. The Clean Air Act imposes obligations on the Environmental Protection Agency, or EPA, and the states to implement regulatory programs that will lead to the attainment and maintenance of EPA-promulgated ambient air quality standards, including standards for sulfur dioxide, particulate matter, nitrogen oxides and ozone. Owners of coal-fired power plants and industrial boilers have been required to expend considerable resources to comply with these ambient air standards. Significant additional emissions control expenditures will be needed in order to meet the current national ambient air standards. Numerous legal and regulatory actions have been initiated over the years under the Clean Air Act, the outcome of which could adversely affect coal mining and coal-fired power plants. In February 2003, legislation was introduced in Congress outlining the Bush administration's Clear Skies Initiative, which calls for dramatic decreases in sulfur emissions from power plants. If lower emissions standards are enacted under the act, it could result in a decrease in coal demand. In summary, the effect that a variety of Clean Air Act regulations and legal actions could have on the coal industry and thus our business cannot be predicted with certainty. We cannot assure you that future regulatory provisions will not materially adversely affect our business, financial condition or results of operations. Additionally, we have no ability to control, or specific knowledge regarding, the environmental and other regulatory compliance of purchasers of coal mined from our properties. Clean Water Act. Section 301 of the Clean Water Act prohibits the discharge of a pollutant from a point source into navigable waters except in accordance with a permit issued under either Section 402 or Section 404 of the Clean Water Act. Navigable waters are broadly defined to include streams, even those that are not navigable in fact, and may include wetlands. All mining operations in Appalachia generate excess material that must be placed in fills in adjacent valleys and hollows. Likewise, coal refuse disposal areas and coal processing slurry impoundments are located in valleys and hollows. Almost all of these areas contain intermittent or perennial streams, which are considered navigable waters. An operator must secure a Clean Water Act permit before filling such streams. For approximately the past twenty-five years, operators have secured Section 404 fill permits to authorize the filling of navigable waters with material from various forms of coal mining. Operators have also obtained permits under Section 404 for the construction of slurry impoundments although the use of these impoundments, including discharges from them, requires permits under Section 402. Our leases require our lessees to obtain all necessary permits required under the Clean Water Act. To our knowledge, our lessees have obtained all permits required under the Clean Water Act and equivalent state laws. Mining Permits and Approvals. Numerous governmental permits or approvals are required for mining operations. We do not hold any mining permits. Under our leases, our lessees are responsible for obtaining and maintaining all permits. In connection with obtaining these permits and approvals, our lessees may be required 12 to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed production of coal may have upon the environment. The requirements imposed by any of these authorities may be costly and time consuming and may delay commencement or continuation of mining operations. Regulations also provide that a mining permit can be refused or revoked if an officer, director or a shareholder with a 10% or greater interest in the entity is affiliated with another entity that has outstanding permit violations. Thus, past or ongoing violations of federal and state mining laws could provide a basis to revoke existing permits and to deny the issuance of additional permits. In order to obtain mining permits and approvals from state regulatory authorities, mine operators, including our lessees, must submit a reclamation plan for restoring the mined property to its prior condition, productive use or other permitted condition upon the completion of mining operations. Typically our lessees submit the necessary permit applications between 12 and 18 months before they plan to begin mining a new area. In our experience, permits generally are approved within 12 months after a completed application is submitted. In the past, our lessees have generally obtained their mining permits without significant delay. Our lessees have obtained or applied for permits to mine a majority of the reserves that are currently planned to be mined by our lessees over the next five years. Our lessees are in the planning phase for obtaining permits for the remaining reserves planned to be mined over the next five years. We cannot assure you, however, that they will not experience difficulty in obtaining mining permits in the future. As a consequence of potential future legislation and administrative regulations that may emphasize the protection of the environment, the activities of mine operators, including our lessees, may be more closely regulated. Legislation and regulations, as well as future interpretations of existing laws, may also require substantial increases in equipment expenditures and operating costs, as well as delays, interruptions or the termination of operations. We cannot predict the possible effect of such regulatory changes. Under some circumstances, substantial fines and penalties, including revocation or suspension of mining permits, may be imposed under the laws described above. Monetary sanctions and, in severe circumstances, criminal sanctions may be imposed for failure to comply with these laws. Framework Convention on Global Climate Change. The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Global Climate Change, commonly known as the Kyoto Protocol, that is intended to limit or capture emissions of greenhouse gases such as carbon dioxide and methane. The U.S. Senate has neither ratified the treaty commitments, which would mandate a reduction in U.S. greenhouse gas emissions, nor enacted any law specifically controlling greenhouse gas emissions, and the Bush Administration has withdrawn support for this treaty. Nonetheless, future regulation of greenhouse gases could occur either pursuant to future U.S. treaty obligations or pursuant to statutory or regulatory changes under the Clean Air Act. Efforts to control greenhouse gas emissions could result in reduced demand for coal if electric power generators switch to lower carbon sources of fuel. These restrictions or uncertainties could have a material adverse effect on our business. Comprehensive Environmental Response, Compensation and Liability Act. CERCLA and similar state laws affect coal mining operations by, among other things, imposing cleanup requirements for threatened or actual releases of hazardous substances that may endanger public health or welfare or the environment. Under CERCLA and similar state laws, joint and several liability may be imposed on waste generators, site owners and lessees and others regardless of fault or the legality of the original disposal activity. Although the EPA excludes most wastes generated by coal mining and processing operations from the hazardous waste laws, such wastes can, in certain circumstances, constitute hazardous substances for the purposes of CERCLA. In addition, the disposal, release or spilling of some products used by coal companies in operations, such as chemicals, could implicate the liability provisions of the statute. Thus, coal mines on lands that we currently own or have previously owned, and sites to which our lessees sent waste materials, may be subject to liability under CERCLA and similar state laws. In particular, we may be liable under CERCLA or similar state laws for the cleanup of hazardous substance contamination at sites where we own surface rights. We cannot assure you that we or our lessees will not become involved in future proceedings, litigation or investigations or that these liabilities will not be material. 13 Endangered Species. The federal Endangered Species Act and counterpart state legislation protects species threatened with possible extinction. Protection of endangered species may have the effect of prohibiting or delaying our lessees from obtaining mining permits and may include restrictions on timber harvesting, road building and other mining or silvicultural activities in areas containing the affected species. A number of species indigenous to our properties are protected under the Endangered Species Act. Based on the species that have been identified to date and the current application of applicable laws and regulations, however, we do not believe there are any species protected under the Endangered Species Act that would materially and adversely affect our lessees' ability to mine coal from our properties in accordance with current mining plans. There can be no assurance, however, that additional species on our properties will not receive protected status under the Endangered Species Act or that currently protected species will not be discovered within our properties. Other Environmental Laws Affecting Our Lessees. Our lessees are required to comply with numerous other federal, state and local environmental laws in addition to those previously discussed. These additional laws include the Resource Conservation and Recovery Act, the Safe Drinking Water Act, the Toxic Substance Control Act and the Emergency Planning and Community Right-to-Know Act. We believe that our lessees are in substantial compliance with all applicable environmental laws. TITLE TO PROPERTY Of the 1.23 billion tons of proven and probable coal reserves to which we had rights as of December 31, 2002, we owned approximately 1.21 billion tons, or 98.4% of the reserves, in fee. We lease approximately 20.2 million tons, or 1.6% of our reserves, from unaffiliated third parties. We believe that we have satisfactory title to all of our mineral properties, but we have not had a qualified title company confirm this belief. Although title to these properties is subject to encumbrances in certain cases, such as customary easements, rights-of-way, interests generally retained in connection with the acquisition of real property, licenses, prior reservations, leases, liens, restrictions and other encumbrances, we believe that none of these burdens will materially detract from the value of our properties or from our interest in them or will materially interfere with their use in the operations of our business. For most of our properties, the surface, oil and gas and mineral or coal estates are owned by different entities. Some of those entities are our affiliates. State law and regulations in most of the states where we do business require the oil and gas owner to coordinate the location of wells so as to minimize the impact on the intervening coal seams. We do not anticipate that the existence of the severed estates will materially impede coal development on our properties. EMPLOYEES AND LABOR RELATIONS We do not have any employees. To carry out our operations, affiliates of our general partner employ approximately 24 employees who directly support our operations. None of these employees are subject to a collective bargaining agreement. Some of the employees of our lessees and sublessees are subject to collective bargaining agreements. SEGMENT INFORMATION Pursuant to SFAS No. 132, "Disclosure About Segments of an Enterprise and Related Information," we are not required to disclose separate segment information because the materiality of timber and oil and gas did not meet the test for segment disclosure. AVAILABLE INFORMATION The Partnership's internet address is www.nrplp.com. We make available free of charge on or through our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and 14 Exchange Commission. Included on our website is our "Code of Business Conduct and Ethics" adopted by our Board of Directors. ITEM 3. LEGAL PROCEEDINGS Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under the various environmental protection statutes to which we are subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS Our common units are listed and traded on the New York Stock Exchange under the symbol "NRP." As of March 1, 2003, there were an estimated 4,700 beneficial owners of our common units, and four holders of subordinated units. The following table sets forth the high and low sales prices per common unit, as reported on the New York Stock Exchange, from October 11, 2002 (the day our common units began trading) to December 31, 2002 and the quarterly cash distribution paid per common unit and subordinated unit.
PRICE RANGE --------------- CASH 2002 HIGH LOW DISTRIBUTIONS - ---- ------ ------ ------------- Fourth Quarter.......................................... $20.70 $18.35 $0.4234*
- --------------- * The prorated cash distribution relates to the period from October 17, 2002, the closing date of our initial public offering, to December 31, 2002. This distribution was declared on January 21, 2003 and paid on February 14, 2003. In addition to common units, we have also issued subordinated units for which there is no established public trading market. The subordinated units were issued as part of our initial public offering in October 2002 and receive a quarterly distribution only after sufficient funds have been paid to the common units, as described below. All of the subordinated units are held by affiliates of our general partner. During the subordination period, the holders of our common units are entitled to receive a minimum quarterly distribution of $0.5125 per unit ($2.05 annualized) prior to any distribution of available cash to holders of our subordinated units. The subordination period is defined generally as the period that will end on the first day of any quarter beginning after September 30, 2007 if (1) we have distributed at least the minimum quarterly distribution on all outstanding units in each of the immediately preceding three consecutive, non-overlapping four-quarter periods and (2) our adjusted operating surplus, as defined in our partnership agreement, during such periods equals or exceeds the amount that would have been sufficient to enable us to distribute the minimum quarterly distribution on all outstanding units on a fully diluted basis and the related distribution on the 2% general partner interest during those periods. In addition, 25% of the subordinated units may convert to common units on a one-for-one basis after September 30, 2005, and 25% of the subordinated units may convert to common units on a one-for-one basis after September 30. 2006, if we meet the tests set forth in our partnership agreement. If the subordination period ends, the rights of the holders of subordinated units will no longer be subordinated to the rights of the holders of common units, the subordinated units may be converted into common units and the common units will no longer be entitled to arrearages. 15 Our general partner, the WPP Group and Arch Coal are entitled to incentive distributions if the amount we distribute with respect to any quarter exceeds specified target levels shown below: PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS
MARGINAL PERCENTAGE INTEREST IN DISTRIBUTIONS ------------------------------------ HOLDERS OF TOTAL QUARTERLY INCENTIVE DISTRIBUTION TARGET GENERAL DISTRIBUTION AMOUNT UNITHOLDERS PARTNER RIGHTS --------------------------- ----------- ------- ------------ Minimum Quarterly Distribution............. $0.5125 98% 2% -- First Target Distribution............. $0.5125 up to $0.5625 98% 2% -- Second Target Distribution............. above $0.5625 up to $0.6625 85% 2% 13% Third Target Distribution............. above $0.6625 up to $0.7625 75% 2% 23% Thereafter................. above $0.7625 50% 2% 48%
We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner. We refer to this cash as "available cash" as that term is defined in our partnership agreement. The amount of available cash may be greater than or less than the minimum quarterly distribution. We currently pay quarterly cash distributions of $0.5125 per unit. In general, we intend to increase our cash distributions in the future assuming we are able to increase our "available cash" from our operations and through acquisitions, provided there is no adverse change in our operations, economic conditions and other factors. However, we cannot guarantee that future distributions will continue at such levels. ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL FINANCIAL DATA The following tables show selected historical financial data for Natural Resource Partners L.P. and our predecessors (Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation and the Arch Coal Contributed Properties, collectively known as predecessors), in each case for the periods and as of the dates indicated. We derived the selected historical financial data for Natural Resource Partners L.P. as of December 31, 2002 and for the period from commencement of operations (October 17, 2002) through December 31, 2002 from the audited financial statements of Natural Resource Partners L.P. We derived the selected historical financial data for the WPP Group as of and for the years ended December 31, 1998, 1999, 2000, 2001 and for the period from January 1 through October 16, 2002 from the audited financial statements of the WPP Group, and we derived the selected historical financial data for the Arch Coal Contributed Properties as of and for the years ended December 31, 1999, 2000, 2001 and for the period from January 1 through October 16, 2002 from the audited financial statements of the Arch Coal Contributed Properties. We derived the selected historical financial data for the Arch Coal Contributed Properties as of and for the years ended December 31, 1998 from the accounting records of Arch Coal. We derived the information in the following tables from, and the information should be read together with and is qualified in its entirety by reference to, the historical financial statements and the accompanying notes included in Item 8, "Financial Statements and Supplementary Data." The tables should be read together with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." While substantially all of the producing coal-related assets and operations of the WPP Group were contributed to us, some assets and liabilities were retained by the WPP Group. 16 NATURAL RESOURCE PARTNERS L.P.
FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31, ----------------------------------------- 2002 2001 2000 1999 1998 ------------------ -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PRICE DATA) INCOME STATEMENT DATA: REVENUES: (1) (1) (1) (1) Coal royalties.................. $ 11,532 Property taxes.................. 1,047 Minimums recognized as revenue...................... 872 Override royalties.............. 226 Other........................... 216 -------- Total revenues.................. 13,893 EXPENSES: Depletion and amortization...... 4,526 Taxes other than income......... 1,296 General and administrative...... 1,059 Override payments............... 226 Coal Royalty Payments........... 171 -------- Total expenses.................. 7,278 -------- Income from operations............ 6,615 Interest expense................ (200) -------- Net income........................ $ 6,415 ======== BALANCE SHEET DATA (AT PERIOD END): Total assets...................... $392,719 Deferred revenue.................. 13,252 Long-term debt.................... 57,500 Total liabilities................. 74,085 Partners' capital................. 318,634 CASH FLOW DATA: Net cash flow provided by (used in): Operating activities............ $ 6,738 Investing activities............ (57,449) Financing activities............ 58,463 OTHER DATA: Royalty coal tons produced by Lessees......................... 7,314 Average gross coal royalty per ton............................. $ 1.58
- --------------- (1) No financial data is presented for these periods because Natural Resource Partners L.P. was not formed until April 9, 2002 and did not commence operations until October 17, 2002. 17 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
FOR THE PERIOD FROM JANUARY 1 THROUGH YEAR ENDED DECEMBER 31, OCTOBER 16, ----------------------------------------- 2002(1) 2001 2000 1999 1998 ----------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PRICE DATA) INCOME STATEMENT DATA: REVENUES: Coal royalties........................ $ 17,261 $ 15,458 $ 11,585 $ 15,754 $ 20,412 Timber royalties...................... 2,774 3,691 4,236 3,770 3,738 Gain on sale of property.............. 92 3,125 3,982 205 70 Property taxes........................ 1,221 1,184 1,404 1,163 1,538 Other................................. 1,219 2,512 1,342 1,293 1,416 -------- -------- -------- -------- -------- Total revenues........................ 22,567 25,970 22,549 22,185 27,174 EXPENSES: General and administrative............ 2,291 2,981 3,009 3,161 3,092 Taxes other than income............... 1,438 1,457 1,701 1,447 1,858 Depreciation, depletion and amortization....................... 3,544 1,369 1,168 1,270 1,996 -------- -------- -------- -------- -------- Total expenses........................ 7,273 5,807 5,878 5,878 6,946 -------- -------- -------- -------- -------- Income from operations.................. 15,294 20,163 16,671 16,307 20,228 Other income (expense): Interest expense...................... (4,786) (3,966) (4,167) (4,353) (5,505) Interest income....................... 114 270 321 254 292 Reversionary interest................. (561) (1,924) -- -- -- -------- -------- -------- -------- -------- Net income.............................. $ 10,061 $ 14,543 $ 12,825 $ 12,208 $ 15,015 ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT PERIOD END): Total assets............................ $ 88,224 $ 76,510 $ 76,089 $ 78,297 Deferred revenue........................ 7,916 7,468 7,301 7,191 Long-term debt.......................... 47,716 50,681 53,431 55,979 Total liabilities....................... 68,055 61,584 64,038 66,378 Partners' capital....................... 20,169 14,926 12,051 11,919 CASH FLOW DATA: Net cash flow provided by (used in): Operating activities.................. $ 8,676 $ 13,056 $ 10,670 $ 13,838 $ 16,210 Investing activities.................. (35,028) 2,685 3,976 188 (46) Financing activities.................. 27,899 (15,434) (14,630) (14,645) (15,472) OTHER DATA: Royalty coal tons produced by Lessees... 9,572 10,309 7,422 9,799 10,568 Average gross coal royalty per ton...... $ 1.80 $ 1.50 $ 1.56 $ 1.61 $ 1.93
- --------------- (1) Up to the date of contribution of assets to Natural Resource Partners L.P. 18 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
FOR THE PERIOD FROM JANUARY 1 THROUGH YEAR ENDED DECEMBER 31, OCTOBER 16, ------------------------------------- 2002(1) 2001 2000 1999 1998 ----------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PRICE DATA) INCOME STATEMENT DATA: REVENUES: Coal royalties.................... $ 5,895 $ 7,457 $ 7,966 $11,688 $ 8,684 Lease and easement income......... 474 787 583 480 490 Gain on sale of property.......... -- 439 709 12 930 Property taxes.................... 61 88 87 81 82 Other............................. 71 31 45 73 101 ------- ------- ------- ------- ------- Total revenues.................... 6,501 8,802 9,390 12,334 10,287 EXPENSES: General and administrative........ 417 611 481 574 488 Taxes other than income........... 69 110 107 98 100 Depletion and amortization........ 1,979 2,144 2,244 2,725 2,178 ------- ------- ------- ------- ------- Total expenses.................... 2,465 2,865 2,832 3,397 2,766 ------- ------- ------- ------- ------- Income from operations.............. 4,036 5,937 6,558 8,937 7,521 Other income (expense): Interest expense.................. (1,877) (3,652) (4,657) (4,999) (5,450) Interest income................... 115 307 376 63 30 ------- ------- ------- ------- ------- Net income before extraordinary item.............................. 2,274 2,592 2,277 4,001 2,101 Loss on early extinguishment of debt........................... -- -- -- (2,678) -- ------- ------- ------- ------- ------- Net income.......................... $ 2,274 $ 2,592 $ 2,277 $ 1,323 $ 2,101 ======= ======= ======= ======= ======= BALANCE SHEET DATA (AT PERIOD END): Total assets........................ $70,236 $70,514 $69,616 $68,148 Deferred revenue.................... 1,034 1,297 1,207 1,783 Long-term debt...................... 47,125 48,625 50,125 51,115 Total liabilities................... 50,110 52,129 53,508 59,362 Partners' capital................... 20,126 18,385 16,108 8,786 CASH FLOW DATA: Net cash flow provided by (used in): Operating activities.............. $ 3,725 $ 3,677 $ 5,731 $ 3,150 $ 3,522 Investing activities.............. -- 475 726 2 1,102 Financing activities.............. (4,069) (4,564) (6,205) (3,136) (3,984) OTHER DATA: Royalty coal tons produced by lessees........................... 4,970 8,509 9,172 11,746 9,744 Average gross coal royalty per ton............................... $ 1.19 $ 0.88 $ 0.87 $ 1.00 $ 0.89
- --------------- (1) Up to the date of contribution of assets to Natural Resource Partners L.P. 19 NEW GAULEY COAL CORPORATION
FOR THE PERIOD FROM JANUARY 1 THROUGH YEAR ENDED DECEMBER 31, OCTOBER 16, ------------------------------------- 2002(1) 2001 2000 1999 1998 ----------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PRICE DATA) INCOME STATEMENT DATA: REVENUES: Coal royalties.................... $1,434 $ 1,609 $ 955 $ 1,332 $ 1,429 Gain on sale of property.......... -- 25 -- -- -- Property taxes.................... 20 28 25 26 23 Other............................. 53 61 32 75 65 ------ ------- ------- ------- ------- Total revenues.................... 1,507 1,723 1,012 1,433 1,517 EXPENSES: General and administrative........ 52 41 32 27 30 Taxes other than income........... 42 45 48 54 62 Depletion and amortization........ 138 212 132 214 160 ------ ------- ------- ------- ------- Total expenses.................... 232 298 212 295 252 ------ ------- ------- ------- ------- Income from operations.............. 1,275 1,425 800 1,138 1,265 Other income (expense): Interest expense.................. (97) (132) (139) (145) (175) Interest income................... 24 15 -- -- 6 Reversionary interest............. (104) (85) -- -- -- ------ ------- ------- ------- ------- Net income.......................... $1,098 $ 1,223 $ 661 $ 993 $ 1,096 ====== ======= ======= ======= ======= BALANCE SHEET DATA (AT PERIOD END): Total assets........................ $ 4,625 $ 4,553 $ 4,636 $ 4,925 Deferred revenue.................... 3,601 3,747 3,902 4,189 Long-term debt...................... 1,584 1,682 1,781 1,866 Total liabilities................... 5,391 5,542 5,787 6,169 Stockholders' deficit............... (766) (989) (1,151) (1,244) CASH FLOW DATA: Net cash flow provided by (used in): Operating activities.............. $ 867 $ 1,323 $ 604 $ 900 $ 600 Investing activities.............. -- (175) -- (67) -- Financing activities.............. (474) (1,091) (591) (979) (370) OTHER DATA: Royalty coal tons produced by lessees........................... 479 718 356 572 522 Average gross coal royalty per ton............................... $ 2.24 $ 2.24 $ 2.68 $ 2.33 $ 2.74
- --------------- (1) Up to the date of contribution of assets to Natural Resource Partners L.P. 20 ARCH COAL CONTRIBUTED PROPERTIES
FOR THE PERIOD FROM JANUARY 1 THROUGH DECEMBER 31, OCTOBER 16, ------------------------------------------ 2002(1) 2001 2000 1999 1998 ------------ ------- ------- -------- ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT PRICE DATA) INCOME STATEMENT DATA: REVENUES: Coal royalties................. $14,768 $18,415 $16,152 $ 13,193 $ 11,379 Other royalties................ 1,349 1,363 907 983 954 Property taxes................. 1,179 1,033 1,204 1,173 1,239 ------- ------- ------- -------- -------- Total revenues................. 17,296 20,811 18,263 15,349 13,572 DIRECT COSTS AND EXPENSES: Depletion...................... 4,889 6,382 5,395 5,625 4,769 Property taxes................. 1,179 1,033 1,204 1,173 1,239 Other expense.................. 528 283 18 -- -- Write-down of impaired assets...................... -- -- -- 65,229 -- ------- ------- ------- -------- -------- Total expenses................. 6,596 7,698 6,617 72,027 6,008 ------- ------- ------- -------- -------- Excess (deficit) of revenues over direct costs and expenses...... $10,700 $13,113 $11,646 $(56,678) $ 7,564 ======= ======= ======= ======== ======== BALANCE SHEET DATA (AT PERIOD END): Total assets..................... $90,733 $97,230 $102,168 $107,932 Deferred revenue................. 10,409 10,035 10,078 8,971 Total liabilities................ 11,180 10,954 10,937 9,897 Net assets purchased............. 79,553 86,276 91,231 98,035 CASH FLOW DATA: Direct cash flow from contributed Properties..................... $19,836 $16,601 $ 15,355 $ 13,508 OTHER DATA: Royalty coal tons produced by Lessees........................ 8,791 11,281 9,862 7,702 6,565 Average gross coal royalty per ton............................ $ 1.68 $ 1.63 $ 1.64 $ 1.71 $ 1.73
- --------------- (1) Up to the date of contribution of assets to Natural Resource Partners L.P. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations should be read in conjunction with the historical financial statements and notes thereto included elsewhere in this filing. For more detailed information regarding the basis of presentation for the following financial information, see the notes to the historical financial statements. After the Introduction, there is a separate section for each of Natural Resource Partners L.P., Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation and the Arch Coal Contributed Properties. The Arch Coal Contributed Properties include the properties contributed to us by Ark Land Company, a subsidiary of Arch Coal, Inc. INTRODUCTION Natural Resource Partners L.P. is a master limited partnership formed by the WPP Group and Arch Coal, Inc. We engage principally in the business of owning and managing coal properties in the three major coal-producing regions of the United States: Appalachia, the Illinois basin and the Western United States. As of December 31, 2002, we controlled approximately 1.23 billion tons of proven and probable coal reserves in eight states. We completed our initial public offering in October 2002. We lease coal reserves to experienced mine operators under long-term leases that grant the operators the right to mine our coal reserves in exchange for royalty payments. As of December 31, 2002, our reserves were located on 48 separate properties and were subject to 97 leases with 40 lessees. For the year ended December 31, 2002, approximately 55% of the coal produced from the properties contributed to us came from underground mines, and 45% came from surface mines. As of December 31, 2002, approximately 64% of our reserves were low sulfur coal. Included in our low sulfur reserves is compliance coal, which meets the standards imposed by the Clean Air Act and constitutes approximately 25% of our reserves. Coal produced from our properties is burned in electric power plants located east of the Mississippi River and in Montana and Minnesota. In the year ended December 31, 2002, our lessees produced 30.5 million tons of coal from the properties contributed to us and our total revenue was $56.6 million, including coal royalty revenues and minimums totaling $50.5 million. Approximately 16% of our lessees' 2002 coal production was metallurgical coal, which the lessees sold to steel companies in the Eastern United States, South America, Europe and Asia. Our revenue and profitability are almost entirely dependent on our lessees' ability to mine and market our coal reserves. Coal royalties are paid to us on the basis of a percentage of the sales price of the coal, subject to a minimum royalty per ton. In addition, our leases specify minimum monthly, quarterly or annual royalties. These minimum royalties are generally recoupable over a specified period of time (usually three to five years) if sufficient royalties are generated from coal production in future periods. We do not recognize these minimum coal royalties as revenue until the applicable recoupment period has expired or they are recouped through production. Until recognized as revenue, these minimum royalties are carried as deferred revenue, a liability on the balance sheet. Most of our coal is produced by publicly held companies with professional and sophisticated sales departments. We estimate that 80% of our coal is sold by our lessees under coal supply contracts that have terms of one year or more. Coal supply contracts with terms of one year or more are becoming increasingly rare. Thus, our coal royalty revenue stream is increasingly affected by changes in market price of coal. During the last few years, steam coal prices have varied greatly. At the beginning of 2000, demand for steam coal was depressed due to excessive stockpiling of coal by utilities in anticipation of "Y2K" problems. By late summer of 2000, these stockpiles returned to normal levels, utilities reentered the market to buy coal, and sufficient supply was not available to meet demand. These events contributed to a rapid increase in coal prices during late 2000. These higher spot prices prevailed for most of 2001. In late 2001, prices began to decline as demand for coal fell due to unusually warm weather during the winter of 2001-2002 and the sluggish U.S. economy. The winter of 2002-2003 has been colder than normal in many parts of the U.S. As a result of the increased demand for electricity for heating, electric utilities have used substantial amounts of coal to generate electricity and have reduced the size of their stockpiles. Recently our lessees have experienced 22 a greater demand for coal, and spot prices have increased about 10%. The effect of spot prices on our results of operations for the near future should be limited because our lessees will receive previously contracted prices for much of their production. Coal prices are based on supply and demand, specific coal characteristics, economics of alternative fuel, and overall domestic and international economic conditions. During 2002, approximately 20% of our coal royalty revenues were from metallurgical coal. Prices of metallurgical coal have remained relatively stable in the past two years. Metallurgical coal, because of its unique chemical characteristics, is usually priced higher than steam coal. Metallurgical coal production has gradually decreased during the past few years due to a decline in exports as a result of the strength of the U.S. dollar and increasing use of electric arc furnaces and pulverized coal, rather than metallurgical coal, for steel production. Metallurgical coal can also be used as steam coal. However, some metallurgical coal mines on our properties may only operate profitably if all or a portion of their production is sold as metallurgical coal. If the operators of these mines are unable to sell metallurgical coal, these mines may not be economically viable and may close. In addition to coal royalty revenue, we generate nominal revenue from rentals, royalties on oil and gas and coalbed methane leases, an overriding royalty arrangement and wheelage payments, which are toll payments for the right to transport third-party coal over or through our property. Most lessees are required to reimburse us for property taxes paid on the leased property. These property tax reimbursements are shown as revenue in the financial statements. The corresponding property tax expenses are included as "taxes other than income." The WPP Group's property tax expenses are higher than its property tax revenue because the WPP Group retained certain properties and because some of the properties contributed by the WPP Group are unleased and, therefore, no reimbursements are received. General and administrative expenses include salary and benefits, rent, expenses and other costs related to managing the properties. An affiliate charges the WPP Group for certain finance, tax, treasury and insurance expenses. The Arch Coal Contributed Properties did not maintain stand-alone corporate treasury, legal, tax, human resources, general administration or other similar corporate support functions. Corporate general and administrative expenses were not previously allocated to the Arch Coal Contributed Properties because there was not sufficient information to develop a reasonable cost allocation. We reimburse the general partner and its affiliates for direct and indirect expenses they incur on our behalf, including general and administrative expenses. Depletion and amortization consist primarily of depletion on the coal properties. Depletion of coal reserves is calculated on a unit-of-production basis and thus fluctuates from property to property with coal production for the period. CRITICAL ACCOUNTING POLICIES Coal Royalties. We recognize coal royalty revenues on the basis of tons of coal sold by our lessees and the corresponding revenue from those sales. Generally, the lessees make payments to us based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum monthly, quarterly or annual payments. These minimum royalty payments are generally recoupable over certain time periods. We initially record minimum payments as deferred revenue and recognize them as coal royalty revenues either when the lessee recoups the minimum payment through production or when the period during which the lessee is allowed to recoup the minimum payment expires. Timber Royalties. We sell timber on a contract basis where independent contractors harvest and sell the timber and, from time to time, in a competitive bid process involving sales of standing timber on individual parcels. We recognize timber revenues when the timber has been sold or harvested by the independent contractors. Title and risk of loss pass to the independent contractors when they harvest the timber. Depletion. We deplete coal properties on a units-of-production basis by lease, based upon coal mined in relation to the net cost of the mineral properties and estimated proved and probable tonnage in those properties. We estimate proven and probable coal reserves with the assistance of third-party mining consultants and involve the use of estimation techniques and recoverability assumptions. Our estimates of coal 23 reserves are updated periodically and may result in adjustments to coal reserves and depletion rates that are recognized prospectively. Timberlands are stated at cost less depletion. We determine the cost of the timber harvested based on the volume of timber harvested in relation to the amount of estimated net merchantable volume by geographic areas. We estimate our timber inventory using statistical information and data obtained from physical measurements and other information gathering techniques. These estimates are updated annually and may result in adjustments of timber volumes and depletion rates, which are recognized prospectively. Changes in these estimates have no effect on our cash flow. NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. Adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of " and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1, 2002, did not have a material impact on our financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations. In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", which supercedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard is not expected to have a significant impact on our financial statements. 24 RESULTS OF OPERATIONS NATURAL RESOURCE PARTNERS L.P. FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 (IN THOUSANDS, EXCEPT PER TON DATA) REVENUES: Coal royalties............................................ $11,532 Property taxes............................................ 1,047 Minimums recognized as revenue............................ 872 Override royalties........................................ 226 Other..................................................... 216 ------- Total revenues............................................ 13,893 EXPENSES: Depletion and amortization................................ 4,526 Taxes other than income................................... 1,296 General and administrative................................ 1,059 Override payments......................................... 226 Coal Royalty Payments.................................. 171 ------- Total expenses............................................ 7,278 ------- Income from operations...................................... 6,615 Other income (expense): Interest expense.......................................... (200) ------- Net income.................................................. $ 6,415 ======= OTHER DATA: Royalties Appalachia................................................ $ 9,492 Illinois Basin............................................ 727 Northern Powder River Basin............................... 1,313 ------- Total................................................ $11,532 ======= Production Appalachia................................................ 5,448 Illinois Basin............................................ 601 Northern Powder River Basin............................... 1,265 ------- Total................................................ 7,314 ======= Average gross royalty Appalachia................................................ $ 1.74 Illinois Basin............................................ 1.21 Northern Powder River Basin............................... 1.04 ------- Total................................................ $ 1.58 =======
25 FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 Revenues. During the period from commencement of operations (October 17, 2002) through the period ending December 31, 2002, coal royalty revenues were $11.5 million on 7.3 million tons of coal produced. Approximately 74.4% of the coal production came from the Appalachian region, 17.3% from the Northern Powder River Basin and 8.3% from the Illinois Basin. Expenses. From commencement of operations (October 17, 2002) through the period ending December 31, 2002, total expenses were $7.3 million. Total expenses include depletion and amortization of $4.5 million, general and administrative of $1.1 million, taxes other than income of $1.3 million and other coal-related expense of $0.4 million. YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 The following table sets forth 2002 and 2001 coal royalty revenues from the properties that were contributed to NRP at the consummation of its initial public offering on October 17, 2002. These coal royalty revenues represent production from the properties, for the years ending December 31, 2002 and 2001, respectively. Coal royalty revenues were generated from the properties in each of the following areas: Appalachia, Illinois Basin and Northern Powder River Basin. COAL ROYALTY REVENUES FROM CONTRIBUTED PROPERTIES
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ (IN THOUSANDS, EXCEPT PER TON DATA) REVENUES Appalachia................................................ $40,688 $31,719 Illinois Basin............................................ 2,994 3,155 Northern Powder River Basin............................... 5,926 6,951 ------- ------- Total............................................. $49,608 $41,825 ======= ======= PRODUCTION Appalachia................................................ 22,600 19,648 Illinois Basin............................................ 2,433 2,659 Northern Powder River Basin............................... 5,474 6,683 ------- ------- Total............................................. 30,507 28,990 ======= ======= AVERAGE GROSS ROYALTY PER TON Appalachia................................................ $ 1.80 $ 1.61 Illinois Basin............................................ 1.23 1.19 Northern Powder River Basin............................... 1.08 1.04 ------- ------- Total............................................. $ 1.63 $ 1.44 ======= =======
Coal royalty revenues, for the year ended December 31, 2002 were $49.6 million compared to $41.8 million for the year ended December 31, 2001, an increase of $7.8 million, or 19%. In 2002, production increased by 1.5 million tons, from 29.0 million tons to 30.5 million tons or 5.2%, compared to 2001. The increases in production and coal royalties were primarily due to: Appalachia. Production from our West Fork property increased from 222,000 tons to 2.1 million tons, and coal royalty revenues increased from $357,000 to $4.7 million because a longwall mine moved onto the property from adjacent property. On our Eunice property, production increased from 1.8 million tons to 2.6 million tons, and coal royalty revenues increased from $2.7 million to $4.6 million because a longwall mine 26 was on our property for a greater portion of the year and was subject to a higher royalty rate. On our Welch/ Wyoming property, production increased from 222,000 tons to 609,000 tons, and coal royalty revenues increased from $361,000 to $1.3 million because a new mine, which began production during 2001, operated on the property for the entire year. On our Dorothy property, production increased from 652,000 tons to 1.0 million tons, and coal royalty revenues increased from $1.1 million to $2.0 million. This increase was due to increased production from a surface mine and the resumption of mining at a temporarily idled mine. On our Kingston property, production increased from 740,000 tons to 1.1 million tons, and coal royalty revenues increased from $1.3 million to $1.8 million. This increase was primarily due to a new mine starting on the property during the year. These increases were partially offset by lower production and coal royalty revenues from our Rockhouse and Boone-Lincoln properties. On our Rockhouse property, production decreased from 322,000 tons to 34,000 tons, and coal royalty revenues decreased from $791,000 to $82,000 because a mine on the property ceased production. On our Boone-Lincoln property, production decreased from 670,000 tons to 195,000 tons, and coal royalty revenues decreased from $1.3 million to $389,000. This decrease was due to lower production on the property from the active surface mine and the temporary idling of the underground mine on the property. This mine has since been restarted. Aggregate production from our Beaver Creek, Thomas and Stony River properties increased from 333,000 tons to 812,000 tons due to higher production as the lessee concentrated production on our property. This resulted in coal royalty revenues increasing from $792,000 to $1.7 million. This increase was partially offset by a decrease in production from our New Gauley property from 441,000 tons to 282,000 tons due to a combination of market-based reductions and adverse geologic conditions in the mine during part of the year. This resulted in a decrease of coal royalty revenues from $985,000 to $683,000. On our Evans-Laviers property, production decreased from 3.8 million tons to 3.4 million tons. Coal royalty revenues decreased from $5.1 million to $4.4 million. This decrease was due to the idling a higher-royalty-rate surface mine for part of the year. Acquisition. In addition to the above increases, the acquisition of properties from El Paso on December 4, 2002 resulted in additional production of 504,000 tons and coal royalty revenues of $601,000 in 2002. Illinois Basin. On our Trico property, production increased to 486,000 tons from 253,000 tons because a mine that began operating in 2001 produced for an entire year. This resulted in coal royalty revenues increasing to $682,000 from $343,000. This increase was offset by lower production on our Cummings/ Hocking-Wolford property. Production decreased from 1.5 million tons to 1.1 million tons, and coal royalty revenues decreased from $1.5 million to $1.1 million. This decrease was due to a larger proportion of the production from the mine being on adjacent property. Northern Powder River. Production from our Western Energy property decreased from 4.9 million tons to 3.7 million tons. This resulted in a decrease in coal royalty revenues from $5.3 million to $4.3 million. This decrease was due to the typical variations in production resulting from the checkerboard ownership pattern of the mine. This pattern causes variations in the proportions of the total mine production on our property. 27 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, THROUGH YEAR ENDING YEAR ENDING OCTOBER 16, DECEMBER 31, DECEMBER 31, 2002 2001 2000 ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER TON DATA) REVENUES: Coal royalties......................................... $17,261 $15,458 $11,585 Timber royalties....................................... 2,774 3,691 4,236 Gain on sale of property............................... 92 3,125 3,982 Property taxes......................................... 1,221 1,184 1,404 Other.................................................. 1,219 2,512 1,342 ------- ------- ------- Total revenues......................................... 22,567 25,970 22,549 EXPENSES: General and administrative............................. 2,291 2,981 3,009 Taxes other than income................................ 1,438 1,457 1,701 Depreciation, depletion and amortization............... 3,544 1,369 1,168 ------- ------- ------- Total expenses......................................... 7,273 5,807 5,878 ------- ------- ------- Income from operations................................... 15,294 20,163 16,671 Other income (expense): Interest expense....................................... (4,786) (3,966) (4,167) Interest income........................................ 114 270 321 Reversionary interest.................................. (561) (1,924) -- ------- ------- ------- Net income............................................... $10,061 $14,543 $12,825 ======= ======= ======= PRODUCTION............................................... 9,572 10,309 10,670 AVERAGE GROSS ROYALTY PER TON............................ $ 1.80 $ 1.50 $ 1.56
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 Revenues. Total revenues for the nine and one-half month period in 2002 were $22.6 million compared to $26.0 million for the full year 2001, a decrease of $3.4 million, or 15%, of which $3.1 million was due to a sale of assets in 2001. For the nine and one-half month period in 2002, coal royalty revenues were $17.3 million compared to $15.5 million for the full year 2001, an increase of $1.8 million, or 12%. Over these same periods, production decreased by 0.7 million tons, or 7%, from 10.3 million tons to 9.6 million tons. In addition to the differences caused by comparing twelve months in 2001 to nine and one-half months in 2002, these changes in production and coal royalties were primarily due to: Appalachia. Production from our West Fork property increased from 222,000 tons to 1.5 million tons, and coal royalty revenues increased from $357,000 to $3.3 million because a longwall mine moved onto the property from adjacent property. On our Eunice property, production stayed constant at 1.8 million tons, and coal royalty revenues increased from $2.7 million to $3.2 million because a greater proportion of production was from a longwall mine that is subject to a higher royalty rate. On our Welch/Wyoming property, production increased from 222,000 tons to 449,000 tons, and coal royalty revenues increased from $361,000 to $1.0 million because a new mine, which began production during 2001, operated on the property for the entire nine and one-half month period. On our Dorothy property, production increased from 652,000 tons to 813,000 28 tons, and coal royalty revenues increased from $1.1 million to $1.6 million. This increase was due to increased production from a surface mine and the resumption of mining at a temporarily idled mine. These increases were partially offset by lower production and coal royalty revenues from our Rockhouse property. On that property, production decreased from 322,000 tons to 34,000 tons, and coal royalty revenues decreased from $791,000 to $82,000 because a mine on the property ceased production. Aggregate production from our Beaver Creek, Thomas and Stony River properties increased from 333,000 tons to 621,000 tons as the lessee concentrated production on our properties during the nine and one-half month period. This resulted in coal royalty revenues increasing from $792,000 to $1.4 million. On our Evans-Laviers property, production decreased from 3.8 million tons to 2.6 million tons, and coal royalty revenues decreased from $5.1 million to $3.5 million. This decrease was due to the idling of a higher-royalty-rate surface mine for part of the nine and one-half month period. Illinois Basin. The increases in Appalachia were offset by lower production on our Cummings/ Hocking-Wolford property. Production decreased from 1.5 million tons to 775,000 tons, and coal royalty revenues decreased from $1.5 million to $778,000. This decrease was due to a larger proportion of the production from the mine being on adjacent property during the nine and one-half month period. Timber revenues decreased to $2.8 million in 2002 from $3.7 million in 2001, a decrease of $0.9 million, or 32%. This decrease was primarily due to 2002 being a short period of nine and one-half months. Other revenues decreased from $2.5 million in 2001 to $1.2 million in 2002, a decrease of $1.3 million, or 50%. Of the $1.3 million decrease, $0.9 million was due to a determination that a lessee was required to pay transportation fees for 2001 that were previously unreported by the lessee for several years. Rental receipts for the nine and one-half month period were $0.3 million lower than for the full year 2001. Expenses. Aggregate expenses for 2002 were $7.3 million compared to $5.8 million for 2001, an increase of $2.0 million, or 34%, primarily due to increased depletion associated with the purchase of the reversionary interest described below. Other Income (Expense). Interest expense was $4.8 million for 2002 compared to $4.0 million for 2001, an increase of $0.8 million, or 20%, resulting from additional debt incurred from the acquisition of the reversionary interest from CSX. Reversionary Interest. The previous owner of Western Pocahontas Properties Limited Partnership's coal and timber properties (CSX Corporation and certain of its affiliates) retained a reversionary interest in those properties whereby it received either a 25% or 28% interest in the properties and the net revenues of the properties after July 1, 2001, and in the net proceeds of any property sale occurring prior to July 1, 2001. Western Pocahontas purchased the reversionary interest related to its Kentucky properties in 2001 and the remainder of the interest in March 2002. In 2001, Western Pocahontas accrued $1.9 million related to the reversionary interest. Net Income. Net income was $10.1 million in 2002 compared to $14.5 million in 2001, a decrease of $4.4 million, or 30%. This is primarily due to 2002 being a short period of nine and one half months. YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 Revenues. Total revenues in 2001 were $26.0 million compared to $22.5 million in 2000, an increase of $3.5 million, or 15%. 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 coal 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 29 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. Overall, coal royalty revenues increased at the Chesapeake Mineral property by $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 coal 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, which resulted in increased coal 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, and coal royalty revenues fell by $348,000. This decrease in production was due to geologic conditions, a change in contractors by the lessee, and a decision to mine a thinner part of the coal seam. 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 92%. 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 reduction of debt. Reversionary Interest. As described above, Western Pocahontas purchased the reversionary interest related to its Kentucky properties in 2001 and the remainder of the interest in March 2002. In 2001, Western Pocahontas Properties 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. 30 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, THROUGH YEAR ENDING YEAR ENDING OCTOBER 16, DECEMBER 31, DECEMBER 31, 2002 2001 2000 ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER TON DATA) REVENUES: Coal royalties................................. $ 5,895 $ 7,457 $ 7,966 Lease and easement income...................... 474 787 583 Gain on sale of property....................... -- 439 709 Property taxes................................. 61 88 87 Other.......................................... 71 31 45 ------- ------- ------- Total revenues................................. 6,501 8,802 9,390 EXPENSES: General and administrative..................... 417 611 481 Taxes other than income........................ 69 110 107 Depletion and amortization..................... 1,979 2,144 2,244 ------- ------- ------- Total expenses................................. 2,465 2,865 2,832 ------- ------- ------- Income from operations........................... 4,036 5,937 6,558 Other income (expense): Interest expense............................... (1,877) (3,652) (4,657) Interest income................................ 115 307 376 ------- ------- ------- Net income....................................... $ 2,274 $ 2,592 $ 2,277 ======= ======= ======= PRODUCTION....................................... 4,970 8,509 9,172 AVERAGE GROSS ROYALTY PER TON.................... $ 1.19 $ .88 $ .87
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 Revenues. Total revenues for the nine and one-half month period in 2002 were $6.5 million compared to $8.8 million for the full year 2001, a decrease of $2.3 million, or 35%. For the nine and one-half month period in 2002, coal royalty revenues were $5.9 million compared to $7.5 million for the full year 2001, a decrease of $1.6 million, or 27%. Over these respective periods, production decreased by 3.5 million tons, or 41%, from 8.5 million tons to 5.0 million tons. These changes in production and coal royalties were primarily due to: Northern Powder River. Production from our Western Energy property decreased from 4.9 million tons to 3.7 million tons. This resulted in a decrease in coal royalty revenues from $5.3 million to $3.3 million. These differences are primarily due to 2002 being a short period of nine and one-half months. Lease and easement income in 2002 was $474,000 compared to $787,000 in 2001. This decrease is a result of a decline in surface mining activity as well as 2002 being a short period of nine and one-half months. Gain on sale of property was $439,000 in 2001, and there were no property sales for the nine and one-half months in 2002. Other Income (Expense). Interest expense was $1.9 million for 2002 compared to $3.7 million for 2001, a decrease of $1.8 million, or 95%. In addition to the differences caused by the difference in the length of periods, this decrease resulted from a reduction in the interest rate and a decline in the amount of debt outstanding. 31 Net Income. Net income was $2.3 million for 2002 compared to $2.6 million for 2001, a decrease of $0.3 million, or 13%. This decrease primarily resulted from a reduction in interest expense that was partially offset by lower coal royalties. YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 Revenues. Total 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 unowned 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 our surface property. Gain on sale of property was $439,000 in 2001, compared to $709,000 in 2000. 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. 32 NEW GAULEY COAL CORPORATION STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, THROUGH YEAR ENDING YEAR ENDING OCTOBER 16, DECEMBER 31, DECEMBER 31, 2002 2001 2000 ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER TON DATA) REVENUES: Coal royalties................................. $1,434 $1,609 $ 955 Gain on sale of property....................... -- 25 -- Property taxes................................. 20 28 25 Other.......................................... 53 61 32 ------ ------ ------ Total revenues................................. 1,507 1,723 1,012 EXPENSES: General and administrative..................... 52 41 32 Taxes other than income........................ 42 45 48 Depletion and amortization..................... 138 212 132 ------ ------ ------ Total expenses................................. 232 298 212 ------ ------ ------ Income from operations........................... 1,275 1,425 800 Other income (expense): Interest expense............................... (97) (132) (139) Interest income................................ 24 15 -- Reversionary interest.......................... (104) (85) -- ------ ------ ------ Net income....................................... $1,098 $1,223 $ 661 ====== ====== ====== PRODUCTION....................................... 479 718 356 AVERAGE GROSS ROYALTY PER TON.................... $ 2.24 $ 2.24 $ 2.68
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 Revenues. Total revenues for the nine and one-half month period in 2002 were $1.5 million compared to $1.7 million for the full year 2001, a decrease of $0.2 million, or 13%. Coal royalty revenues in 2002 were $1.4 million compared to $1.6 million in 2001, a decrease of $0.2 million, or 14%. Over these same periods, production decreased by 239,000 tons, or 50%, from 718,000 tons to 479,000 tons. In addition to the differences caused by comparing twelve months in 2001 to nine and one-half months in 2002, these changes in production and coal royalties were primarily due to: A decrease in production from our West Virginia property from 441,000 tons to 230,000 tons. Coal royalty revenues decreased from $985,000 to $561,000 due to a combination of market-based reductions and adverse geologic conditions in the mine during part of the nine and one-half month period of 2002. This decrease was partially offset by increased coal royalty revenues on our Alabama properties. Expenses. Aggregate expenses for the nine and one-half month period in 2002 were $232,000 compared to $298,000 for 2001, a decrease of $66,000, or 28%. This decrease was due primarily to a decrease in depletion expense. Net Income. Net income was $1.1 million for 2002 compared to $1.2 million for 2001, a decrease of $0.1 million, or 9%. This decrease was primarily due to 2002 being a short period of nine and one-half months. 33 YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 Revenues. Total 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 60%. 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: Appalachia. 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. 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 71%. This increase was primarily due to increased coal royalty revenues. ARCH COAL CONTRIBUTED PROPERTIES STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
FOR THE PERIOD FROM JANUARY 1, THROUGH YEAR ENDING YEAR ENDING OCTOBER 16, DECEMBER 31, DECEMBER 31, 2002 2001 2000 ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER TON DATA) REVENUES: Coal royalties................................. $14,768 $18,415 $16,152 Other royalties................................ 1,349 1,363 907 Property taxes................................. 1,179 1,033 1,204 ------- ------- ------- Total revenues................................. 17,296 20,811 18,263 DIRECT COSTS AND EXPENSES: Depletion...................................... 4,889 6,382 5,395 Property taxes................................. 1,179 1,033 1,204 Other expense.................................. 528 283 18 Total expenses................................. 6,596 7,698 6,617 ------- ------- ------- Excess of revenues over direct costs and expenses....................................... $10,700 $13,113 $11,646 ======= ======= ======= PRODUCTION....................................... 8,791 11,281 9,862 AVERAGE GROSS ROYALTY PER TON.................... $ 1.68 $ 1.63 $ 1.64
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 Revenues. Revenues for the nine and one-half month period in 2002 were $17.3 million, a decrease of $3.5 million as compared to twelve months in 2001. In addition to the differences caused by comparing twelve months in 2001 to nine and one-half months in 2002, these changes in production and coal royalties were primarily due to: Appalachia. On our Kingston property, production increased from 740,000 tons to 894,000, and coal royalty revenues increased from $1.3 million to $1.5 million. This increase was primarily due to a new mine starting on the property during the year. On our Boone-Lincoln property, production decreased from 670,000 tons to 158,000 tons, and coal royalty revenues decreased from $1.3 million to $322,000. This decrease was 34 due to lower production on the property from the active surface mine and the temporary idling of the underground mine on the property. This mine has since been restarted. Illinois basin. On our Trico property, production increased to 376,000 tons from 253,000 tons due to a mine that began operating in 2001 producing for nine and one-half months. This resulted in coal royalty revenues increasing to $528,000 from $343,000. Direct costs and expenses. Direct costs and expenses in 2002 were $6.6 million compared to $7.6 million in 2001, an decrease of $1.0 million, or 13%. This decrease was largely due to depletion resulting from the nine and one-half month period being compared to a full year. Depletion expense decreased $1.5 million to $4.8 million in 2002 from $6.3 million in 2001. 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 increases 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 increased production at various surface and underground mines at the Lynch property of 1.1 million tons, 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. RELATED PARTY TRANSACTIONS 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 also be reimbursed. Cost reimbursements due our general partner may be substantial and will reduce our cash available for distribution to unitholders. In 2002, the reimbursements to our general partner for services performed by WPP totaled $256,000. For additional information, please read "Certain Relationships and Related Transactions -- Omnibus Agreement." 35 AGREEMENTS WITH ARK LAND COMPANY Concurrently with our initial public offering in October 2002, we entered into four coal mining leases with Ark Land Company, a subsidiary of Arch Coal, Inc. The Ark Land leases grant them the right to mine our coal on the following properties: - Lone Mountain located in Kentucky, which contains 47.1 million tons of proven and probable reserves as of December 31, 2002; - Pardee located in Kentucky and Virginia, which contains 20.4 million tons of proven and probable reserves as of December 31, 2002; - Boone/Lincoln located in West Virginia, which contains 18.5 million tons of proven and probable reserves as of December 31, 2002; and - Campbell's Creek located in West Virginia, which contains 9.8 million tons of proven and probable reserves as of December 31, 2002. Coal royalty revenues payable under these leases based on 2002 actual production were $9.5 million, representing 19.2% of our total coal royalty revenues for the year ended December 31, 2002. If no production had taken place in 2002, minimum royalties of $5.75 million would have been payable under the leases. The Ark Land leases have an initial term of either eight or ten years, each with an automatic year-to-year extension until the earlier to occur of (1) delivery of notice by Ark Land that it will not renew the lease or (2) 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 sold from our properties, with minimum annual royalty payments. Under the Ark Land leases, minimum royalty payments are credited against future production royalties. The leases are intended to retain some of the legal rights Ark Land possessed when it owned the properties. For this reason, the leases contain some terms and provisions that are different from our third-party coal leases negotiated at arm's length. Some of the more significant differences include: - Ark Land has the ability to sublease the leased property without our prior approval, although it remains responsible for sublessee performance; - minimum royalty payments from Ark Land continue to be payable during the initial lease term even if all mineable and merchantable coal has been mined from the property; - royalties for coal sold to any affiliates may be based on a gross selling price below the market value of the coal; - the indemnities provided by Ark Land to us do not survive the termination of the leases; - we only have a limited ability to terminate the leases; - Ark Land has royalty-free wheelage rights on the leased properties; and - the leases do not impose a legal duty to diligently mine the maximum amount of coal possible from the leased property. We believe that the production and minimum royalty rates contained in the Ark Land leases are consistent with current market royalty rates. Ark Land owns an overriding royalty interest in leased coal reserves mined by Black Beauty Coal Company ("Black Beauty"), an affiliate of Peabody Energy, from property located in Knox County, Indiana. Ark Land has retained the overriding royalty interest following the consummation of the initial public offering. However, Ark Land and Arch Coal, Inc. entered into a Royalty Pass-Through Agreement and Guaranty with one of our subsidiaries at closing to pass through to us any royalties paid to Ark Land by Black Beauty under the overriding royalty interest, and Arch Coal, Inc. will guarantee that to the extent of the royalties paid to Ark Land. Annual advance overriding royalty payments, against which production royalties under the leases are 36 credited, are received by Ark Land in June of each year. In 2001, Ark Land received less than $1 million from the overriding royalty interest, or less than 2% of our partnership's 2001 revenues. This term of this pass-through agreement expires upon the termination of the overriding royalty interest. In May 2002, Ark Land received a notice from Black Beauty asserting that Black Beauty is no longer obligated to pay the $400,000 advance overriding royalty payments to Ark Land associated with a portion of the underlying leased property beginning when the next payment would be due on June 29, 2003. In response, Ark Land has notified Black Beauty that Ark Land disagrees with Black Beauty's right to terminate these payments and intends to assert its right to receive these payments. We cannot assure you as to whether Ark Land will ultimately be successful in this dispute, or whether or when we will receive any or all of the amounts in dispute from Ark Land under our royalty pass-through agreement. On November 20, 2002, after the closing of our initial public offering, we agreed with Arch to terminate this royalty pass-through agreement and guaranty and to substitute in its place an amendment to the lease covering these reserves. The amendment requires Ark Land to pay us a non-recoupable quarterly rental payment equal to the quarterly minimums that were due under the royalty pass-through agreement. This amendment is at least as favorable to us as the pass-through agreement. For more information about our related party transactions, please read Item 13, "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. We believe that cash generated from operations and our borrowing capacity under our new facility will be sufficient to meet our working capital requirements and anticipated capital expenditures for the next several years. We are actively pursuing additional property acquisitions; accordingly, we are currently in discussions with our banks to increase our revolving credit facility to provide for additional acquisitions. We intend to fund any acquisitions with borrowings under our revolving credit facility and proceeds from the issuance of additional common units. A minimal portion of our capital expenditures will be maintenance capital expenditures, which will be deducted from our 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, changes in capital markets, and financial, business and other factors, some of which are beyond our control. For a more complete discussion of factors that will affect cash flow we generate from our operations, please read "Risks Related to Our Business." Our capital expenditures have historically been minimal. 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 maintenance capital expenditures that do not extend the useful life of existing assets as operating expenses as we incur them. Net cash provided by operations during the period following our initial public offering, from October 17, 2002 through December 31, 2002, was $6.7 million, substantially all of which was coal royalty revenues, partially offset by an increase in accounts receivable and changes in other operating assets and liabilities. Net cash used in investing activities during the period from October 17, 2002 through December 31, 2002 was $57.4 million for the acquisition of the El Paso coal properties. In December 2002, we acquired mineral rights to approximately 120 million tons of coal reserves from subsidiaries of El Paso Corporation for $57 million in cash that we borrowed under our revolving credit facility. Approximately one-half of the 37 reserves are located in Kentucky, and the remainder are in Virginia and West Virginia. Some of these reserves were leased to and mined by a subsidiary of El Paso Corporation, and some are subject to an overriding royalty interest. The acquisition consisted of approximately 177,000 acres of mineral property (including approximately 25,000 surface acres). Other revenue from the property will arise from timber harvests, surface leases and oil and gas royalty. We also acquired an overriding royalty interest in coal in North Dakota. Subsequent to year-end, Coastal Coal sold their mining operations to Alpha Natural Resources. Cash provided by financing activities in the period from October 17, 2002 through December 31, 2002 was $58.5 million. This was primarily attributable to the borrowings under our revolving credit facility used to finance the acquisition of properties from El Paso. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS DESCRIPTION OF CREDIT FACILITY In connection with our initial public offering of common units, our operating company entered into a three-year, $100 million revolving credit facility. The revolving credit facility includes a $12.0 million distribution loan sub-limit that can be used for funding quarterly distributions. The remainder of the revolving credit facility is available for general limited partnership and limited liability company purposes, including future acquisitions, but may not be used to fund quarterly distributions. Our obligations under the revolving credit facility are unsecured but will be guaranteed by us and our operating subsidiaries. We may prepay all loans at any time without penalty. We must reduce all borrowings under the distribution loan sub-facility to zero for a period of at least 15 consecutive days once during each twelve-month period. Indebtedness under the revolving credit facility bears interest, at our option, at either: - the higher of the federal funds rate plus 0.50% or the prime rate as announced by the agent bank; or - at a rate equal to LIBOR plus an applicable margin ranging from 1.25% to 1.75%. We incur a commitment fee on the unused portion of the revolving credit facility at a rate of 0.50% per annum. The revolving 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 revolving credit facility contains various covenants limiting our operating company's and its subsidiaries' ability to: - incur indebtedness; - grant liens; - engage in mergers and acquisitions or change the nature of our business; - amend our organizational documents or the omnibus agreement; - make loans and investments; - sell assets; or - enter into transactions with affiliates. The credit agreement also contains covenants requiring us to maintain: - a ratio of consolidated indebtedness to consolidated EBITDA (as defined in the credit agreement) that does not exceed 2.5 to 1.0 for the four most recent quarters; and 38 - a ratio of consolidated EBITDA to consolidated interest expense of at least 4.0 to 1.0 for the four most recent quarters. If an event of default exists under the credit agreement, the lenders may accelerate the maturity of any indebtedness outstanding under the credit agreement and exercise other rights and remedies. Each of the following will constitute an event of default: - failure to pay any principal, interest, fees or other amount when due; - failure to pay any indebtedness, other than indebtedness under the revolving credit facility, in excess of $1 million when due or the occurrence and continuance of any other default beyond the applicable grace period, if any, if the default permits or causes the acceleration of the indebtedness or termination of any commitment to lend; - bankruptcy or insolvency events; - termination of existence; - failure to comply with the loan documents, subject to certain grace periods; - any representation, warranty or document provided is determined to have been materially untrue when made or provided; - entry and the failure to pay, bond, stay or contest adverse judgments or similar processes in excess of $1 million more than any applicable insurance coverage; and - any of the following changes in control: - we cease to own all of the member interests of the operating company; - our general partner ceases to own directly all of our general partner interests; or - Corbin J. Robertson, Jr., the WPP Group and one or more of their direct or indirect subsidiaries cease to own more than 50% of the partnership interests of our general partner. On December 4, 2002, we borrowed $57.5 million under our revolving credit facility for the acquisition of coal assets from El Paso Corporation. We recorded interest expense of $200,000 in the fourth quarter, consisting of actual interest expense of $117,000 accruing at a rate of 2.72% for 27 days, as well as commitment and other fees associated with the revolving credit facility. CONTRACTUAL OBLIGATIONS The following table reflects our long-term non-cancelable contractual obligations as of December 31, 2002 (in millions):
PAYMENTS DUE BY PERIOD ---------------------------------------------- CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER - ----------------------- ---- ---- ----- ---- ---- ---------- Long-term Debt (including current maturities).......................... $ -- $ -- $57.5 $ -- $ -- $ -- ==== ==== ===== ==== ==== ====
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, 2000, 2001 and 2002. ENVIRONMENTAL The operations of our lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. The terms of substantially all of our leases impose liability on the relevant lessees for all environmental and reclamation liabilities arising under those laws and regulations on the relevant lessees. However, if a particular lessee is not 39 financially capable of fulfilling those obligations, there is a possibility that regulatory authorities could attempt to assign the liabilities to us as the landowner. We would contest such an assignment. FORWARD-LOOKING STATEMENTS Statements included in this Form 10-K are forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements which are also forward-looking statements. Such forward-looking statements include, among other things, statements regarding capital expenditures, acquisitions and dispositions, expected commencement dates of coal mining, projected quantities of future coal production by our lessees producing coal from our reserves leased, projected demand or supply for coal that will affect sales levels, prices and royalties realized by us. These forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events 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. You should not put undue reliance on any forward-looking statements. Please read "Risks Related to Our Business" for important factors that could cause our actual results of operations or our actual financial condition to differ. RISKS RELATED TO OUR BUSINESS - We may not have sufficient cash from operations to pay the minimum quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner. - A substantial or extended decline in coal prices could reduce our coal royalty revenues and the value of our coal reserves. - Our lessees' coal mining operations are subject to operating risks that could result in lower coal royalty revenues to us. - We depend on a limited number of primary operators for a significant portion of our coal royalty revenues, and the loss of or reduction in production from any of our major operators could reduce our coal royalty revenues. - We may not be able to terminate our leases if any of our lessees declare bankruptcy, and we may experience delays and be unable to replace lessees that do not make royalty payments. - If our lessees do not manage their operations well, their production volumes and our coal royalty revenues could decrease. - Due to our lack of asset diversification, adverse developments in the coal industry could reduce our coal royalty revenues. - Any decrease in the demand for metallurgical coal could result in lower coal production by our lessees, which would thereby reduce our coal royalty revenues. - We may not be able to expand and our business will be adversely affected if we are unable to replace or increase our reserves or obtain other mineral reserves through acquisitions. - Any change in fuel consumption patterns by electric power generators resulting in a decrease in the use of coal could result in lower coal production by our lessees, which would reduce our coal royalty revenues. 40 - Current conditions in the coal industry may make it difficult for our lessees to extend existing contracts or enter into supply contracts with terms of one year or more, which could adversely affect the stability and profitability of their operations and adversely affect our coal royalty revenues. - Competition within the coal industry may adversely affect the ability of our lessees to sell coal, and excess production capacity in the industry could put downward pressure on coal prices. - Lessees could satisfy obligations to their customers with coal from properties other than ours, depriving us of the ability to receive amounts in excess of minimum royalty payments. - Fluctuations in transportation costs and the availability or reliability of transportation could reduce the production of coal mined from our properties. - Our reserve estimates depend on many assumptions that may be inaccurate, which could materially adversely affect the quantities and value of our reserves. - Our lessees' work forces could become increasingly unionized in the future. - We may be exposed to changes in interest rates because our current borrowings under our revolving credit facility may be subject to variable interest rates based upon LIBOR. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, which includes adverse changes in commodity prices and interest rates as discussed below: COMMODITY PRICE RISK We are dependent upon the efficient marketing of the coal mined by our lessees. Our lessees sell the coal under various long-term and short-term contracts as well as on the spot market. In previous years, a large portion of these sales were under long term contracts. Current conditions in the coal industry may make it difficult for our lessees to extend existing contracts or enter into supply contracts with terms of one year or more. Our lessees' failure to negotiate long-term contracts could adversely affect the stability and profitability of our lessees' operations and adversely affect our coal royalty revenues. As more coal is sold on the spot market, coal royalty revenues may become more volatile due to fluctuations in spot coal prices. INTEREST RATE RISK Our exposure to changes in interest rates results from our current borrowings under our revolving credit facility, which may be subject to variable interest rates based upon LIBOR. To date, we have not deemed it necessary to enter into any financial instruments to hedge our interest rate risk because interest rates have remained at historically low levels. Management intends to monitor interest rates and may enter into interest rate instruments to protect against increased borrowing costs. At December 31, 2002, the Partnership had outstanding $57.5 million in variable interest rate debt. If LIBOR rates were to increase by 100 basis points, annual interest expense would increase by $575,000, assuming the same principal amount remained outstanding during the year. 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Natural Resource Partners L.P.: Report of independent auditors............................ 43 Balance sheet as of December 31, 2002..................... 44 Income statement from inception through December 31, 2002................................................... 45 Statement of partner's capital from inception through December 31, 2002...................................... 46 Statement of cash flows from inception through December 31, 2002............................................... 47 Notes to financial statements............................. 48 The WPP Group: Western Pocahontas Properties Limited Partnership: Report of independent auditors......................... 55 Balance sheet as of December 31, 2001.................. 56 Statements of income for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000... 57 Statements of changes in partners' capital for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000............................ 58 Statements of cash flows for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000.................................................. 59 Notes to financial statements.......................... 60 Great Northern Properties Limited Partnership: Report of independent auditors......................... 69 Balance sheet as of December 31, 2001.................. 70 Statements of income for the period ended October 16, 2002 and years ended December 31, 2001, 2000.......... 71 Statements of changes in partners' capital for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000............................ 72 Statements of cash flows for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000.................................................. 73 Notes to financial statements.......................... 74 New Gauley Coal Corporation: Report of independent auditors......................... 79 Balance sheet as of December 31, 2001.................. 80 Statements of income for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000... 81 Statements of changes in partners' capital for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000............................ 82 Statements of cash flows for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000.................................................. 83 Notes to financial statements.......................... 84 Arch Coal, Inc. Contributed Properties: Report of independent auditors......................... 89 Statement of Assets and Liabilities Contributed as of December 31, 2001..................................... 90 Statements of revenues and direct costs and expenses for the period ended October 16, 2002 and the years ended December 31, 2001 and 2000...................... 91 Notes to financial statements.......................... 92
42 NATURAL RESOURCE PARTNERS L. P. CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS The Partners of Natural Resource Partners L. P. We have audited the accompanying consolidated balance sheet of Natural Resource Partners L. P. as of December 31, 2002, and the related consolidated statements of income, partners' capital and cash flows for the period from commencement of operations (October 17, 2002) through December 31, 2002. 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 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 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Natural Resource Partners L. P. at December 31, 2002 and the consolidated results of its operations and its cash flows for the period from commencement of operations (October 17, 2002) through December 31, 2002, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP February 11, 2003 Houston, Texas 43 NATURAL RESOURCE PARTNERS L. P. CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002 ----------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 7,753 Accounts receivable....................................... 7,593 Accounts receivable -- affiliate.......................... 1,450 Other..................................................... 511 -------- Total current assets................................. 17,307 Property and equipment, at cost............................. 433,430 Less accumulated depreciation and depletion............... (59,243) -------- Net property and equipment................................ 374,187 Loan financing costs, net................................... 1,225 -------- Total assets......................................... $392,719 ======== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable.......................................... $ 735 Accounts payable -- affiliate............................. 667 Property and franchise taxes payable...................... 1,731 Accrued interest.......................................... 200 -------- Total current liabilities............................ 3,333 Deferred revenue............................................ 13,252 Long-term debt.............................................. 57,500 Partners' capital: Common units (11,353,658 units outstanding)............... 148,646 Subordinated units (11,353,658 units outstanding)......... 163,322 General partners' interest................................ 6,666 -------- Total partners' capital.............................. 318,634 -------- Total liabilities and partners' capital.............. $392,719 ========
The accompanying notes are an integral part of these financial statements. 44 NATURAL RESOURCE PARTNERS L. P. CONSOLIDATED STATEMENT OF INCOME FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 (IN THOUSANDS, EXCEPT PER UNIT DATA) REVENUES: Coal royalties............................................ $11,532 Property tax.............................................. 1,047 Minimums recognized as revenue............................ 872 Override royalties........................................ 226 Other..................................................... 216 ------- Total revenues......................................... 13,893 OPERATING COSTS AND EXPENSES: Depletion and amortization................................ 4,526 Taxes other than income................................... 1,296 General and administrative................................ 1,059 Override payments......................................... 226 Coal royalty payments..................................... 171 ------- Total operating costs and expenses..................... 7,278 ------- INCOME FROM OPERATIONS:..................................... 6,615 Interest expense..................................... (200) ------- NET INCOME.................................................. $ 6,415 ======= General partners' net income.............................. $ 128 ======= Limited partners' net income.............................. $ 6,287 ======= BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT: Common.................................................... $ 0.28 ======= Subordinated.............................................. $ 0.28 ======= WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING: Common.................................................... 11,354 ======= Subordinated.............................................. 11,354 =======
The accompanying notes are an integral part of these financial statements. 45 NATURAL RESOURCE PARTNERS L. P. STATEMENT OF PARTNERS' CAPITAL (IN THOUSANDS, EXCEPT UNIT DATA)
COMMON UNITS SUBORDINATED UNITS GENERAL --------------------- --------------------- PARTNER UNITS AMOUNTS UNITS AMOUNTS AMOUNTS TOTAL ---------- -------- ---------- -------- ------- -------- BALANCE AT COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002).......................... -- $ 1 -- $ -- -- $ 1 Net assets contributed by sponsors on October 17, 2002........................ 8,679,405 96,691 11,353,658 160,179 $6,538 263,408 Additional contribution by sponsors.................... -- 1,847 -- -- -- 1,847 Issuance of units to the public, net of offering and other costs................. 2,598,750 45,453 -- -- -- 45,453 Additional units purchased by GNP and NGCC................ 75,503 1,510 -- -- -- 1,510 Net income for the period from commencement of operations (October 17, 2002) through December 31, 2002........... -- 3,144 -- 3,143 128 6,415 ---------- -------- ---------- -------- ------ -------- BALANCE AT DECEMBER 31, 2002..... 11,353,658 $148,646 11,353,658 $163,322 $6,666 $318,634 ========== ======== ========== ======== ====== ========
The accompanying notes are an integral part of these financial statements. 46 NATURAL RESOURCE PARTNERS L. P. CONSOLIDATED STATEMENTS OF CASH FLOWS COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 6,415 Adjustments to reconcile net income to net cash provided by operating activities: Depletion and amortization............................. 4,526 Change in operating assets and liabilities, net of effects of assets acquired: Accounts receivable.................................... (9,043) Other assets........................................... (511) Trade payables......................................... 1,402 Deferred revenue....................................... 2,018 Accrued liabilities.................................... 200 Property taxes payable................................. 1,731 -------- Net cash provided by operating activities......... 6,738 -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property................................... (57,449) -------- Net cash used in investing activities............. (57,449) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans....................................... 57,500 Deferred financing costs.................................. (1,316) Repayment of debt......................................... (46,531) Contributions by sponsors................................. 1,847 Proceeds from initial sale of common units net of transaction costs...................................... 45,453 Proceeds from sale of common units to GNP and NGCC........ 1,510 -------- Net cash provided by financing activities......... 58,463 -------- NET INCREASE IN CASH........................................ 7,752 CASH AT BEGINNING OF PERIOD................................. 1 -------- CASH AT END OF YEAR......................................... $ 7,753 ======== SUPPLEMENTAL CASH FLOW INFORMATION: Non-cash investing activities Net Assets Contributed by sponsors........................ 153,091 Excess of cost over net book value of Arch properties..... 110,315 Deferred revenue assumed on acquisition of property....... (2,152)
The accompanying notes are an integral part of these financial statements. 47 NATURAL RESOURCE PARTNERS L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND ORGANIZATION Natural Resource Partners L.P. (the "Partnership"), a Delaware limited partnership, was formed in April 2002 to own and manage certain coal royalty producing properties contributed to the Partnership by Western Pocahontas Properties Limited Partnership, ("WPP"), Great Northern Properties Limited Partnership, ("GNP"), New Gauley Coal Corporation, ("NGCC") and Arch Coal, Inc. (collectively "predecessors" or "predecessor companies"). The predecessor companies contributed assets to the Partnership on October 17, 2002. There were no operations in the Partnership prior to the contribution if the assets from the predecessor companies. Therefore, the statements of income, partners' capital and cash flows are presented from the date of commencement of operations (October 17, 2002) through December 31, 2002. The chief executive officer of the Partnership's managing general partner controls the general partners of WPP and GNP and is the controlling shareholder of NGCC. He also controls the general partner of the Partnership. In accordance with EITF 87-19, "Change of Accounting Basis in Master Limited Partnership Transactions," the assets of WPP, GNP and NGCC were contributed to the Partnership at historical costs. The assets contributed by Arch Coal, Inc., which consisted solely of land and coal reserves were recorded at their fair values. The Partnership engages principally in the business of owning and managing coal properties in the three major coal-producing regions of the United States: Appalachia, the Illinois Basin and the Western United States. As of December 31, 2002, the Partnership controlled approximately 1.23 billion tons of proven and probable coal reserves in eight states. The Partnership does not operate any mines. The Partnership leases coal reserves, through its wholly owned subsidiary, NRP (Operating) LLC, to experienced mine operators under long-term leases that grant the operators the right to mine the Partnership's coal reserves in exchange for royalty payments. The Partnership's lessees are generally required to make payments to the Partnership based on the higher of a percentage of the gross sales price or a fixed price per ton of coal sold, in addition to a minimum payment. The Partnership completed its initial public offering of 2,598,750 common units at a price of $20.00 per unit on October 17, 2002 and received aggregate gross proceeds of $52.0 million. Since the underwriters did not exercise their over-allotment option, GNP and NGCC purchased an additional 75,503 common units at a price of $20.00 per unit for aggregate gross proceeds of $1.5 million, resulting in aggregate gross proceeds of $53.5 million. In addition, WPP, GNP, NGCC and Arch contributed $0.9 million to cover transaction costs and expenses in excess of those covered by proceeds of the public offering. Underwriting fees in connection with the offering were $3.6 million. The Partnership's net proceeds from the offering, the purchase of common units by GNP and NGCC and the contribution by WPP, GNP, NGCC and Arch Coal totaled $51.8 million. The Partnership used approximately $46.5 million of the proceeds to repay debt that was assumed from WPP, GNP and NGCC, $1.3 million to cover fees related to its revolving credit facility and $3.0 million to cover expenses related to its initial public offering, which consisted primarily of legal, accounting and other professional service costs. The remaining $1.0 million of proceeds was used to establish working capital necessary for the operation of the Partnership's business. Concurrent with the sale of common units to the public, Arch Coal, Inc. sold 1,901,250 common units to the public at a price of $20.00 per unit resulting in aggregate gross proceeds of $38 million and net proceeds of $35.4 million. In addition, Arch Coal Inc. contributed $0.4 million and $0.6 million to the Partnership to establish working capital and cover fees related to the Partnership's revolving credit facility. The general partner of the Partnership is NRP (GP) LP, a Delaware limited partnership, whose general partner is GP Natural Resource Partners LLC, a Delaware limited liability company. 48 NATURAL RESOURCE PARTNERS L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of Natural Resource Partners L.P. and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated. 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. PROPERTY AND EQUIPMENT Land and coal property are carried at historical cost for properties contributed to the Partnership by WPP, GNP and NGCC. The coal properties contributed by Arch Coal Inc. have been accounted for using purchase accounting based on their estimated fair value. 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 Partnership's accounts receivable result from amounts due from third-party companies in the coal industry. This concentration of customers may affect 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, due to their short-term nature or variable interest rates that reflect market rates. DEFERRED FINANCING COSTS Deferred financing costs consists of legal and other costs related to the issuance of the Partnership's revolving credit facility. These costs are amortized over the term of the facility. 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. 49 NATURAL RESOURCE PARTNERS L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 typically 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. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. Adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on the Partnership's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1, 2002, did not have a material impact on the Partnership's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on the Partnership's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal 50 NATURAL RESOURCE PARTNERS L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) activities that are initiated after December 31, 2002. The adoption of this standard is not expected to have a significant impact on the Partnership's financial statements. 3. ACQUISITION On December 4, 2002, the Partnership purchased, through a wholly owned subsidiary, the land and mineral rights to approximately 120 million tons of coal and 25,000 acres of surface land for $57.5 million, including transaction costs, from certain subsidiaries of El Paso Corporation. El Paso Corporation retained an overriding royalty interest in certain assets. The acquisition was funded with the Partnership's revolving credit facility. The factors used in determining the fair market value of the assets included, but were not limited to, discounted future net cash flows, the quality of the reserves, the probability of continued coal mining on the property, and marketability of the coal. The results of operations of this transaction were included in the Partnership's consolidated financial statements since December 4, 2002. 4. PROPERTY AND EQUIPMENT Property and equipment includes:
DECEMBER 31, 2002 --------------- (IN THOUSANDS) Land........................................................ $ 13,532 Coal properties............................................. 411,434 Other....................................................... 8,464 -------- $433,430 ======== Depletion expense for the period............................ $ 3,676 ========
5. REVOLVING CREDIT FACILITY At December 31, 2002, the Partnership had borrowed $57.5 million on its $100 million revolving credit facility. The Partnership has a $100 million unsecured revolving credit facility, which matures in October 2005, when all principal payments are due in full. The revolving credit facility allows the Partnership to elect the interest rate at (i) LIBOR plus an applicable margin ranging from 1.25% to 1.75%, based on certain financial data or (ii) the higher of the federal funds rate plus 0.50% or the prime rate as announced by the agent bank. The revolving credit facility bore interest at a rate of 2.72% at December 31, 2002. The revolving credit facility includes a $12 million distribution loan sublimit that can be used for quarterly distributions. The financial covenants require the Partnership to maintain a ratio of consolidated total indebtedness to consolidated EBITDA (as defined in the credit agreement) that does not exceed 2.5 to 1.0 and a ratio of consolidated EBITDA to consolidated interest expense of at least 4.0 to 1.0. The Partnership is currently in compliance with all of the covenants of the revolving credit facility. 6. RELATED PARTY TRANSACTIONS Quintana Minerals Corporation, a company controlled by Corbin J. Robertson, Jr., Chairman and CEO of the Partnership's managing general partner, provided certain administrative services to the Partnership and charged it for direct costs related to the administrative services. The total expenses charged to the Partnership under this arrangement were $135,000 for the period from commencement of operations on October 17 to 51 NATURAL RESOURCE PARTNERS L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 2002. These costs are reflected in the general and administrative expenses in the accompanying statements of income. Western Pocahontas Properties Limited Partnership provides certain administrative services for the Partnership and allocated a portion of its overhead in 2002. The total expenses charged to the Partnership under this arrangement were $256,000 for the period from commencement of operations on October 17 to December 31, 2002. These costs are reflected in the general and administrative expenses in the accompanying statements of income. At December 31, 2002, the Partnership had accounts receivable from affiliates of $1.4 million due from Arch Coal, Inc. which is primarily made up of $436,000 in minimum royalty payments received by Arch Coal, Inc. that were due to the Partnership and a $839,000 advance rental payment from the Pardee lease. The Partnership also had accounts payable to affiliates of $667,000, which includes overhead reimbursements to Quintana Minerals Corporation and Western Pocahontas Properties of $135,000 and $256,000, respectively, as well as $276,000 for coal royalties received by Natural Resource Partners from lessees that was due to Western Pocahontas Properties. 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 the Partnership's properties by its lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. As owner of surface interests in some properties, we may be liable for certain environmental conditions occurring at the surface properties. The terms of substantially all of the Partnership's coal leases require the lessee to comply with all applicable laws and regulations, including environmental laws and regulations. Lessees post reclamation bonds assuring that reclamation will be completed as required by the relevant permit, and substantially all of the leases require the lessee to indemnify the Partnership against, among other things, environmental liabilities. Some of these indemnifications survive the termination of the lease. Because Natural Resource Partners L. P. has no employees, Western Pocahontas employees make regular visits to the mines to ensure compliance with lease terms, but the duty to comply with all regulations rests with the lessees. Management believes that the Partnership's lessees will be able to comply with existing regulations and does not expect any lessee's failure to comply with environmental laws and regulations to have a material impact on its financial condition or results of operations. The Partnership has neither incurred, nor is aware of, any material environmental charges imposed on it related to its properties for the period ended December 31, 2002. The Partnership is not associated with any environmental contamination that may require remediation costs. However, lessees do, from time to time, conduct reclamation work on the properties under lease to them. Because the Partnership is not the permittee of the mines being reclaimed, it is not responsible for the costs associated with these reclamation operations. However, in the event any of the Partnership's lessees are unable to complete its reclamation obligations and their bonding company likewise fails to meet the obligations or provide money to the state to perform the reclamation, the Partnership could be held liable for these costs. The Partnership is also indemnified by WPP, GNP, NGCC and Arch Coal Inc., jointly and severally, for three years after the closing of the initial public offering against environmental and tax liabilities attributable to the ownership and operation of the assets contributed to the Partnership prior to the closing. The environmental indemnity is limited to a maximum of $10.0 million. 52 NATURAL RESOURCE PARTNERS L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. MAJOR LESSEES The Partnership depends on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 ------------------ REVENUES PERCENT -------- ------- (DOLLARS IN THOUSANDS) Lessee A.................................................... $1,815 13.1% Lessee B.................................................... $2,120 15.3% Lessee C.................................................... $1,994 14.4%
9. INCENTIVE PLAN Prior to the Partnership's initial public offering, GP Natural Resource Partners LLC, the general partner of NRP (GP) LP, the Partnership's general partner, adopted the Natural Resource Partners Long-Term Incentive Plan (the "Plan") for employees and directors of GP Natural Resource Partners LLC and its affiliates who perform services for the Partnership. The Plan provides for the granting of restricted units and unit options. The Plan permits the granting of awards covering a number of common units equal to three percent of the number of common units outstanding immediately following the Partnership's initial public offering of common units. The Plan is administered by the compensation committee of GP Natural Resource Partners LLC's board of directors. Subject to the rules of the exchange upon which the common units are listed at the time, GP Natural Resource Partners LLC's board of directors or the compensation committee also has the right to alter or amend the Plan or any part of the Plan from time to time, including increasing the number of units that may be granted. Except upon the occurrence of unusual or nonrecurring events, no change in any outstanding grant may be made that would materially reduce the benefit intended to be made available to a participant without the consent of the participant. A restricted unit is a "phantom" unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, its fair market value in cash. The compensation committee may make grants under the Plan to employees and directors containing such terms as the compensation committee shall determine. The compensation committee will determine the period over which the restricted units granted to employees and directors will vest. The committee may provide for an acceleration of vesting based upon the achievement of specified financial objectives. In addition, the restricted units will vest upon a change in control of the Partnership, the general partner, or GP Natural Resource Partners LLC. If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's restricted units will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Common units to be delivered upon the vesting of restricted units may be common units acquired by GP Natural Resource Partners LLC in the open market, common units already owned by GP Natural Resource Partners LLC, common units acquired by GP Natural Resource Partners LLC directly from the Partnership, from another affiliate or any other person or entity or any combination thereof. GP Natural Resource Partners LLC will be entitled to reimbursement by the Partnership for the cost incurred in acquiring common units. Unit options under the Plan will have an exercise price that may not be less than the fair market value of the units on the date of grant. In general, units will become exercisable over a period determined by the compensation committee. The compensation committee may provide for an acceleration of vesting based upon 53 NATURAL RESOURCE PARTNERS L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the achievement of specified financial objectives. In addition, the units will become exercisable upon a change in control as described for restricted units above. If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's options will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Upon exercise of a unit option, GP Natural Resource Partners LLC will acquire common units as describe above for restricted units. The general partner adopted the Natural Resource Partners Annual Incentive Compensation Plan (the "Compensation Plan") in October 2002. The Compensation Plan is designed to enhance the performance of GP Natural Resource Partners LLC's and its affiliates' key employees by rewarding them with cash awards for achieving annual financial and operational performance objectives. The compensation committee in its discretion may determine individual participants and payments, if any, for each year. The board of directors of GP Natural Resource Partners LLC may amend or change the Compensation Plan at any time. The Partnership will reimburse GP Natural Resource Partners LLC for payments and costs incurred under the Compensation Plan. 10. SUBSEQUENT EVENT CASH DISTRIBUTIONS On January 21, 2003, the Partnership declared a cash distribution of $0.4234 per unit. Total distributions of $9.8 million were paid on February 14, 2003. 54 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 sheet of Western Pocahontas Properties Limited Partnership as of December 31, 2001, and the related statements of income, changes in partners' capital and cash flows for each of the two years in the period ended December 31, 2001 and the period from January 1, 2002 through October 16, 2002. 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, 2001, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001 and the period from January 1, 2002 through October 16, 2002, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP February 7, 2003 Houston, Texas 55 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP BALANCE SHEET
DECEMBER 31, 2001 ----------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 4,415 Restricted cash........................................... 4,912 Cash in escrow............................................ 1,000 Accounts receivable....................................... 2,787 Other..................................................... 37 -------- Total current assets................................. 13,151 Property and equipment, at cost............................. 121,424 Less accumulated depreciation and depletion............... (47,321) -------- 74,103 Deferred financing costs.................................... 970 -------- Total assets......................................... $ 88,224 ======== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current portion of long-term debt......................... $ 2,966 Note payable.............................................. 7,848 Accounts payable -- affiliate............................. 24 Accrued liabilities....................................... 720 Reversionary interest payable............................. 865 -------- Total current liabilities............................ 12,423 Deferred revenue............................................ 7,916 Long-term debt.............................................. 47,716 Commitments and contingencies............................... -- Partners' capital........................................... 20,169 -------- Total liabilities and partners' capital.............. $ 88,224 ========
The accompanying notes are an integral part of these financial statements. 56 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1 YEAR ENDED THROUGH DECEMBER 31, OCTOBER 16, ----------------- 2002 2001 2000 ----------- ------- ------- (IN THOUSANDS) REVENUES: Coal royalties............................................ $17,261 $15,458 $11,585 Timber royalties.......................................... 2,774 3,691 4,236 Gain on sale of property.................................. 92 3,125 3,982 Property tax.............................................. 1,221 1,184 1,404 Other..................................................... 1,219 2,512 1,342 ------- ------- ------- Total revenues.................................... 22,567 25,970 22,549 EXPENSES: General and administrative................................ 2,291 2,981 3,009 Taxes other than income................................... 1,438 1,457 1,701 Depreciation, depletion and amortization.................. 3,544 1,369 1,168 ------- ------- ------- Total expenses.................................... 7,273 5,807 5,878 ------- ------- ------- Income from operations...................................... 15,294 20,163 16,671 Other income (expense): Interest expense.......................................... (4,786) (3,966) (4,167) Interest income........................................... 114 270 321 Reversionary interest..................................... (561) (1,924) -- ------- ------- ------- Net income.................................................. $10,061 $14,543 $12,825 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 57 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
GENERAL PARTNER LIMITED PARTNERS TOTAL --------------- ---------------- ------- (IN THOUSANDS) 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............................................. 101 9,960 10,061 Cash distributions..................................... (80) (7,920) (8,000) ----- ------- ------- BALANCE, OCTOBER 16, 2002.............................. $ 267 $21,963 $22,230 ===== ======= =======
The accompanying notes are an integral part of these financial statements. 58 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1 THROUGH YEAR ENDED DECEMBER 31, OCTOBER 16, ----------------------- 2002 2001 2000 ----------- ---------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 10,061 $ 14,543 $ 12,825 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............... 3,544 1,369 1,168 Gain on sale of property............................... (92) (3,125) (3,982) Change in operating assets and liabilities Accounts receivable.................................. (3,684) (1,098) 580 Other assets......................................... (1,355) (4) (11) Accounts payable -- affiliate........................ -- 9 (14) Accrued liabilities.................................. 282 49 39 Deferred revenues.................................... 785 448 65 Reversionary interest payable........................ (865) 865 -- -------- -------- -------- Net cash provided by operating activities......... 8,676 13,056 10,670 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of properties.......................... 92 3,659 4,001 Capital expenditures...................................... (35,120) (974) (25) -------- -------- -------- Net cash provided by (used in) investing activities...................................... (35,028) 2,685 3,976 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from financing................................... 45,000 -- -- Deferred financing costs.................................. 173 -- -- Repayment of notes payable................................ (7,848) -- -- Repayment of debt......................................... (2,377) (2,748) (2,549) Distributions to partners................................. (8,000) (9,300) (9,950) Cash placed in restricted accounts, net................... (49) (2,386) (2,131) Cash placed in (returned from) escrow..................... 1,000 (1,000) -- -------- -------- -------- Net cash provided by (used in) financing activities...................................... 27,899 (15,434) (14,630) -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 1,547 307 16 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 4,415 4,108 4,092 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,962 $ 4,415 $ 4,108 ======== ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 4,786 $ 3,966 $ 4,167 Non-cash transactions: Issuance of note payable for reversionary interest........ $ -- $ 7,900 $ --
The accompanying notes are an integral part of these financial statements. 59 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND ORGANIZATION Western Pocahontas Properties Limited Partnership ("the Partnership"), a Delaware limited partnership, was formed in 1986 to own and manage land and mineral rights and timber located in West Virginia, Kentucky, Alabama, Maryland and Indiana. Western Pocahontas Corporation ("WPC"), a Texas corporation, serves as the general partner. All items of income and loss of the Partnership are allocated 1% to the general partner and 99% to the limited partners. The Partnership enters into leases with various third-party operators for the right to mine coal reserves and harvest timber on the Partnership's land in exchange for royalty payments. Generally, the coal lessees make payments to the Partnership based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments. The timber lessees make payments to the Partnership based on pre-determined rates per board foot harvested. 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. 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. 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. 60 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 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 or 2002 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. 61 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP 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. The adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 effective January 1, 2002 did not have a material impact on our financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not have a significant impact on our financial statements. 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 and $1.4 million to a reduction in the reversionary interest payable for the period ended October 16, 2002. The 62 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, 2001 -------------- (IN THOUSANDS) Land........................................................ $ 4,144 Coal properties............................................. 103,922 Timberlands................................................. 12,915 Other....................................................... 443 -------- $121,424 ========
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 March 2002. 5. LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, 2001 -------------- (IN THOUSANDS) 7.6% fixed notes payable due April 1, 2013.................. $50,682 Less -- Current portion of notes payable.................... (2,966) ------- Long-term debt.............................................. $47,716 =======
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 63 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 approximately $500,000 for each of the years ended December 31, 2000 and 2001, and $330,000 for the period from January 1, 2002 through October 16, 2002. 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 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, 2000 and 2001, the Partnership contributed approximately $90,000 to the retirement plan. No contribution was required during the period from January 1, 2002 through October 16, 2002. 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, 2000 and 2001, the Partnership made matching contributions in an amount of approximately $50,000, and $28,277 during the period from January 1, 2002 through October 16, 2002. 64 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, 2001, 2002 or the period ended October 16, 2002. 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. LEASE COMMITMENTS AND GUARANTEES The total rental and lease expenses for each of the years ended December 31, 2000 and 2001 were approximately $167,000 and $142,000, respectively, and $114,000 for the period from January 1, 2002 through October 16, 2002. The minimum rental payments for the next five years are as follows in thousands: 2003........................................................ $110 2004........................................................ 110 2005........................................................ 115 2006........................................................ 115 2007........................................................ --
The Partnership guaranteed a $2.0 million note payable of New Gauley Coal Corporation, the outstanding balance of which totaled approximately $1.7 million and $1.6 million at December 31, 2001 and October 16, 2002, respectively. New Gauley Coal Corporation was formerly wholly owned by the Partnership. 65 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. MAJOR LESSEES The Partnership depends on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
FOR THE PERIOD FROM JANUARY 1, 2002 YEAR ENDED DECEMBER 31, THROUGH --------------------------------------- OCTOBER 16, 2002 2001 2000 -------------------- ------------------ ------------------ REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT --------- -------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Lessee A........................ $5,659 25.1% $4,956 19.1% $5,420 24.0% Lessee B........................ $3,609 16.0% $5,113 20.5% $1,489 6.6% Lessee C........................ $4,058 18.0% $2,123 8.2% $1,222 5.4%
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. 66 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 TIMBER OTHER COMBINED ------- ------- ------- -------- (IN THOUSANDS) 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 FOR THE PERIOD FROM JANUARY 1, 2002 THROUGH OCTOBER 16, 2002 Revenues...................................... $18,482 $ 2,774 $ 1,311 $ 22,567 Operating costs and expenses.................. 2,392 864 473 3,729 Depreciation, depletion and amortization...... 3,084 293 167 3,544 ------- ------- ------- Operating income.............................. $13,006 $ 1,617 $ 671 15,294 ======= ======= ======= Interest expense.............................. (4,786) Interest income............................... 114 Reversionary interest......................... (561) -------- Net income.................................... $ 10,061 ======== Total assets.................................. $92,299 $11,061 $22,075 $125,435 Capital expenditures.......................... 29,670 5,450 -- 35,120
11. SUBSEQUENT EVENT In connection with the formation of Natural Resource Partners L.P. and its public offering of limited partnership units, the Partnership transferred certain coal royalty producing properties that are currently under 67 WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002, at historical cost. The Partnership also transferred a portion of its deferred revenue and long-term debt to Natural Resource Partners L.P. The Partnership retained a coal reserve property that is leased to a third party that is experiencing permitting problems. Additionally, the Partnership retained unleased coal reserve properties, surface land and timberlands. 68 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 sheet of Great Northern Properties Limited Partnership as of December 31, 2001, and the related statements of income, changes in partners' capital and cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002. 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, 2001, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP February 7, 2003 Houston, Texas 69 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP BALANCE SHEET
DECEMBER 31, 2001 -------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 749 Restricted cash........................................... 9,923 Accounts receivable....................................... 1,637 Other..................................................... 10 -------- Total current assets................................. 12,319 Property and equipment, at cost............................. 72,720 Less accumulated depreciation and depletion............... (15,709) -------- 57,011 Deferred financing costs.................................... 906 -------- Total assets......................................... $ 70,236 ======== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current portion of long-term debt......................... $ 1,500 Accounts payable.......................................... 140 Accrued interest.......................................... 311 -------- Total current liabilities............................ 1,951 Deferred revenue............................................ 1,034 Long-term debt.............................................. 47,125 Commitments and contingencies............................... -- Partners' capital........................................... 20,126 -------- Total liabilities and partners' capital.............. $ 70,236 ========
The accompanying notes are an integral part of these financial statements. 70 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, YEAR ENDED THROUGH DECEMBER 31, OCTOBER 16, ----------------- 2002 2001 2000 ----------- ------- ------- (IN THOUSANDS) REVENUES: Coal royalties............................................ $ 5,895 $ 7,457 $ 7,966 Lease and easement income................................. 474 787 583 Gain on sale of property.................................. -- 439 709 Property tax.............................................. 61 88 87 Other..................................................... 71 31 45 ------- ------- ------- Total revenues......................................... 6,501 8,802 9,390 EXPENSES: General and administrative................................ 417 611 481 Taxes other than income................................... 69 110 107 Depletion and amortization................................ 1,979 2,144 2,244 ------- ------- ------- Total expenses......................................... 2,465 2,865 2,832 ------- ------- ------- Income from operations...................................... 4,036 5,937 6,558 Other income (expense): Interest expense.......................................... (1,877) (3,652) (4,657) Interest income........................................... 115 307 376 ------- ------- ------- Net income.................................................. $ 2,274 $ 2,592 $ 2,277 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 71 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
GENERAL LIMITED PARTNER PARTNERS TOTAL ------- -------- ------- (IN THOUSANDS) 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.................................................. 23 2,251 2,274 Cash distributions.......................................... (7) (654) (661) ---- ------- ------- BALANCE, OCTOBER 16, 2002................................... $217 $21,522 $21,739 ==== ======= =======
The accompanying notes are an integral part of these financial statements. 72 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, YEAR ENDED THROUGH DECEMBER 31, OCTOBER 16, ----------------- 2002 2001 2000 ----------- ------- ------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 2,274 $ 2,592 $ 2,277 Adjustments to reconcile net income to net cash provided by operating activities: Depletion and amortization............................. 1,979 2,144 2,244 Gain on sale of property............................... -- (439) (709) Deferred revenue....................................... 30 (263) 87 Change in operating assets and liabilities Accounts receivable.................................. (620) (99) 1,809 Other assets......................................... (46) (2) (12) Accounts payable and accrued interest................ 108 (256) 35 ------- ------- ------- Net cash provided by operating activities......... 3,725 3,677 5,731 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of properties.......................... -- 475 726 ------- ------- ------- Net cash provided by investing activities......... -- 475 726 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt......................................... (1,125) (1,500) (1,500) Partners' distributions................................... (661) (851) -- Cash placed in restricted accounts, net................... (2,283) (2,213) (4,705) ------- ------- ------- Net cash used in financing activities............. (4,069) (4,564) (6,205) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (344) (412) 252 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 749 1,161 909 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 405 $ 749 $ 1,161 ======= ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 1,877 $ 4,018 $ 4,688 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 73 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND ORGANIZATION Great Northern Properties Limited Partnership ("the Partnership"), a Delaware limited partnership, was formed in 1992 to own and manage land and mineral rights located in Montana, North Dakota, Wyoming, Illinois and Washington. GNP Management Corporation ("GNP"), a Delaware corporation, serves as its general partner. All items of income and loss of the Partnership are allocated 1% to the general partner and 99% to the limited partners. In 1999, a limited partner's interest in the Partnership was redeemed by the partners for $1,000. The Partnership enters into leases with various coal mine operators for the right to mine coal reserves on the Partnership's land in exchange for royalty payments. Generally, the lessees make payments to the Partnership based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments. 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. 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. 74 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, due to their short-term nature or variable interest rates that reflect current market rates. 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 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 or 2002 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. 75 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP 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. The adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 effective January 1, 2002 did not have a material impact on our financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not have a significant impact on our financial statements. 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. 76 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment includes:
DECEMBER 31, 2001 -------------- (IN THOUSANDS) Land........................................................ $ 2,172 Coal properties............................................. 70,491 Other....................................................... 57 ------- $72,720 =======
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, 2001 -------------- (IN THOUSANDS) Floating rate notes, bearing interest at 4.70 percent at December 31, 2001 due September 30, 2004.................. $48,625 Less -- Current portion of notes payable.................... (1,500) ------- Long-term debt.............................................. $47,125 =======
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, and $2.3 million for the period from January 1, 2002 through October 16, 2002. 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 77 GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, 2000 and 2001 and for the period ended October 16, 2002. 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. 8. MAJOR LESSEES The Partnership depends on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
FOR THE PERIOD FROM JANUARY 1, 2002 YEAR ENDED DECEMBER 31, THROUGH --------------------------------------- OCTOBER 16, 2002 2001 2000 -------------------- ------------------ ------------------ REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT --------- -------- -------- ------- -------- ------- (IN THOUSANDS) Lessee A........................ $3,302 50.7% $5,324 60.5% $6,467 81.2% Lessee B........................ 1,311 20.1% 1,634 18.6% 1,233 15.5%
9. SUBSEQUENT EVENT In connection with the formation of Natural Resource Partners L.P. and its public offering of limited partnership units, the Partnership transferred certain coal royalty producing properties that are currently under lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002, at historical cost. The Partnership also transferred a portion of its deferred revenue and long-term debt to Natural Resource Partners L.P. The Partnership retained unleased coal reserve properties and surface land. 78 NEW GAULEY COAL CORPORATION FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS The Stockholders of New Gauley Coal Corporation We have audited the accompanying balance sheet of New Gauley Coal Corporation as of December 31, 2001, and the related statements of income, changes in stockholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002. 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, 2001, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP February 7, 2003 Houston, Texas 79 NEW GAULEY COAL CORPORATION BALANCE SHEET
DECEMBER 31, 2001 -------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 399 Accounts receivable....................................... 106 ------- Total current assets................................. 505 Property and equipment, at cost............................. 6,490 Less accumulated depletion................................ (2,786) ------- Deferred financing costs.................................... 201 Note receivable including interest........................ 215 ------- Total assets......................................... $ 4,625 ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt......................... $ 99 Accrued liabilities....................................... 107 ------- Total current liabilities............................ 206 Deferred revenue............................................ 3,601 Long-term debt.............................................. 1,584 Stockholders' equity (deficit): Common stock, $100 par value 25,000 shares authorized, 21,378 issued and outstanding.......................... 2,137 Accumulated deficit....................................... (2,903) ------- Total stockholders' (deficit)........................ (766) ------- Total liabilities and stockholders' equity (deficit)........................................... $ 4,625 =======
The accompanying notes are an integral part of these financial statements. 80 NEW GAULEY COAL CORPORATION STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, YEAR ENDED THROUGH DECEMBER 31, OCTOBER 16, --------------- 2002 2001 2000 ----------- ------ ------ (IN THOUSANDS) REVENUES: Coal royalties............................................ $1,434 $1,609 $ 955 Gain on sale of property.................................. -- 25 -- Property tax.............................................. 20 28 25 Other..................................................... 53 61 32 ------ ------ ------ Total revenues......................................... 1,507 1,723 1,012 EXPENSES: General and administrative................................ 52 41 32 Taxes other than income................................... 42 45 48 Depletion and amortization................................ 138 212 132 ------ ------ ------ Total expenses......................................... 232 298 212 ------ ------ ------ Income from operations...................................... 1,275 1,425 800 Other income (expense): Interest expense.......................................... (97) (132) (139) Interest income........................................... 24 15 -- Reversionary interest..................................... (104) (85) -- ------ ------ ------ Net income.................................................. $1,098 $1,223 $ 661 ====== ====== ======
The accompanying notes are an integral part of these financial statements. 81 NEW GAULEY COAL CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
ACCUMULATED COMMON STOCK DEFICIT TOTAL ------------ ----------- ------- (IN THOUSANDS) 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................................................ -- 1,098 1,098 Dividends................................................. -- (400) (400) ------ ------- ------- BALANCE, OCTOBER 16, 2002................................. $2,137 $(2,205) $ (68) ====== ======= =======
The accompanying notes are an integral part of these financial statements. 82 NEW GAULEY COAL CORPORATION STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, YEAR ENDED THROUGH DECEMBER 31, OCTOBER 16, ---------------- 2002 2001 2000 ----------- ------- ------ (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $1,098 $ 1,223 $ 661 Adjustments to reconcile net income to net cash provided by operating activities: Depletion and amortization............................. 138 212 132 Decrease in deferred revenues.......................... (280) (146) (154) Gain on sale of property............................... -- (25) -- Change in operating assets and liabilities Accounts receivable.................................. (43) (12) (36) Other assets......................................... (30) (15) -- Accrued liabilities.................................. (16) 86 1 ------ ------- ------ Net cash provided by operating Activities......... 867 1,323 604 ------ ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in note receivable............................. -- (200) -- Proceeds from sale of properties.......................... -- 25 -- ------ ------- ------ Net cash used in investing activities............. -- (175) -- ------ ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt......................................... (74) (91) (91) Dividends................................................. (400) (1,000) (500) ------ ------- ------ Net cash used in financing activities............. (474) (1,091) (591) ------ ------- ------ NET INCREASE IN CASH AND CASH EQUIVALENTS................... 393 57 13 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 399 342 329 ------ ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 792 $ 399 $ 342 ====== ======= ====== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 97 $ 132 $ 139
The accompanying notes are an integral part of these financial statements. 83 NEW GAULEY COAL CORPORATION NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND ORGANIZATION New Gauley Coal Corporation ("the Company"), a West Virginia subchapter S corporation, was incorporated in 1918 to own and manage land and mineral rights. The Company owns property in Alabama and West Virginia. The Company enters into leases with various coal mine operators for the right to mine coal reserves on the Company's land in exchange for royalty payments. Generally, the lessees make payments to the Company based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments. 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 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. 84 NEW GAULEY COAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 or 2002 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. The adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial statements. 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- 85 NEW GAULEY COAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 effective January 1, 2002 did not have a material impact on our financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not have a significant impact on our financial statements. 3. REVERSIONARY INTEREST The previous owner of a portion 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. Through the period ended October 16, 2002, the Company has accrued approximately $39,000 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. 86 NEW GAULEY COAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT Property and equipment includes:
DECEMBER 31, 2001 -------------- (IN THOUSANDS) Land........................................................ $ 88 Coal properties............................................. 6,402 ------ $6,490 ======
In January 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, 2001 -------------- (IN THOUSANDS) 7.6% fixed note payable due April 1, 2013................... $1,683 Less -- Current portion of note payable..................... (99) ------ Long-term debt.............................................. $1,584 ======
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, 2001, or the period ended October 16, 2002. 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, 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 87 NEW GAULEY COAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, 2001, and period ended October 16, 2002. 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 that exceed ten percent of total revenues are as follows:
FOR THE PERIOD FROM JANUARY 1, 2002 YEAR ENDED DECEMBER 31, THROUGH --------------------------------------- OCTOBER 16, 2002 2001 2000 -------------------- ------------------ ------------------ REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT --------- -------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Lessee A........................ $561 37.2% $985 57.2% $298 29.4% Lessee B........................ 858 56.9% 624 36.2% 657 64.9%
9. SUBSEQUENT EVENT In connection with the formation of Natural Resource Partners L.P. and its public offering of limited partnership units, the Company transferred certain coal royalty producing properties that are currently under lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002 at historical cost The Company transferred a portion of its deferred revenue and all its long-term debt to Natural Resource Partners L.P. The Company retained unleased coal reserve properties. 88 ARCH COAL 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, 2001, and the related statements of revenues and direct costs and expenses for the period January 1, 2002 through October 16, 2002 and the years ended December 31, 2001 and 2000. 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, 2001 and the revenue and direct costs and expenses of the acquired properties for the period January 1, 2002 through October 16, 2002 and the years ended December 31, 2001 and 2000, 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, 2001, and the revenues and direct costs and expenses of the acquired properties for the period January 1, 2002 through October 16, 2002 and the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP February 11, 2003 St. Louis, Missouri 89 ARCH COAL, INC. CONTRIBUTED PROPERTIES STATEMENTS OF ASSETS PURCHASED AND LIABILITIES ASSUMED
DECEMBER 31, 2001 -------------- (IN THOUSANDS) ASSETS Accounts receivable from lessees............................ $ 1,434 --------- Total current assets................................. 1,434 Coal lands and mineral rights: Coal lands and mineral rights, at cost.................... 242,730 Less accumulated depletion................................ (153,431) --------- 89,299 --------- Total assets......................................... $ 90,733 ========= LIABILITIES Current liabilities: Property tax payable...................................... $ 771 --------- Total current liabilities............................ 771 Deferred revenue............................................ 10,409 --------- Total liabilities.................................... 11,180 --------- Net assets purchased................................. $ 79,553 =========
The accompanying notes are an integral part of these financial statements 90 ARCH COAL CONTRIBUTED PROPERTIES STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
FOR THE PERIOD JANUARY 1 THROUGH YEAR ENDING YEAR ENDING OCTOBER 16, DECEMBER 31, DECEMBER 31, 2002 2001 2000 ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PRICE DATA) REVENUES: Coal royalties......................................... $14,768 $18,415 $16,152 Other royalties........................................ 1,349 1,363 907 Property taxes......................................... 1,179 1,033 1,204 ------- ------- ------- Total revenues......................................... 17,296 20,811 18,263 DIRECT COSTS AND EXPENSES: Depletion.............................................. 4,889 6,382 5,395 Property taxes......................................... 1,179 1,033 1,204 Other expense.......................................... 528 283 18 ------- ------- ------- Total expenses......................................... 6,596 7,698 6,617 ------- ------- ------- Excess of revenues over direct costs and expenses........ $10,700 $13,113 $11,646 ======= ======= =======
The accompanying notes are an integral part of these financial statements 91 ARCH COAL CONTRIBUTED PROPERTIES NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Ark Land Company ("Ark Land") is a wholly owned subsidiary of Arch Coal, Inc. ("Arch Coal"). Ark Land owns and manages land and mineral rights primarily located in the Western, Central Appalachian and the Illinois Basins. In conjunction with the formation of Natural Resource Partners L. P. ("NRP"), Ark Land contributed a number of owned land and coal interests on which coal leasing activity occurs ("Contributed Properties") to NRP. Ark Land retained owned land and mineral reserves with no leasing activity as well as other land and mineral reserves controlled through leasing arrangements. The accompanying statements have been prepared on Ark Land's historical cost basis in the Contributed Properties. The Contributed Properties was not a legal entity and, except for revenues earned from the properties and certain direct costs and expenses of the properties and assets acquired and liabilities assumed, no separate financial information was maintained. The Contributed Properties did not maintain stand-alone corporate treasury, legal, tax, human resources, general administration and other similar corporate support functions. Corporate general and administrative expenses have not been allocated to the Contributed Properties, nor were they allocated in connection with the preparation of the accompanying statements because there was not sufficient information to develop a reasonable cost allocation. Because the separate and distinct accounts necessary to present a balance sheet and income statements of the Contributed Properties were not maintained for the period from January 1 through October 16, 2002 and for the two years ended December 31, 2001. Statements of Revenues and Direct Costs and Expenses were prepared. The accompanying Statements of Revenues and Direct Costs and Expenses and Statement of Assets Purchased and Liabilities Assumed are not intended to be a complete presentation of financial position and the results of operations of the Contributed Properties. The accompanying financial statements have been prepared to comply with the requirements of the Securities and Exchange Commission for inclusion in the annual report on Form 10-K of NRP. With respect to cash flows, the Contributed Properties did 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. 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. 92 ARCH COAL CONTRIBUTED PROPERTIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) REVENUES Coal Royalties. Coal royalty revenues are recognized on the basis of tons of coal sold by the Contributed Properties' 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 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. The Contributed Properties have adopted SFAS No. 143 effective January 1, 2003 and it did not have a material affect. 3. RELATED PARTY TRANSACTIONS Certain of the Contributed Properties were leased to affiliates of Arch Coal that mine on the properties. Contracted royalty rates from these affiliates ("affiliate royalties") for the period from January 1, 2002 through October 16, 2002 and the two 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 $7.7 million, $10.5 million and $10.2 million during the period from January 1, 2002 through October 16, 2002 and the two years ended December 31, 2001. 93 ARCH COAL CONTRIBUTED PROPERTIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. MAJOR LESSEES The Contributed Properties depended on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed 10% of total revenues, are as follows:
FOR THE PERIOD FROM JANUARY 1, 2002 YEAR ENDED DECEMBER 31, THROUGH --------------------------------------- OCTOBER 16, 2002 2001 2000 -------------------- ------------------ ------------------ REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT --------- -------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Arch Coal....................... $7,741 45% $10,492 50% $10,191 55% Lessee A........................ 4,093 24% 4,895 23% 2,942 16%
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 the Contributed Properties 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 its 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 period from January 1, 2002 to October 16, 2002 and the two years ended December 31, 2001. 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 PERIOD ENDED DECEMBER 31, OCTOBER 16, ----------------- 2002 2001 2000 ------------ ------- ------- CASH FLOWS FROM CONTRIBUTED PROPERTIES Excess of revenues over direct costs and expenses... $10,700 $13,113 $11,646 Adjustments to reconcile to net cash provided from Contributed Properties: Depletion........................................ 4,889 6,382 5,395 Write-down of impaired assets.................... -- -- -- Change in working capital: Accounts receivable.............................. (269) 115 (457) Property tax payable............................. (140) (148) 60 Deferred royalties............................... 1 374 (43) ------- ------- ------- Direct cash flow from Contributed Properties........ $15,181 $19,836 $16,601 ======= ======= =======
94 ARCH COAL CONTRIBUTED PROPERTIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. SUBSEQUENT EVENT In connection with the formation of Natural Resource Partners, L.P. and the consummation of its initial public offering of limited partnership units, Arch Coal transferred certain coal royalty producing properties that are currently under lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002 at fair market value. 95 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 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, 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. 96 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER As a master limited partnership we do not employ any of the people responsible for the management of our properties. Instead, we reimburse our managing general partner, GP Natural Resource Partners LLC, for its services. All directors and officers are elected by our managing general partner. The following table sets forth information concerning the directors and officers of GP Natural Resource Partners LLC. Each officer and director is elected for their respective office or directorship on an semi-annual basis.
FIRST ELECTED A OFFICER/ NAME AGE POSITION WITH THE GENERAL PARTNER DIRECTOR - ---- --- --------------------------------- --------- Corbin J. Robertson, Jr. .................... 55 Chairman of the Board and Chief Executive Officer 2002(1) Nick Carter............... 56 President and Chief Operating Officer 2002(1) Dwight L. Dunlap.......... 49 Chief Financial Officer and Treasurer 2002(1) Kevin F. Wall............. 46 Vice President and Chief Engineer 2002(1) Kathy E. Hager............ 51 Vice President Investor Relations 2002(2) Charles H. Kerr........... 49 Secretary 2002(2) Kenneth Hudson............ 48 Controller 2002(1) Robert T. Blakely......... 61 Director 2003(3) David M. Carmichael....... 64 Director 2002(2) Robert B. Karn III........ 61 Director 2002(2) Steven F. Leer............ 50 Director 2002(1) S. Reed Morian............ 58 Director 2002(1) David B. Peugh............ 48 Director 2002(1) W. W. Scott, Jr. ......... 57 Director 2002(1)
- --------------- (1) First elected an officer or director during the formation of the Partnership in April 2002. (2) Elected as an officer or director at the first board meeting of the Partnership's general partner in October 2002. (3) Elected as a director in January 2003. 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. Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation are all affiliates of Natural Resource Partners L.P. 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. Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation are all affiliates of Natural Resource Partners L.P. Prior to 1990, Mr. Carter held various positions with MAPCO Coal Corporation and was engaged in the private practice of law. He is President of the National Council of Coal Lessors, the 97 immediate past Chair of the West Virginia Chamber of Commerce and a board member of the Kentucky Coal Association. Dwight L. Dunlap is the Chief Financial Officer 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 Four international public accounting firm. Kevin F. 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 of Professional Engineers. Mr. Wall also serves on the Board of Directors of Leadership Tri-State and is a past president of the West Virginia Society of Professional Engineers. Kathy E. Hager is the Vice President, Investor Relations for GP Natural Resource Partners LLC. Ms. Hager joined the partnership in July 2002. She was the Principal of IR Consulting Associates from 2001 to July 2002 and from 1980 through 2000 held various financial and investor relations positions with Santa Fe Energy Resources, most recently as Vice President -- Public Affairs. She is a Certified Public Accountant. Ms. Hager has served on the local board of directors of the National Investor Relations Institute and has maintained professional affiliations with various energy industry organizations. She has also served on the Executive Committee and as a National Vice President of the Institute of Management Accountants. Charles H. Kerr is the Secretary of GP Natural Resource Partners LLC. Mr. Kerr has worked for Quintana Minerals Corporation, an affiliate of the Partnership, where he is currently Vice-President of Land/Legal, since 1983. His responsibilities have included acquisitions and divestitures, land/legal management and administration, strategic planning and contract and agreement negotiation and administration. Prior to joining Quintana, he worked for two independent oil and gas companies. 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. Robert T. Blakely is a member of the Board of Directors of GP Natural Resource Partners LLC. He currently serves as President of Performance Enhancement Group, a company involved in the acquisition of companies manufacturing high performance and racing automotive engine components. He previously served as Executive Vice President and Chief Financial Officer of Lyondell Chemical from 1999 through 2002, Executive Vice President and Chief Financial Officer of Tenneco, Inc. from 1981 until 1999 as well as a Managing Director at Morgan Stanley. He recently completed a four-year term on the Financial Accounting Standards Advisory Council and currently serves as a trustee of Cornell University, where he serves as Chairman of Cornell's Finance Committee and a member of the Executive Committee of the Board. Mr. Blakely was recently named to the Board of Directors of Lufkin Industries. David M. Carmichael is a member of the Board of Directors of GP Natural Resource Partners LLC. He currently is a private investor. Mr. Carmichael is the former Vice Chairman of KN Energy and the former Chairman and Chief Executive Officer of American Oil and Gas Corporation, CARCON Corporation and WellTech, Inc. He has served on the Board of Directors of Tom Brown, Inc. since 1997 and ENSCO International since 2001. He also currently serves as a trustee of the Texas Heart Institute. 98 Robert B. Karn III is a member of the Board of Directors of GP Natural Resource Partners LLC. He currently is a consultant and serves on the Board of Directors of various entities. He was the partner in charge of the coal mining practice worldwide for Arthur Andersen from 1981 until his retirement in 1998. He retired as Managing Partner of the St. Louis office's Financial and Economic Consulting Practice. Mr. Karn is a Certified Public Accountant, Certified Fraud Examiner and has served as President of numerous organizations. He also currently serves on the Board of Directors of Peabody Energy. 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, a past Chairman of the Center for Energy and Economic Development and a past 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 since 1986, New Gauley Coal Corporation since 1992 and 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 1981. He has also served as Chairman, Chief Executive Officer and President of DX Holding Company 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 1995. 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. The Board of Directors of GP Natural Resource Partners LLC has formed three committees, staffed solely by independent directors, to assist it in its duties as follows: Audit Committee: *Robert B. Karn, III -- Chairman *Robert T. Blakely -- Member David M. Carmichael -- Member - --------------- * Determined to be Audit Committee Financial Experts pursuant to Item 401 of Regulation S-K. Compensation, Nominating and Governance Committee: David M. Carmichael -- Chairman Robert T. Blakely -- Member Robert B. Karn, III -- Member Conflicts Committee: Robert T. Blakely -- Chairman Robert B. Karn, III -- Member David M. Carmichael -- Member SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities and Exchange Act of 1934 requires directors, officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of their equity securities. These people are also required to furnish us with copies of all Section 16(a) forms that they file. 99 Based solely upon a review of the copies of Forms 3, 4 and 5 furnished to us, or written representations from certain reporting persons that no Forms 5 were required, we believe that our officers and directors complied with all filing requirements with respect to transactions in our equity securities during 2002, except that each of Messrs. Carmichael, Leer, Morian, Peugh, Robertson and Scott filed a late Form 4, and Arch Coal filed two late Form 4's. ITEM 11. EXECUTIVE COMPENSATION We have no executive officers, but we reimburse the general partner for compensation paid to the general partners' executive officers in connection with managing NRP. NRP and its general partner were formed in April 2002, but did conduct any operations until the completion of the initial public offering of common units on October 17, 2002. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------ OTHER ANNUAL NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION - --------------------------- ---- ------ ------ ------------ Corbin J. Robertson, Jr., Chairman of the Board and CEO......................................... 2002 $ -- $ -- $ --
Corbin J. Robertson Jr., Chairman of the Board and CEO, did not receive any salary, bonus or other compensation during 2002 that was reimbursed by us to the general partner. We did not reimburse the general partner for any amount in excess of $100,000 for services rendered by any other of our executive officers during 2002. COMPENSATION OF DIRECTORS Each non-employee director of the general partner receives 10,000 unit options upon election to the board. Additionally, each director receives an annual retainer of $20,000, payable quarterly, plus additional fees of $2,000 annually for being a Committee Chairman and $500 per committee meeting. Each non-employee director also receives $1,000 for attending board meetings in person or $500 for participation in telephonic meetings. Both Stephen F. Leer and David B. Peugh have assigned any compensation they receive as directors of the general partner to Arch Coal, Inc., their employer. 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 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. Subject to the rules of the exchange upon which the common units are listed at the time, GP Natural Resource Partners LLC's board of directors or the compensation committee 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 or the compensation committee 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 the rules of the exchange upon which the common units are listed at that time. Except upon the occurrence of unusual or nonrecurring events, no change in any outstanding grant may be made that would materially reduce the benefit intended to be made available to a participant without the consent of the participant. 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, its fair market 100 value in cash. The compensation committee may make grants under the plan to employees and directors containing such terms as the compensation committee shall determine. 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 GP Natural Resource Partners LLC, common units acquired by GP Natural Resource Partners LLC directly from us, from another affiliate or any other person or entity 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 directors containing such terms as the committee shall determine consistent with the plan. Unit options will have an exercise price that 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. The compensation committee may base its determination upon the achievement of specified financial objectives. In addition, the unit options will become exercisable upon a change in control as described above. If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's options will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Upon exercise of a unit option, GP Natural Resource Partners LLC will acquire common units in the open market, directly from us, from another affiliate or any other person or entity, or use common units already owned by GP Natural Resource Partners LLC, or any combination of the foregoing. GP Natural Resource Partners LLC will be entitled to reimbursement by us for the difference between the cost incurred in acquiring these common units and the proceeds received 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 also adopted the Natural Resource Partners Annual Incentive Compensation Plan in October 2002. The annual incentive plan is designed to enhance the performance of GP Natural Resource Partners LLC 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. 101 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 1, 2003, the amount and percentage of the Partnership units beneficially held by (1) each person known to us to beneficially own 5% or more of the stock, (2) by each of the directors and executive officers and (3) by all directors and executive officers as a group. Unless otherwise noted, each of the named persons and members of the group has sole voting and investment power with respect to the units shown.
PERCENTAGE OF PERCENTAGE OF PERCENTAGE COMMON COMMON SUBORDINATED SUBORDINATED OF TOTAL NAME OF BENEFICIAL OWNER UNITS UNITS(1) UNITS UNITS(1) UNITS - ------------------------ --------- ------------- ------------ ------------- ---------- Corbin J. Robertson, Jr.(2)........... 3,433,473 30.2% 5,440,673 47.9% 39.1% Western Pocahontas Properties Limited Partnership(3)(5)................... 3,158,166 27.8% 5,231,766 46.1% 36.9% Arch Coal, Inc.(4)(5)................. 2,895,670 25.5% 4,796,920 42.3% 33.9% Ark Land Company(4)(5)................ 2,895,670 25.5% 4,796,920 42.3% 33.9% Great Northern Properties Partnership(5)...................... 673,715 5.9% 1,116,065 9.8% 7.9% David M. Carmichael................... 5,000 * 0 0 * Robert B. Karn III.................... 1,500 * 0 0 * Steven R. Leer........................ 1,000 * 0 0 * S. Reed Morian........................ 6,000 * 0 0 * David B. Peugh........................ 1,000 * 0 0 * W. W. Scott, Jr. ..................... 5,000 * 0 0 * Nick Carter........................... 5,000 * 0 0 * Dwight L. Dunlap...................... 4,000 * 0 0 * Kathy E. Hager........................ 4,000 * 0 0 * Kevin F. Wall......................... 500 * 0 0 * Charles H. Kerr....................... 2,500 * 0 0 * Kenneth Hudson........................ 500 * 0 0 * Directors and Officers as a Group..... 3,469,473 30.6% 5,440,673 47.9% 39.2%
- --------------- * Less than one percent. (1) Based upon 11,353,658 common units issued and outstanding on March 1, 2003 and 11,353,658 subordinated units issued and outstanding on March 1, 2003. Unless otherwise noted, beneficial ownership is less than 1% of the Partnership's common units and subordinated units. (2) Mr. Robertson may be deemed to beneficially own the 3,158,166 common units and 5,231,766 subordinated units owned by Western Pocahontas Properties Limited Partnership, and 126,107 common units and 208,907 subordinated units owned by New Gauley Coal Corporation. Also included are 66,300 common units held by William K. Robertson 1992 Management Trust and 66,400 units held by Frances C. Robertson 1992 Management Trust, both of which Mr. Robertson is the trustee, and has voting control, but not direct ownership. Also included are 16,400 common units held by Barbara Robertson, Mr. Robertson's spouse. (3) These units may be deemed to be beneficially owned by Mr. Robertson. (4) Arch Coal, Inc. is the parent company of Ark Land Company and may be deemed to beneficially own the units held by Ark Land Company. (5) The address of Western Pocahontas Properties Limited Partnership and Great Northern Properties Limited Partnership is 601 Jefferson Street, Suite 3600, Houston, Texas 77002. The address of Arch Coal, Inc. and Ark Land Company is One City Place Drive Suite 300, St. Louis, Missouri 63141. For information relating to the securities authorized for issuance under equity compensation plans, please see Item 5, "Market for Registrant's Common Units and Related Unitholder Matters." 102 EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR NUMBER OF SECURITIES EXERCISE PRICE OF FUTURE ISSUANCE UNDER TO BE ISSUED UPON EXERCISE OUTSTANDING EQUITY COMPENSATION PLANS OF OUTSTANDING OPTIONS, OPTIONS, (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) PLAN CATEGORY (A) (B) (C) - ------------- -------------------------- ------------------- ------------------------- Equity compensation plans approved by security holders (LTIP).......... 60,000 $19.50 280,610 Equity compensation plans not approved by security holders................. -- -- -- ------ ------ ------- Total........... 60,000 $19.50 280,610 ====== ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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............. - 6,853,658 common units; - 11,353,658 subordinated units; - 2% general partner interest in Natural Resource Partners; - the incentive distribution rights; and - the assumption of $46.5 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. 103 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 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 entered into among the Partnership, our general partner, the WPP Group, Arch Coal, Ark Land Company and Robertson Coal Management LLC concurrently with the closing of the 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, 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." 104 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 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 105 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 the six month period, Arch Coal has made a good faith, reasonable attempt to divest the interest, but is unable to do so and Arch has not received an extension from our conflicts committee or has not offered us the opportunity to buy its competing interest, Arch Coal may opt to either (1) have its designated directors immediately resign from the board of directors of our general partner, in which case Arch Coal may continue to own and operate the competing business but will continue to relinquish its rights to designate directors of our general partner until such time as it divests the competing business, or (2) hire an independent investment banking firm to determine the fair market value of the competing business. If Arch Coal elects to obtain an independent valuation of its competing business, then: - if Arch Coal and our general partner (with the concurrence of the conflicts committee) agree upon the price of the competing business, our partnership will purchase the competing business; - if Arch Coal seeks to sell the competing business to our partnership at the price determined by the investment banking firm and our general partner (with the concurrence of the conflicts committee) declines to purchase the competing business, Arch Coal will be free to continue to own and operate the competing business; - if Arch Coal does not wish to sell the competing business to our partnership at the price determined by the investment banking firm and our general partner (with the concurrence of the conflicts committee) seeks to purchase the competing business at such price, then Arch Coal's designated directors must immediately resign from the board of directors of our general partner, in which case Arch Coal may continue to own and operate the competing business. Arch Coal will continue to relinquish its rights to designate directors of our general partner until it divests the competing business. 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 the initial public offering against environmental liabilities associated with the properties contributed to us and occurring before the closing date of the initial public offering and (2) all tax liabilities attributable to the ownership or operation of the partnership assets prior to the closing of the initial public offering. The environmental indemnity will be limited to a maximum amount of $10.0 mil- 106 lion. 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 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. For information relating to our leases with Ark Land Company, please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Related Party Transactions." 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. 107 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; - 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. 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 do not have any officers or employees and 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 conduct businesses and activities of their own in which we 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 are not required to work full time on our affairs. These officers devote significant time to the affairs of the WPP Group or its affiliates and are compensated by these affiliates for the services rendered to them. WE REIMBURSE OUR GENERAL PARTNER AND ITS AFFILIATES FOR EXPENSES. We 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 determines 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. 108 COMMON UNITHOLDERS 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, do 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. CONTRACTS BETWEEN US, ON THE ONE HAND, AND OUR GENERAL PARTNER AND ITS AFFILIATES, ON THE OTHER, ARE 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 the result of arm's-length negotiations. All of these transactions entered into after our initial public offering are on terms that are fair and reasonable to us. Our general partner and its affiliates 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 is no obligation of our general partner or 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 80.2% of our outstanding common units and will be able to exercise this 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 in the past were retained by our general partner, its affiliates and us and have continued to be retained by our general partner, its affiliates and us. Attorneys, independent auditors and others who perform services for us are 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, 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 is 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 "Omnibus Agreement." MISCELLANEOUS Corbin J. Robertson III, the son of our managing general partner's Chief Executive Officer, Corbin J. Robertson, Jr., is an employee of Quintana Minerals Corporation, which performs services for us from time to 109 time. Subsequent to year-end, Quintana Minerals Corporation was reimbursed in the amount of $5,000 as a bonus for services performed by Corbin J. Robertson III during 2002. ITEM 14. CONTROLS AND PROCEDURES We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act) within the 90 days prior to the filing date of this report. This evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Office and Chief Financial Officer of GP Natural Resource Partners LLC, our managing general partner. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective in producing the timely recording, processing, summary and reporting of information and in accumulation and communication of information to management to allow for timely decisions with regard to required disclosure. In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the last date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)(1) AND (2) FINANCIAL STATEMENTS AND SCHEDULES Please See Item 8, "Financial Statements and Supplementary Data" (A)(3) EXHIBITS EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 -- Certificate of Limited Partnership of Natural Resource Partners L.P. (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.2* -- First Amended and Restated Agreement of Limited Partnership of Natural Resource Partners L.P., dated as of October 17, 2002. 3.3 -- Certificate of Formation of NRP (Operating) LLC (incorporated by reference to Exhibit 3.3 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.4* -- Amended and Restated Limited Liability Company Agreement of NRP (Operating) LLC, dated as of October 17, 2002. 3.5 -- Certificate of Limited Partnership of NRP (GP) LP (incorporated by reference to Exhibit 3.5 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.6* -- First Amended and Restated Agreement of Limited Partnership of NRP (GP) LP, dated as of October 17, 2002. 3.7 -- Certificate of Formation of GP Natural Resource Partners LLC (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.8* -- Second Amended and Restated Limited Liability Company Agreement of GP Natural Resource Partners LLC, dated as of October 17, 2002. 10.1* -- Credit Agreement, dated as of October 10, 2002, and effective as of October 17, 2002, by and among NRP (Operating) LLC, as Borrower, PNC Bank, National Association, as Administrative Agent, the Banks and Natural Resource Partners L.P., WPP LLC, GNP LLC, NNG LLC and ACIN LLC, as Guarantors.
110
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.2* -- Contribution, Conveyance and Assumption Agreement by and among Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation, Ark Land Company, WPP LLC, GNP LLC, NNG LLC, ACIN LLC, Robertson Coal Management LLC, NRP (Operating) LLC, GP Natural Resource Partners LLC, NRP (GP) LP and Natural Resource Partners L.P., dated as of October 17, 2002. 10.3* -- Natural Resource Partners Long-Term Incentive Plan 10.4* -- Natural Resource Partners Annual Incentive Plan 10.5* -- Omnibus Agreement dated October 17, 2002, by and among Arch Coal, Inc., Ark Land Company, Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation, Robertson Coal Management LLC, GP Natural Resource Partners LLC, NRP (GP) LP, Natural Resource Partners L.P. and NRP (Operating) LLC. 10.6* -- Royalty Pass-Through Agreement and Guaranty dated as of October 17, 2002 among Arch Coal, Inc., Ark Land Company and ACIN LLC. 10.7 -- Form of Coal Mining Lease between Ark Land Company and ACIN LLC (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1 filed September 9, 2002, File No. 333-86582) 10.8* -- Purchase and Sale Agreement dated November 6, 2002, by and among El Paso CGP Company, Coastal Coal Company, LLC, Coastal Coal --West Virginia LLC, ANR Western Coal Develop- ment Company and CSTL LLC 10.9* -- First Amendment to Purchase and Sale Agreement, dated December 4, 2002. 10.10* -- Lease Amendment No. 1 to Coal Mining Lease dated November 20, 2002 between ACIN LLC and Ark Land Company. 21.1* -- List of subsidiaries of Natural Resource Partners L.P. 99.1* -- Audited balance sheets of NRP (GP) LP 99.2* -- Section 1350 certifications
- --------------- * Filed herewith (B) REPORTS ON FORM 8-K 1. A Current Report on Form 8-K (Items 5 and 7) was filed on October 22, 2002, in connection with NRP's appointment of two independent directors. 2. A Current Report on Form 8-K (Items 5 and 7) was filed on November 7, 2002, in connection with NRP's agreement to buy coal reserves from subsidiaries of El Paso Corporation. 3. A Current Report on Form 8-K (Item 9) was filed on November 27, 2002, relating to NRP's third quarter pro forma earnings and fourth quarter guidance. 4. A Current Report on Form 8-K (Items 5 and 7) was filed on December 5, 2002, in connection with the completion of NRP's acquisition of coal reserves from subsidiaries of El Paso Corporation. 111 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned and thereunto duly authorized. NATURAL RESOURCE PARTNERS L.P. By: NRP (GP) LP, its general partner By: GP NATURAL RESOURCE PARTNERS LLC, its general partner By: /s/ NICK CARTER ------------------------------------ Nick Carter President and Chief Operating Officer Date: March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on or behalf and in the capacities and on the dates indicated. Date: March 28, 2003 By: /s/ CORBIN J. ROBERTSON, JR. ------------------------------------ Corbin J. Robertson, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 28, 2003 By: /s/ DWIGHT L. DUNLAP ------------------------------------ Dwight L. Dunlap Chief Financial Officer and Treasurer (Principal Financial Officer) Date: March 28, 2003 By: /s/ KENNETH HUDSON ------------------------------------ Kenneth Hudson Controller (Principal Accounting Officer) Date: March 28, 2003 By: /s/ ROBERT T. BLAKELY ------------------------------------ Robert T. Blakely Director Date: March 28, 2003 By: /s/ DAVID M. CARMICHAEL ------------------------------------ David M. Carmichael Director 112 Date: March 28, 2003 By: /s/ ROBERT B. KARN III ---------------------------------- Robert B. Karn III Director Date: March 28, 2003 By: /s/ STEVEN F. LEER ------------------------------------ Steven F. Leer Director Date: March 28, 2003 By: /s/ S. REED MORIAN ------------------------------------ S. Reed Morian Director Date: March 28, 2003 By: /s/ DAVID B. PEUGH ------------------------------------ David B. Peugh Director Date: March 28, 2003 By: /s/ W. W. SCOTT, JR. ------------------------------------ W. W. Scott, Jr. Director 113 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Corbin J. Robertson, Jr., certify that: 1) I have reviewed this annual report on Form 10-K of Natural Resource Partners L.P. 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ CORBIN J. ROBERTSON ------------------------------------ Corbin J. Robertson, Jr. Chief Executive Officer and Chairman of the Board Date: March 28, 2003 114 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Dwight L. Dunlap, certify that: 1) I have reviewed this annual report on Form 10-K of Natural Resource Partners L.P. 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ DWIGHT L. DUNLAP ------------------------------------ Dwight L. Dunlap Chief Financial Officer and Treasurer Date: March 28, 2003 115 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 -- Certificate of Limited Partnership of Natural Resource Partners L.P. (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.2* -- First Amended and Restated Agreement of Limited Partnership of Natural Resource Partners L.P., dated as of October 17, 2002. 3.3 -- Certificate of Formation of NRP (Operating) LLC (incorporated by reference to Exhibit 3.3 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.4* -- Amended and Restated Limited Liability Company Agreement of NRP (Operating) LLC, dated as of October 17, 2002. 3.5 -- Certificate of Limited Partnership of NRP (GP) LP (incorporated by reference to Exhibit 3.5 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.6* -- First Amended and Restated Agreement of Limited Partnership of NRP (GP) LP, dated as of October 17, 2002. 3.7 -- Certificate of Formation of GP Natural Resource Partners LLC (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 filed April 19, 2002, File No. 333-86582) 3.8* -- Second Amended and Restated Limited Liability Company Agreement of GP Natural Resource Partners LLC, dated as of October 17, 2002. 10.1* -- Credit Agreement, dated as of October 10, 2002, and effective as of October 17, 2002, by and among NRP (Operating) LLC, as Borrower, PNC Bank, National Association, as Administrative Agent, the Banks and Natural Resource Partners L.P., WPP LLC, GNP LLC, NNG LLC and ACIN LLC, as Guarantors. 10.2* -- Contribution, Conveyance and Assumption Agreement by and among Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation, Ark Land Company, WPP LLC, GNP LLC, NNG LLC, ACIN LLC, Robertson Coal Management LLC, NRP (Operating) LLC, GP Natural Resource Partners LLC, NRP (GP) LP and Natural Resource Partners L.P., dated as of October 17, 2002. 10.3* -- Natural Resource Partners Long-Term Incentive Plan 10.4* -- Natural Resource Partners Annual Incentive Plan 10.5* -- Omnibus Agreement dated October 17, 2002, by and among Arch Coal, Inc., Ark Land Company, Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation, Robertson Coal Management LLC, GP Natural Resource Partners LLC, NRP (GP) LP, Natural Resource Partners L.P. and NRP (Operating) LLC. 10.6* -- Royalty Pass-Through Agreement and Guaranty dated as of October 17, 2002 among Arch Coal, Inc., Ark Land Company and ACIN LLC. 10.7 -- Form of Coal Mining Lease between Ark Land Company and ACIN LLC (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1 filed September 9, 2002, File No. 333-86582) 10.8* -- Purchase and Sale Agreement dated November 6, 2002, by and among El Paso CGP Company, Coastal Coal Company, LLC, Coastal Coal -- West Virginia LLC, ANR Western Coal Development Company and CSTL LLC 10.9* -- First Amendment to Purchase and Sale Agreement, dated December 4, 2002. 10.10* -- Lease Amendment No. 1 to Coal Mining Lease dated November 20, 2002 between ACIN LLC and Ark Land Company. 21.1* -- List of subsidiaries of Natural Resource Partners L.P. 99.1* -- Audited balance sheets of NRP (GP) LP 99.2* -- Section 1350 certifications
- --------------- * Filed herewith EX-3.2 3 h04228exv3w2.txt 1ST AMENDED AGREEMENT OF LIMITED PARTNERSHIP EXHIBIT 3.2 ================================================================================ EXECUTION VERSION FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF NATURAL RESOURCE PARTNERS L.P. ================================================================================ TABLE OF CONTENTS ARTICLE I DEFINITIONS Section 1.1 Definitions.................................................. 1 Section 1.2 Construction................................................. 20 ARTICLE II ORGANIZATION Section 2.1 Formation.................................................... 20 Section 2.2 Name......................................................... 20 Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices................................................ 21 Section 2.4 Purpose and Business......................................... 21 Section 2.5 Powers....................................................... 21 Section 2.6 Power of Attorney............................................ 22 Section 2.7 Term......................................................... 23 Section 2.8 Title to Partnership Assets.................................. 23 ARTICLE III RIGHTS OF LIMITED PARTNERS Section 3.1 Limitation of Liability...................................... 24 Section 3.2 Management of Business....................................... 24 Section 3.3 Outside Activities of the Limited Partners................... 24 Section 3.4 Rights of Limited Partners................................... 24 ARTICLE IV CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS Section 4.1 Certificates................................................. 25 Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates............ 26 Section 4.3 Record Holders............................................... 27 Section 4.4 Transfer Generally........................................... 27 Section 4.5 Registration and Transfer of Limited Partner Interests....... 27 Section 4.6 Transfer of the General Partner's General Partner Interest... 28 Section 4.7 Transfer of Incentive Distribution Rights.................... 29 Section 4.8 Restrictions on Transfers.................................... 29 Section 4.9 Citizenship Certificates; Non-citizen Assignees.............. 30 Section 4.10 Redemption of Partnership Interests of Non-citizen Assignees. 31
NATURAL RESOURCE PARTNERS L.P. FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ARTICLE V CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS Section 5.1 Organizational Contributions................................. 32 Section 5.2 Contributions by the General Partner and its Affiliates...... 33 Section 5.3 Contributions by Initial Limited Partners.................... 33 Section 5.4 Interest and Withdrawal...................................... 34 Section 5.5 Capital Accounts............................................. 34 Section 5.6 Issuances of Additional Partnership Securities............... 37 Section 5.7 Limitations on Issuance of Additional Partnership Securities. 38 Section 5.8 Conversion of Subordinated Units............................. 40 Section 5.9 Limited Preemptive Right..................................... 42 Section 5.10 Splits and Combinations...................................... 42 Section 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests.................................................... 43 ARTICLE VI ALLOCATIONS AND DISTRIBUTIONS Section 6.1 Allocations for Capital Account Purposes..................... 43 Section 6.2 Allocations for Tax Purposes................................. 51 Section 6.3 Requirement and Characterization of Distributions; Distributions to Record Holders.............................. 53 Section 6.4 Distributions of Available Cash from Operating Surplus....... 53 Section 6.5 Distributions of Available Cash from Capital Surplus......... 55 Section 6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution Levels.......................................... 56 Section 6.7 Special Provisions Relating to the Holders of Subordinated Units........................................................ 56 Section 6.8 Special Provisions Relating to the Holders of Incentive Distribution Rights.......................................... 57 Section 6.9 Entity-Level Taxation........................................ 57 ARTICLE VII MANAGEMENT AND OPERATION OF BUSINESS Section 7.1 Management................................................... 57 Section 7.2 Certificate of Limited Partnership........................... 60 Section 7.3 Restrictions on the General Partner's Authority.............. 60 Section 7.4 Reimbursement of the General Partner......................... 61 Section 7.5 Outside Activities........................................... 62 Section 7.6 Loans from the General Partner; Loans or Contributions from the Partnership; Contracts with Affiliates; Certain Restrictions on the General Partner.......................... 63
NATURAL RESOURCE PARTNERS L.P. FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ii Section 7.7 Indemnification.............................................. 64 Section 7.8 Liability of Indemnitees..................................... 66 Section 7.9 Resolution of Conflicts of Interest.......................... 67 Section 7.10 Other Matters Concerning the General Partner................. 68 Section 7.11 Purchase or Sale of Partnership Securities................... 69 Section 7.12 Registration Rights of the General Partner and its Affiliates................................................... 69 Section 7.13 Reliance by Third Parties.................................... 71 ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 8.1 Records and Accounting....................................... 72 Section 8.2 Fiscal Year.................................................. 72 Section 8.3 Reports...................................................... 72 ARTICLE IX TAX MATTERS Section 9.1 Tax Returns and Information.................................. 73 Section 9.2 Tax Elections................................................ 73 Section 9.3 Tax Controversies............................................ 73 Section 9.4 Withholding.................................................. 73 ARTICLE X ADMISSION OF PARTNERS Section 10.1 Admission of Initial Limited Partners........................ 74 Section 10.2 Admission of Substituted Limited Partner..................... 74 Section 10.3 Admission of Successor General Partner....................... 75 Section 10.4 Admission of Additional Limited Partners..................... 75 Section 10.5 Amendment of Agreement and Certificate of Limited Partnership.................................................. 75 ARTICLE XI WITHDRAWAL OR REMOVAL OF PARTNERS Section 11.1 Withdrawal of the General Partner............................ 76 Section 11.2 Removal of the General Partner............................... 77 Section 11.3 Interest of Departing Partner and Successor General Partner.. 78 Section 11.4 Termination of Subordination Period, Conversion of Subordinated Units and Extinguishment of Cumulative Common Unit Arrearages....................................... 79 Section 11.5 Withdrawal of Limited Partners............................... 79
NATURAL RESOURCE PARTNERS L.P. FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP iii ARTICLE XII DISSOLUTION AND LIQUIDATION Section 12.1 Dissolution.................................................. 80 Section 12.2 Continuation of the Business of the Partnership After Dissolution.................................................. 80 Section 12.3 Liquidator................................................... 81 Section 12.4 Liquidation.................................................. 81 Section 12.5 Cancellation of Certificate of Limited Partnership........... 82 Section 12.6 Return of Contributions...................................... 82 Section 12.7 Waiver of Partition.......................................... 82 Section 12.8 Capital Account Restoration.................................. 83 ARTICLE XIII AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE Section 13.1 Amendment to be Adopted Solely by the General Partner........ 83 Section 13.2 Amendment Procedures......................................... 84 Section 13.3 Amendment Requirements....................................... 85 Section 13.4 Special Meetings............................................. 85 Section 13.5 Notice of a Meeting.......................................... 86 Section 13.6 Record Date.................................................. 86 Section 13.7 Adjournment.................................................. 86 Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes... 86 Section 13.9 Quorum....................................................... 87 Section 13.10 Conduct of a Meeting......................................... 87 Section 13.11 Action Without a Meeting..................................... 88 Section 13.12 Voting and Other Rights...................................... 88 ARTICLE XIV MERGER Section 14.1 Authority.................................................... 89 Section 14.2 Procedure for Merger or Consolidation........................ 89 Section 14.3 Approval by Limited Partners of Merger or Consolidation...... 90 Section 14.4 Certificate of Merger........................................ 91 Section 14.5 Effect of Merger............................................. 91 ARTICLE XV RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS Section 15.1 Right to Acquire Limited Partner Interests................... 91
NATURAL RESOURCE PARTNERS L.P. FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP iv ARTICLE XVI GENERAL PROVISIONS Section 16.1 Addresses and Notices........................................ 93 Section 16.2 Further Action............................................... 94 Section 16.3 Binding Effect............................................... 94 Section 16.4 Integration.................................................. 94 Section 16.5 Creditors.................................................... 94 Section 16.6 Waiver....................................................... 94 Section 16.7 Counterparts................................................. 94 Section 16.8 Applicable Law............................................... 94 Section 16.9 Invalidity of Provisions..................................... 95 Section 16.10 Consent of Partners.......................................... 95
NATURAL RESOURCE PARTNERS L.P. FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP v 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 October 17, 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). NATURAL RESOURCE PARTNERS L.P. FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP "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. "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. 2 "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. Each of Ark Land and Arch Coal, Inc. (and any successor thereto) shall be deemed to be an Affiliate for purposes of this definition for so long as Arch Coal, Inc. or any of its Subsidiaries holds an interest in the general partner of the General Partner. Great Northern (and any successor thereto) shall be deemed to be an Affiliate for purposes of this definition for so long as it holds an interest in the General Partner. 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. "Ark Land" means Ark Land Company, a Delaware corporation. "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. 3 "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. 4 "Book-Up Event" means an event which triggers a positive adjustment to the Capital Accounts of the Partners pursuant to Section 5.5(d). "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 5 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. "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. 6 "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. "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). 7 "First Target Distribution" means $0.5625 per Unit per Quarter (or, with respect to the period commencing on the Closing Date and ending on December 31, 2002, it means the product of $0.5625 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. 8 "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). "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. 9 "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 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 $0.5125 per Unit per Quarter (or with respect to the period commencing on the Closing Date and ending on December 31, 2002, it means the 10 product of $0.5125 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 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). 11 "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 12 (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 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 13 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 and described in Section 2 of the Underwriting Agreement. "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. 14 "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 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 15 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. 333-86852) 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. "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). 16 "Second Target Distribution" means $0.6625 per Unit per Quarter (or, with respect to the period commencing on the Closing Date and ending on December 31, 2002, it means the product of $0.6625 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 September 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 17 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 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 $0.7625 per Unit per Quarter (or, with respect to the period commencing on the Closing Date and ending on December 31, 2002, it means the product of $0.7625 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 18 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 October 10, 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 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. "U.S. GAAP" means United States Generally Accepted Accounting Principles consistently applied. 19 "Western Pocahontas" means Western Pocahontas Properties Limited Partnership, a Delaware limited partnership. "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 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. 20 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. 21 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 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. 22 (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. 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. 23 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 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; 24 (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 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 25 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 Partnership, 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 Partnership, 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. 26 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, 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 27 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. (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 September 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). 28 (b) Subject to Section 4.6(c) below, on or after September 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 September 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 September 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 September 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 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 29 (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 30 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. (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 31 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 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. 32 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) 116,957 Common Units, (C) 208,907 Subordinated Units and (D) 0.8% 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) 3,158,166 Common Units, (C) 5,231,766 Subordinated Units and (D) 19.94% 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) 607,362 Common Units, (C) 1,116,065 Subordinated Units and (D) 4.26% 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) 4,796,920 Common Units, (C) 4,796,920 Subordinated Units and (D) 10.0% 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 in full, 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. 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 33 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. Upon receipt by the Partnership of the Capital Contributions from the Underwriters as provided in this Section 5.3(b), the Partnership shall use 57.75% of such cash to redeem from Western Pocahontas and New Gauley an aggregate number of Common Units held by Western Pocahontas and New Gauley equal to the amount of such cash divided by the Initial Unit Price. To the extent that the Over-Allotment Option is not exercised in full and Great Northern and/or New Gauley purchases additional Common Units from the Partnership pursuant to the second paragraph of Section 2 of the Underwriting Agreement, then the Capital Contributions received by the Partnership from Great Northern and New Gauley shall be used to redeem from Great Northern and/or New Gauley that same number of Common Units held by the General Partner equal to the number of Common Units issued to Great Northern and/or New Gauley, respectively, pursuant to this Section 5.3(b). (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 2,674,253, (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 75,503 units to New Gauley and Great Northern to the extent the Over-Allotment Option is not exercised in full, (iii) the 11,353,658 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 34 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. (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 35 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. (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 36 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 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 37 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 5,676,829 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 which such Acquisition is to be consummated or such 38 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 39 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, or (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. (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) would not have exceeded 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 2,838,415 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 September 30, 2005 in respect of which: 40 (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 2,838,414 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 September 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 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). 41 (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. (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 42 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 43 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. (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 44 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; (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 45 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 comply with the Partnership Minimum Gain 46 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. 47 (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 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 48 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 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 49 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. 50 (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 51 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 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 52 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 December 31, 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 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, 53 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 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: 54 (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. 55 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. (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 56 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 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 57 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; (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 58 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. 59 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 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 60 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 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. 61 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 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 62 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 63 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). (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, 64 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 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 65 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 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. 66 (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, or 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. 67 (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 68 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 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 two registrations at the request of Ark Land and not more than one registration at the request of each of Western Pocahontas, Great Northern and New Gauley, each being 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 69 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 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 70 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 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 71 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. 72 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 73 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. 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. 74 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 (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. 75 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; (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. 76 (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 September 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 September 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 which the General Partner is a general partner or a 77 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 78 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. (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. 79 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 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 80 (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. 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: 81 (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. 82 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 83 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; (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); or (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. 84 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. (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 85 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. 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 86 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. 87 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 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. 88 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 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; 89 (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. (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 convert the Partnership or any Group Member into a new limited liability entity, 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 conversion, 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 conversion, 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. 90 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 mailed. As used in this Agreement, (i) "Current Market Price" as of any date of any class of 91 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 92 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 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 93 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. 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. 94 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. 95 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: /s/ Nick Carter ------------------------------------------ Name: Nick Carter Title: President and Chief Operating Officer ORGANIZATIONAL LIMITED PARTNER: GP NATURAL RESOURCE PARTNERS LLC By: /s/ Nick Carter --------------------------------------------- Name: Nick Carter Title: President and Chief Operating Officer 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: /s/ Nick Carter --------------------------------------- Name: Nick Carter Title: President and Chief Operating Officer NATURAL RESOURCE PARTNERS L.P. FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP 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 for any purpose unless it has been countersigned and registered by the Transfer Agent and Registrar. Dated: Natural Resource Partners L.P. ----------------- Countersigned and Registered by: By: NRP (GP) LP, its General Partner By: GP Natural Resource Partners LLC, its General Partner By: - --------------------------------- ---------------------------------- as Transfer Agent and Registrar Name: ------------------------------ By: By: ------------------------------ ---------------------------------- Authorized Signature Secretary 2 [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 _________ (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts/Transfers to CD of survivorship and not as Minors Act (State) tenants in common 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 32-2164875. 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 3 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 (Please insert Social Security or other and address of Assignee) identifying number of Assignee) __________ 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 (Signature) ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY 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. 4 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 5 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. 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, 6 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. 7 EX-3.4 4 h04228exv3w4.txt AMENDED LIMITED LIABILITY COMPANY AGREEMENT EXHIBIT 3.4 EXECUTION VERSION AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF NRP (OPERATING) LLC TABLE OF CONTENTS ARTICLE I DEFINITIONS Section 1.1 Definitions.................................................. 1 Section 1.2 Construction................................................. 7 ARTICLE II ORGANIZATION Section 2.1 Formation.................................................... 7 Section 2.2 Name......................................................... 7 Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices................................................ 7 Section 2.4 Purpose and Business......................................... 8 Section 2.5 Powers....................................................... 8 Section 2.6 Power of Attorney............................................ 8 Section 2.7 Term......................................................... 10 Section 2.8 Title to Company Assets...................................... 10 ARTICLE III RIGHTS OF MEMBERS Section 3.1 Limitation of Liability...................................... 10 Section 3.2 Outside Activities of the Members............................ 10 Section 3.3 Rights of Members............................................ 10 ARTICLE IV TRANSFERS OF INTERESTS Section 4.1 Transfer Generally........................................... 11 Section 4.2 Transfer of Membership Interests............................. 12 Section 4.3 Restrictions on Transfers.................................... 12 ARTICLE V CAPITAL CONTRIBUTIONS AND ISSUANCE OF INTERESTS Section 5.1 Initial Contributions........................................ 12 Section 5.2 Contributions Pursuant to the Contribution and Conveyance Agreement.................................................... 13 Section 5.3 Additional Capital Contributions............................. 13 Section 5.4 Interest and Withdrawal...................................... 13 Section 5.5 Loans from Members........................................... 13 Section 5.6 Issuances of Additional Company Securities................... 13 Section 5.7 Limited Preemptive Rights.................................... 14 Section 5.8 Fully Paid and Non-Assessable Nature of Membership Interests. 14 ARTICLE VI ALLOCATIONS AND DISTRIBUTIONS Section 6.1 Allocations.................................................. 14 Section 6.2 Distributions................................................ 14
ARTICLE VII MANAGEMENT AND OPERATION OF BUSINESS Section 7.1 Management................................................... 15 Section 7.2 Certificate of Formation..................................... 17 Section 7.3 Restrictions on Managing Member's Authority.................. 17 Section 7.4 Reimbursement of the General Partner and GP LLC; Benefit Plans........................................................ 18 Section 7.5 Outside Activities........................................... 18 Section 7.6 Loans from the Managing Member or the General Partner; Loans or Contributions from the Company; Contracts with Affiliates................................................... 19 Section 7.7 Indemnification.............................................. 21 Section 7.8 Liability of Indemnitees..................................... 22 Section 7.9 Resolution of Conflicts of Interest.......................... 23 Section 7.10 Other Matters Concerning the Managing Member................. 24 Section 7.11 Reliance by Third Parties.................................... 25 ARTICLE VIII OFFICERS Section 8.1 Officers..................................................... 25 Section 8.2 Compensation................................................. 27 ARTICLE IX BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting....................................... 28 Section 9.2 Fiscal Year.................................................. 28 ARTICLE X TAX MATTERS Section 10.1 Tax Returns and Information.................................. 28 Section 10.2 Tax Elections................................................ 28 ARTICLE XI ADMISSION OF MEMBERS Section 11.1 Initial Member............................................... 28 Section 11.2 Admission of Substituted Members............................. 29 Section 11.3 Admission of Additional Members.............................. 29 Section 11.4 Amendment of Agreement and Certificate of Formation.......... 29 ARTICLE XII WITHDRAWAL OF MEMBERS Section 12.1 Withdrawal of Members........................................ 30 ARTICLE XIII DISSOLUTION AND LIQUIDATION Section 13.1 Dissolution.................................................. 30 Section 13.2 Liquidator................................................... 30 Section 13.3 Liquidation.................................................. 31 Section 13.4 Cancellation of Certificate of Formation..................... 31
Section 13.5 Return of Capital Contributions.............................. 31 Section 13.6 Waiver of Partition.......................................... 32 Section 13.7 Capital Account Restoration.................................. 32 ARTICLE XIV AMENDMENT OF AGREEMENT Section 14.1 Amendment to be Adopted Solely by the Managing Member........ 32 Section 14.2 Amendment Procedures......................................... 33 ARTICLE XV MERGER Section 15.1 Authority.................................................... 33 Section 15.2 Procedure for Merger or Consolidation........................ 34 Section 15.3 Approval by Members of Merger or Consolidation............... 35 Section 15.4 Certificate of Merger........................................ 35 Section 15.5 Effect of Merger............................................. 35 ARTICLE XVI GENERAL PROVISIONS Section 16.1 Addresses and Notices........................................ 36 Section 16.2 Further Action............................................... 36 Section 16.3 Binding Effect............................................... 36 Section 16.4 Integration.................................................. 36 Section 16.5 Creditors.................................................... 36 Section 16.6 Waiver....................................................... 37 Section 16.7 Counterparts................................................. 37 Section 16.8 Applicable Law............................................... 37 Section 16.9 Invalidity of Provisions..................................... 37 Section 16.10 Consent of Members........................................... 37
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF NRP (OPERATING) LLC THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF NRP (OPERATING) LLC, dated as of October 17, 2002, is entered into by and among Natural Resource Partners L.P., a Delaware limited partnership ("MLP"), together with any other Persons who hereafter become Members in the Company or parties hereto as provided herein. R E C I T A L S: WHEREAS, the MLP caused NRP (Operating) LLC (referred to herein as the "Company") to be formed as a limited liability company under the Delaware Limited Liability Company Act on April 17, 2002 and a Certificate of Formation was filed with the Secretary of State of the State of Delaware on such date. WHEREAS, NRP entered into a Limited Liability Company Agreement relating to the Company on April 17, 2002 (the "Original Agreement"). WHEREAS, the MLP now desires to amend and restate the Original Agreement in connection with the initial public offering of the MLP to reflect additional contributions to the Company and certain other matters. NOW THEREFORE, in consideration of the covenants, conditions and agreements contained herein, the MLP hereby enters into this Agreement amending and restating the Original Agreement in its entirety: 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. Capitalized terms used herein but not otherwise defined shall have the meaning assigned to such term in the MLP Agreement. "ACIN LLC" means ACIN LLC, a Delaware limited liability company. "Act" means the Delaware Limited Liability Company Act, 6 Del. C. Section 18-101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute. "Additional Member" means a Person admitted to the Company as a Member pursuant to Section 11.3 and who is shown as such on the books and records of the Company. "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. "Agreement" means this Amended and Restated Limited Liability Company Agreement of NRP (Operating) LLC, as it may be amended, supplemented or restated from time to time. The Agreement shall constitute a "limited liability company agreement" as such term is defined in the Act. "Arch Coal" means Arch Coal, Inc., a Delaware corporation. "Ark Land" means Ark Land Company, a Delaware corporation. "Assignee" means a Person to whom one or more Membership Interests have been transferred in a manner permitted under this Agreement, but who has not been admitted as a Substituted Member. "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 Company Group on hand at the end of such Quarter, and (ii) all additional cash and cash equivalents of the Company 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 Managing Member to (i) provide for the proper conduct of the business of the Company Group (including reserves for future capital expenditures and for anticipated future credit needs of the Company 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 of the MLP Agreement in respect of any one or more of the next four Quarters; provided, however, that the Managing Member may not establish cash reserves pursuant to (iii) above if the effect of such reserves would be that the MLP 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 -2- been made, established, increased or reduced, for purposes of determining Available Cash, within such Quarter if the Managing Member 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. "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 Contribution" means any cash, cash equivalents or the value of Contributed Property that a Member contributes to the Company pursuant to this Agreement or the Contribution Agreement. "Certificate of Formation" means the Certificate of Formation of the Company filed with the Secretary of State of the State of Delaware as referenced in Section 2.1, as such Certificate of Formation may be amended, supplemented or restated from time to time. "Closing Date" means the first date on which Common Units are sold by the MLP to the Underwriters pursuant to the provisions of the Underwriting Agreement. "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 successor law. "Commission" means the United States Securities and Exchange Commission. "Common Unit" has the meaning assigned to such term in the MLP Agreement. "Company" means NRP (Operating) LLC, a Delaware limited liability company, and any successors thereto. "Company Group" means the Company and any Subsidiary of the Company, treated as a single consolidated entity. "Company Security" means any class or series of membership interest in the Company. "Conflicts Committee" has the meaning assigned to such term in the MLP Agreement. "Contribution Agreement" means the Contribution, Conveyance and Assumption Agreement, dated as of the Closing Date, among the Company, the MLP, the General Partner, New Gauley, Great Northern, Western Pocahontas, Ark Land, NNG LLC, GNP LLC, WPP LLC, ACIN LLC and RCM LLC, together with the additional conveyance documents and instruments contemplated or referenced thereunder. "Contributed Property" means each property or other asset, in such form as may be permitted by the Act, but excluding cash, contributed to the Company. -3- "Credit Agreement" means the Credit Agreement dated as of October 17, 2002 by and among the Company, ACIN LLC, GNP LLC, NNG LLC, WPP LLC, the MLP and PNC Bank, National Association. "Cumulative Common Unit Arrearage" has the meaning assigned to such term in the MLP Agreement. "General Partner" means NRP (GP) LP, a Delaware limited partnership, and its successors and permitted assigns as general partner of the MLP. "GNP LLC" shall mean GNP LLC, a Delaware limited liability company. "GP LLC" shall mean GP Natural Resource Partners LLC, a Delaware limited liability company, and its successors and permitted assigns as general partner of the General Partner. "Great Northern" means Great Northern Properties Limited Partnership, a Delaware limited partnership. "Group Member" means a member of the Company Group. "Indemnitee" means (a) the Managing Member, the General Partner or GP LLC, (b) any Person who is or was a member, partner, director, officer, employee, agent or trustee of any Group Member, the MLP, the General Partner, GP LLC or any of their respective Affiliates and (c) any Person who is or was serving at the request of the Managing Member as a member, partner, director, officer, employee, partner, agent, fiduciary or trustee of another Person, in each case, acting in such capacity, 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 Offering" means the initial offering and sale of Common Units to the public, as described in the Registration Statement. "Liquidation Date" means the date on which any event giving rise to the dissolution of the Company occurs. "Liquidator" means one or more Persons selected by the Managing Member to perform the functions described in Section 13.2 as liquidating trustee of the Company within the meaning of the Act. "Managing Member" means Natural Resource Partners L.P. and its predecessors, successors and permitted assigns as managing member of the Company. "Member" means any Person that is admitted to the Company as a member pursuant to the terms and conditions of this Agreement; but the term Member shall not include any Person from and after the time such Person withdraws as a Member from the Company. "Membership Interest" means the ownership interest of a Member in the Company. "Merger Agreement" has the meaning assigned to such term in Section 15.1. -4- "Minimum Quarterly Distribution" has the meaning assigned to such term in the MLP Agreement. "MLP" has the meaning assigned to such term in the recitals. "MLP Agreement" means the 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. "MLP Security" has the meaning assigned to the term "Partnership Security" in the MLP Agreement. "National Securities Exchange" has the meaning assigned to such term in the MLP Agreement. "New Gauley" shall mean New Gauley Coal Corporation, a West Virginia corporation. "NNG LLC" means NNG LLC, a Delaware limited liability company. "Omnibus Agreement" means the Omnibus Agreement, dated as of the Closing Date, among the Company, the MLP, the General Partner, GP LLC, Arch Coal, Ark Land, New Gauley, Western Pocahontas, Great Northern and RCM LLC. "Opinion of Counsel" means a written opinion of counsel (who may be regular counsel to the Company or the MLP or any of their respective Affiliates) acceptable to the Managing Member in its reasonable discretion. "Original Agreement" shall have the meaning given such term in the recitals hereto. "Percentage Interest" means the percentage interest in the Company held by a Member. "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. "Pro Rata" means, when modifying Members and Assignees, apportioned among all Members and Assignees in accordance with their relative Percentage Interests. "Quarter" means, unless the context requires otherwise, a fiscal quarter of the Company. "RCM LLC" means Robertson Coal Management LLC, a Delaware limited liability company. "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 MLP with the Commission under the Securities Act to register the offering and sale of the Common Units in the Initial Offering. -5- "Securities Act" means the Securities Act of 1933, as amended, supplemented or restated from time to time and any successor to such statute. "Special Approval" has the meaning assigned to such term in the MLP Agreement. "Subordinated Unit" has the meaning assigned to such term in the MLP Agreement. "Subordination Period" has the meaning assigned to such term in the MLP Agreement. "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 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 Member" means a Person who is admitted as a Member to the Company pursuant to Section 11.2 in place of and with all the rights of a Member and who is shown as a Member on the books and records of the Company. "Surviving Business Entity" has the meaning assigned to such term in Section 15.2(b). "Transfer" has the meaning assigned to such term in Section 4.1(a). "Underwriter" means each Person named as an underwriter in the Underwriting Agreement who purchases Common Units pursuant thereto. "Underwriting Agreement" means the Underwriting Agreement dated as of October 10, 2002 among the Company, the MLP, the General Partner, GP LLC, Arch Coal, Ark Land, New Gauley, Western Pocahontas, Great Northern, ACIN LLC, NNG LLC, WPP LLC, GNP LLC, RCM LLC and the Underwriters, providing for the purchase of Common Units by such Underwriters. "Unit" has the meaning assigned to such term in the MLP Agreement. "Unit Majority" has the meaning assigned to such term in the MLP Agreement. "U.S. GAAP" means United States Generally Accepted Accounting Principles consistently applied. -6- "Western Pocahontas" shall mean Western Pocahontas Properties Limited Partnership, a Delaware limited partnership. "Working Capital Borrowings" has the meaning assigned to such term in the MLP Agreement. "WPP LLC" means WPP LLC, a Delaware limited liability company. 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. On April 17, 2002, the MLP formed the Company as a limited liability company pursuant to the provisions of the Act by virtue of the filing of the Certificate of Formation with the Secretary of State of the State of Delaware. The MLP hereby amends and restates the Original Agreement in its entirety. This amendment and restatement shall become effective on the date of this Agreement. The rights and liabilities of the Members shall be as provided in the Act for Members except as provided herein. To the extent that the rights or obligations of any Member are different by reason of any provision of this Agreement than they would be in the absence of such provision, to the extent permitted by the Act, this Agreement shall control. Section 2.2 Name. The name of the Company shall be "NRP (Operating) LLC". The Company's business may be conducted under any other name or names deemed necessary or appropriate by the Managing Member in its sole discretion, including, the name of the MLP. The words "Limited Liability Company," "L.L.C." or "LLC" or similar words or letters shall be included in the Company's name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The Managing Member in its discretion may change the name of the Company at any time and from time to time and shall notify the other Member(s) of such change in the next regular communication to the Members. Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices. Unless and until changed by the Managing Member, the registered office of the Company in the State of Delaware shall be located at 1209 Orange Street, New Castle County, Wilmington, Delaware 19801, and the registered agent for service of process on the Company in the State of Delaware at such registered office shall be The Corporation Trust Company. The -7- principal office of the Company shall be located at 601 Jefferson Street, Suite 3600, Houston, Texas 77002 or such other place as the Managing Member may from time to time designate by notice to the Members. The Company may maintain offices at such other place or places within or outside the State of Delaware as the Managing Member deems necessary or appropriate. Section 2.4 Purpose and Business. The purpose and nature of the business to be conducted by the Company shall be to (a) manage, operate, lease, sell and otherwise deal with any and all assets or properties contributed to the Company by the Members or hereafter acquired by the Company, (b) serve as the sole member, partner or stockholder of its Subsidiaries and, in connection therewith, to exercise all the rights and powers conferred upon the Company as the sole member, partner or stockholder of such Subsidiaries pursuant to the operating agreements, partnership agreements or charter documents of each of such Subsidiaries, (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 type of business or activity engaged in by the Company and its Subsidiaries and their predecessors prior to the Closing Date and, in connection therewith, to exercise all of the rights and powers conferred upon the Company pursuant to the agreements relating to such business activity, (d) 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 Managing Member and which lawfully may be conducted by a limited liability company organized pursuant to the Act and, in connection therewith, to exercise all of the rights and powers conferred upon the Company pursuant to the agreements relating to such business activity, (e) borrow money and issue evidences of indebtedness and secure any such indebtedness by mortgage or pledge of, or other lien on, the assets of the Company and (f) do anything necessary or appropriate to the foregoing, including the making of capital contributions or loans to a Group Member, the MLP or any Subsidiary thereof; provided, however, that the Managing Member shall not cause the Company or the MLP to engage, directly or indirectly, in any business activity that the Managing Member reasonably determines would cause the MLP to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes. The Managing Member has no obligation or duty to the Company, the Members, or the Assignees to propose or approve, and in its discretion may decline to propose or approve, the conduct by the Company of any business. Section 2.5 Powers. The Company 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 Company. Section 2.6 Power of Attorney. (a) Each Member and each Assignee hereby constitutes and appoints the Managing Member and, if a Liquidator shall have been selected pursuant to Section 13.2, the Liquidator (and any successor to the Liquidator by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, as the case may be, with -8- full power of substitution, as its 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 all amendments or restatements hereof and all amendments and restatements of the Certificate of Formation) that the Managing Member or the Liquidator deems necessary or appropriate to form, qualify or continue the existence or qualification of the Company as a limited liability company in the State of Delaware and in all other jurisdictions in which the Company may conduct business or own property; (B) all certificates, documents and other instruments that the Managing Member 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 Managing Member or the Liquidator deems necessary or appropriate to reflect the dissolution and liquidation of the Company pursuant to the terms of this Agreement; (D) all certificates, documents and other instruments relating to the admission, withdrawal, removal or substitution of any Member pursuant to, or other events described in, Article IV, XI, XII or XIII; (E) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of any class or series of Membership Interests issued pursuant hereto; and (F) all certificates, documents and other instruments (including agreements and a certificate of merger) relating to a merger or consolidation of the Company pursuant to Article XV; 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 Managing Member 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 Members hereunder or is consistent with the terms of this Agreement or is necessary or appropriate, in the discretion of the Managing Member or the Liquidator, to effectuate the terms or intent of this Agreement; provided, that when required by any provision of this Agreement that establishes a percentage of the Members or of the Members of any class or series required to take any action, the Managing Member 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 Members or of the Members of such class or series, as applicable. Nothing contained in this Section 2.6(a) shall be construed as authorizing the Managing Member to amend this Agreement except in accordance with Article XIV 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 dissolution, bankruptcy or termination of any Member or -9- Assignee and the transfer of all or any portion of such Member's or Assignee's Membership Interest and shall extend to such Member's or Assignee's successors and assigns. Each such Member or Assignee hereby agrees to be bound by any representation made by the Managing Member or the Liquidator acting in good faith pursuant to such power of attorney; and each such Member 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 Managing Member or the Liquidator taken in good faith under such power of attorney. Each Member or Assignee shall execute and deliver to the Managing Member or the Liquidator, within 15 days after receipt of the request therefor, such further designation, powers of attorney and other instruments as the Managing Member or the Liquidator deems necessary to effectuate this Agreement and the purposes of the Company. Section 2.7 Term. The term of the Company commenced upon the filing of the Certificate of Formation in accordance with the Act and shall continue in existence until the dissolution of the Company in accordance with the provisions of Article XIII. The existence of the Company as a separate legal entity shall continue until the cancellation of the Certificate of Formation as provided in the Act. Section 2.8 Title to Company Assets. Title to Company assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Company as an entity, and no Member, individually or collectively, shall have any ownership interest in such Company assets or any portion thereof. ARTICLE III RIGHTS OF MEMBERS Section 3.1 Limitation of Liability. The Members and the Assignees shall have no liability under this Agreement except as expressly provided in this Agreement or in the Act. Section 3.2 Outside Activities of the Members. 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 Members or Assignees, any Member or Assignee shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Company, including business interests and activities in direct competition with the Company Group. Neither the Company, nor any other Member or Assignee shall have any rights by virtue of this Agreement in any business ventures of any Member or Assignee. Section 3.3 Rights of Members. (a) In addition to other rights provided by this Agreement or by applicable law, and except as limited by Section 3.3(b), each Member shall have the right, for a purpose -10- reasonably related to such Member's interest as a member in the Company, upon reasonable written demand and at such Member's own expense: (i) to obtain true and full information regarding the status of the business and financial condition of the Company; (ii) promptly after becoming available, to obtain a copy of the Company'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 Member; (iv) to have furnished to him a copy of this Agreement and the Certificate of Formation 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 Formation 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 Capital Contributions made by each Member and which each Member has agreed to contribute in the future, and the date on which each became a Member; and (vi) to obtain such other information regarding the affairs of the Company as is just and reasonable. (b) The Managing Member may keep confidential from the Members and Assignees, for such period of time as the Managing Member deems reasonable, (i) any information that the Managing Member reasonably believes to be in the nature of trade secrets or (ii) other information the disclosure of which the Managing Member in good faith believes (A) is not in the best interests of the Company Group, (B) could damage the Company 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 Company the primary purpose of which is to circumvent the obligations set forth in this Section 3.3). ARTICLE IV TRANSFERS OF INTERESTS Section 4.1 Transfer Generally. (a) The term "transfer," when used in this Agreement with respect to a Membership Interest, shall be deemed to refer to a transaction by which the holder of a Membership Interest assigns such Membership Interest to another Person who is or becomes a Member or an Assignee, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. (b) No Membership 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 -11- transfer of a Membership 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 Managing Member of any or all of the issued and outstanding membership interests in the Managing Member. Section 4.2 Transfer of Membership Interests. A Member may transfer all, but not less than all, of its Membership Interest in connection with the merger, consolidation or other combination of such Member with or into any other Person or the transfer by such Member of all or substantially all of its assets to another Person, and following any such transfer such Person may become a Substituted Member pursuant to Article XI. Except as set forth in the immediately preceding sentence, or in connection with any pledge of (or any related foreclosure on) a Member's Membership Interest solely for the purpose of securing, directly or indirectly, indebtedness of the Company, the MLP or such Member, a Member may not transfer all or any part of its Membership Interest or withdraw from the Company. Section 4.3 Restrictions on Transfers. (a) Notwithstanding the other provisions of this Article IV, no transfer of any Membership Interest 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 Company or the MLP under the laws of the jurisdiction of its formation or (iii) cause the Company or the MLP 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 Managing Member may impose restrictions on the transfer of Membership Interests if a subsequent Opinion of Counsel determines that such restrictions are necessary to avoid a significant risk of the Company or the MLP 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 Managing Member may determine to be necessary or appropriate to impose such restrictions. ARTICLE V CAPITAL CONTRIBUTIONS AND ISSUANCE OF INTERESTS Section 5.1 Initial Contributions. On April 17, 2002 in connection with the formation of the Company under the Act, the MLP made an initial Capital Contribution to the Company in the amount of $1,000 in exchange for all of the Membership Interests in the Company. Upon completion of such contribution, 100% of the Membership Interests in the Company were held by the MLP. -12- Section 5.2 Contributions Pursuant to the Contribution and Conveyance Agreement. Pursuant to the Contribution Agreement, the MLP has contributed to the Company, as a Capital Contribution all of its interest in GNP LLC, WPP LLC, ACIN LLC and NNG LLC in exchange for a continuation of its Membership Interest. Following execution of this Agreement, the MLP shall continue to hold 100% of the Membership Interests in the Company. Section 5.3 Additional Capital Contributions. With the consent of the Managing Member, any Member may, but shall not be obligated to, make additional Capital Contributions to the Company. Section 5.4 Interest and Withdrawal. No interest shall be paid by the Company on Capital Contributions. No Member 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 Company 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 Member or Assignee shall have priority over any other Member 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 Members or Assignees agree within the meaning of Section 18-502(b) of the Act. Section 5.5 Loans from Members. Loans by a Member to the Company shall not constitute Capital Contributions. If any Member shall advance funds to the Company in excess of the amounts required hereunder to be contributed by it to the capital of the Company, the making of such excess advances shall not result in any increase in the amount of the Capital Account of such Member. The amount of any such excess advances shall be a debt obligation of the Company to such Member and shall be payable or collectible only out of the Company assets in accordance with the terms and conditions upon which such advances are made. Section 5.6 Issuances of Additional Company Securities. (a) The Company may issue additional Company Securities and options, rights, warrants and appreciation rights relating to the Company Securities for any Company purpose at any time and from time to time to such Persons for such consideration and on such terms and conditions as shall be established by the Managing Member and approved by the Members. The issuance by the Company of Company Securities or rights, warrants or appreciation rights in respect thereof shall be deemed an amendment to this Agreement. (b) Each additional Company Security authorized to be issued by the Company 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 Company Securities), as shall be fixed by the Managing Member and approved by the Members, including (i) the right to share Company profits and losses or items thereof; (ii) the right to share in Company distributions; (iii) the rights -13- upon dissolution and liquidation of the Company; (iv) whether, and the terms and conditions upon which, the Company may redeem such Company Security; (v) whether such Company 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 Company Security will be issued, evidenced by certificates and assigned or transferred; and (vii) the right, if any, of the holder of each such Company Security to vote on Company matters, including matters relating to the relative designations, preferences, rights, powers and duties of such Company Security. (c) The Managing Member is hereby authorized and directed to take all actions that it deems necessary or appropriate in connection with (i) each issuance of Company Securities and options, rights, warrants and appreciation rights relating to Company Securities pursuant to this Section 5.6, (ii) the admission of Additional Members and (iii) all additional issuances of Company Securities. The Managing Member is further authorized and directed to specify the relative rights, powers and duties of the holders of the Membership Interests or other Company Securities being so issued. The Managing Member shall do all things necessary to comply with the Act and is authorized and directed to do all things it deems necessary or advisable in connection with any future issuance of Company Securities, including compliance with any statute, rule, regulation or guideline of any federal, state or other governmental agency. Section 5.7 Limited Preemptive Rights. No Person shall have preemptive, preferential or other similar rights with respect to (a) additional Capital Contributions; (b) issuance or sale of any class or series of Membership Interests, whether unissued, held in the treasury or hereafter created; (c) issuance of any obligations, evidences of indebtedness or other securities of the Company convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase or subscribe to, any such Membership Interests; (d) issuance of any right of subscription to or right to receive, or any warrant or option for the purchase of, any such Membership Interests; or (e) issuance or sale of any other securities that may be issued or sold by the Company. Section 5.8 Fully Paid and Non-Assessable Nature of Membership Interests. All Membership Interests issued pursuant to, and in accordance with the requirements of this Article V shall be fully paid and non-assessable Membership Interests, except as such non-assessability may be affected by Section 18-607 of the Act. ARTICLE VI ALLOCATIONS AND DISTRIBUTIONS Section 6.1 Allocations. All income, gain, loss, deductions and items of income shall be allocated to the Members in proportion to their ownership of the Membership Interests unless otherwise required by the Code. Section 6.2 Distributions. -14- (a) Within 45 days following the end of each Quarter commencing with the Quarter ending on December 31, 2002, an amount equal to 100% of Available Cash with respect to such Quarter shall, subject to Section 18-607 of the Act, be distributed in accordance with this Article VI by the Company to the Members in accordance with their respective Percentage Interests. The immediately preceding sentence shall not require any distribution of cash if and to the extent such distribution would be prohibited by applicable law or by any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which the Company is a party or by which it is bound or its assets are subject. All distributions required to be made under this Agreement shall be made subject to Section 18-607 of the Act. (b) Notwithstanding Section 6.2(a), in the event of the dissolution and liquidation of the Company, all receipts received during or after the Quarter in which the Liquidation Date occurs, other 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 13.3. (c) The Managing Member shall have the discretion to treat taxes paid by the Company on behalf of, or amounts withheld with respect to, all or less than all of the Members, as a distribution of Available Cash to such Members. ARTICLE VII MANAGEMENT AND OPERATION OF BUSINESS Section 7.1 Management. (a) The Company shall be managed by the Managing Member. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Company shall be exclusively vested in the Managing Member, and no other Member shall have any management power or control over the business and affairs of the Company. Under the direction of the Managing Member, the day-to-day activities of the Company shall be conducted on the Company's behalf by the Officers, who shall be agents of the Company. (b) In addition to the powers now or hereafter granted a manager of limited liability company under applicable law or which are granted to the Managing Member under any other provisions of this Agreement, the Managing Member, subject to Section 7.3, and the Officers, subject to Article VIII and the direction of the Managing Member, shall have full power and authority to do all things and on such terms as they may deem necessary or appropriate to conduct the business of the Company, 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 a Membership Interest, and the incurring of any other obligations; -15- (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 Company; (iii) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Company or the merger or other combination of the Company with or into another Person; (iv) the use of the assets of the Company (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 Company Group, the lending of funds to other Persons (including the MLP or any Group Member), the repayment or guarantee of obligations of the MLP or the Company Group and the making of capital contributions to any Group Member; (v) the negotiation, execution and performance of any contracts, conveyances or other instruments (including instruments that limit the liability of the Company under contractual arrangements to all or particular assets of the Company, with the other party to the contract to have no recourse against the MLP or its assets other than its interest in the Company, even if same results in the terms of the transaction being less favorable to the Company than would otherwise be the case); (vi) the distribution of Company cash; (vii) the selection and dismissal of Officers 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 Company Group and the Members as it deems necessary or appropriate; (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, or other Persons subject to the restrictions set forth in Section 2.4; (x) the control of any matters affecting the rights and obligations of the Company, 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 purchase, sale or other acquisition or disposition of Membership Interests, or the issuance of additional options, rights, warrants and appreciation rights relating to Membership Interests; and -16- (xiii) the undertaking of any action in connection with the Company's participation in its Subsidiaries as the sole member or stockholder. (c) Notwithstanding any other provision of this Agreement, the MLP Agreement, the Act or any applicable law, rule or regulation, each Member and each other Person who may acquire a Membership Interest in the Company hereby (i) approves, ratifies and confirms the execution, delivery and performance by the parties thereto of the Underwriting Agreement, the Omnibus Agreement, the Contribution Agreement, the Credit Agreement and the other agreements and documents 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 Managing Member 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 Company without any further act, approval or vote of the Members or Assignees or the other Persons who may acquire an interest in the Company; and (iii) agrees that the execution, delivery or performance by the Managing Member, the MLP, 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 Managing Member of the rights accorded pursuant to Article XV), shall not constitute a breach by the Managing Member of any duty that the Managing Member may owe the Company or the Members 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 Formation. The MLP caused the Certificate of Formation to be filed with the Secretary of State of the State of Delaware as required by the Act and certain other certificates or documents it determined in its sole discretion to be necessary or appropriate for the qualification and operation of the Company in certain other states. The Managing Member shall use all reasonable efforts to cause to be filed such additional certificates or documents as may be determined by the Managing Member in its sole discretion to be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited liability company in the State of Delaware or any other state in which the Company may elect to do business or own property. To the extent that such action is determined by the Managing Member in its sole discretion to be reasonable and necessary or appropriate, the Managing Member shall file amendments to and restatements of the Certificate of Formation and do all things to maintain the Company as a limited liability company under the laws of the State of Delaware or of any other state in which the Company may elect to do business or own property. Subject to the terms of Section 3.3(a), the Managing Member shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Formation, any qualification document or any amendments thereto to any Member or Assignee. Section 7.3 Restrictions on Managing Member's Authority. (a) The Managing Member may not, without written approval of the specific act by the Members, 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 Company; (ii) possessing Company property, or assigning -17- any rights in specific Company property, for other than a Company purpose; (iii) admitting a Person as a Member; or (iv) amending this Agreement in any manner. (b) Except as provided in Articles XIII and XV, the Managing Member may not sell, exchange or otherwise dispose of all or substantially all of the Company'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 Company the sale, exchange or other disposition of all or substantially all of the assets of the Company, without the approval of the Members; provided, however, that this provision shall not preclude or limit the Managing Member's ability to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the Company and shall not apply to any forced sale of any or all of the assets of the Company pursuant to the foreclosure of, or other realization upon, any such encumbrance. Section 7.4 Reimbursement of the General Partner and GP LLC; Benefit Plans. (a) The General Partner and GP LLC shall be reimbursed on a monthly basis, or such other reasonable basis as the Managing Member may determine in its sole discretion, for (i) all direct and indirect expenses either of them incurs or payments they make on behalf of the Company (including salary, bonus, incentive compensation and other amounts paid to any Person including Affiliates of the General Partner or GP LLC to perform services for the Company or for the Managing Member in the discharge of their duties to the Company), and (ii) all other necessary or appropriate expenses allocable to the Company or otherwise reasonably incurred by the General Partner or GP LLC in furtherance of the Company's business (including expenses allocated to the General Partner or GP LLC by its Affiliates). Reimbursements pursuant to this Section 7.4 shall be in addition to any reimbursement to the General Partner or GP LLC as a result of indemnification pursuant to Section 7.7. (b) The Managing Member, in its sole discretion and without the approval of any Member (who shall have no right to vote in respect thereof), may propose and adopt on behalf of the Company employee benefit plans, employee programs and employee practices, or cause the Company to issue Company Securities, in connection with or pursuant to any employee benefit plan, employee program or employee practice maintained or sponsored by any Group Member or any Affiliate thereof, in each case for the benefit of employees of the General Partner, any Group Member or any Affiliate thereof, or any of them, in respect of services performed, directly or indirectly, for the benefit of the Company Group. Section 7.5 Outside Activities. (a) Except as specifically restricted by the Omnibus Agreement, each Indemnitee 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 Member or Assignee. Neither any Group Member, any Member nor any other -18- Person shall have any rights by virtue of this Agreement or the relationship established hereby in any business ventures of any Indemnitee. (b) Subject to the terms of Section 7.5(a) and the Omnibus Agreement, but otherwise notwithstanding anything to the contrary in this Agreement, (i) the engaging in competitive activities by any Indemnitee in accordance with the provisions of this Section 7.5 is hereby approved by the Company and all Members, (ii) it shall be deemed not to be a breach of the Managing Member's fiduciary duty or any other obligation of any type whatsoever of the Managing Member for the Indemnitees to engage in such business interests and activities in preference to or to the exclusion of the Company and (iii) except as set forth in the Omnibus Agreement, the Indemnitees shall have no obligation to present business opportunities to the Company. (c) Anything in this Agreement to the contrary notwithstanding, to the extent that provisions 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 Managing Member to the Company and its Members, or to constitute a waiver or consent by the Members to any such restriction, such provisions shall be inapplicable and have no effect in determining whether the Managing Member has complied with its fiduciary duties in connection with determinations made by it under this Section 7.5. Section 7.6 Loans from the Managing Member or the General Partner; Loans or Contributions from the Company; Contracts with Affiliates. (a) The Managing Member, GP LLC, the General Partner or any of their Affiliates may lend to any Group Member, and any Group Member may borrow from the Company or any of its Affiliates, funds needed or desired by any Group Member for such periods of time and in such amounts as the Managing Member 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 GP LLC, the General Partner or any of their Affiliates (other than the MLP, a subsidiary of the MLP or another Group Member). (b) Each of the General Partner and GP LLC may itself, or may enter into an agreement with any of its Affiliates to, render services to a Group Member or to the MLP in the discharge of its duties as the General Partner of the MLP, or as the general partner of the General Partner of the MLP, respectively. Any services rendered to a Group Member by the General Partner or GP LLC or any of their respective Affiliates shall be on terms that are fair and reasonable to the Company, provided, however, that the requirements of this Section 7.6(b) shall be deemed satisfied as to (a) any transaction approved by Special Approval, (ii) any transaction, -19- the terms of which are not less favorable to the Company 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 Company Group), is equitable to the Company Group. The provisions of Section 7.4 shall apply to the rendering of services described in this Section 7.6(b). (c) The Company may lend or contribute to any Group Member, and any Group Member may borrow from the Company, funds on terms and conditions established in the sole discretion of the Managing Member; provided, however, that the Company 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 Managing Member's financial abilities or guarantees) by unrelated lenders on comparable loans. The foregoing authority shall be exercised by the Managing Member in its sole discretion and shall not create any right or benefit in favor of any Group Member or any other Person. (d) The Company 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 GP LLC, nor any of their respective Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Company, directly or indirectly, except pursuant to transactions that are fair and reasonable to the Company; 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 Company 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 Company), is equitable to the Company. (f) Neither the General Partner nor GP LLC nor any of their respective Affiliates will have any obligation to permit any Group Member to use any facilities or assets of the General Partner, GP LLC or their respective 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, GP LLC or their respective Affiliates to enter into such contracts. (g) Without limitation of Sections 7.5(a) through 7.5(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 Members. -20- 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 Company 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 Managing Member) not opposed to, the best interests of the Company 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 GP LLC or their Affiliates (other than a Group Member) with respect to their respective obligations incurred pursuant to the Underwriting Agreement or the Contribution Agreement (other than obligations incurred by the General Partner or GP LLC on behalf of the MLP or the Company). 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 Company, 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 Company 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 or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company 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 Members, 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 the Credit 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 Company may purchase and maintain (or reimburse the General Partner, GP LLC, the Managing Member or their Affiliates for the cost of) insurance, on behalf of the Managing Member, its Affiliates and such other Persons as the Managing Member shall determine, against any liability that may be asserted against or expense that may be incurred by such Person in connection with the Company's activities or such Person's activities on behalf of -21- the Company, regardless of whether the Company 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 Company 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 Company 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 Company. (f) In no event may an Indemnitee subject the Members 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 Company, nor the obligations of the Company 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 or the MLP Agreement, no Indemnitee shall be liable for monetary damages to the Company, the Members, the Assignees or any other Persons who have acquired interests in the Company or MLP 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 set forth in Section 7.1(a), the Managing Member 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 Managing Member shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the Managing Member in good faith. -22- (c) To the extent that, at law or in equity, an Indemnitee has duties (including fiduciary duties) and liabilities relating thereto to the Company or to the Members, the Managing Member and any other Indemnitee acting in connection with the Company's business or affairs shall not be liable to the Company or to any Member 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 Members 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 Company, the Members, the Managing Member, and the Member'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, whenever a potential conflict of interest exists or arises between the General Partner or any of its respective Affiliates, on the one hand, and the Company, any Member or any Assignee, on the other, any resolution or course of action by the Managing Member or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Members, and shall not constitute a breach of this Agreement, of any agreement contemplated herein, 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 Company. The Managing Member 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 Company if such conflict of interest or resolution is (i) approved by Special Approval (as long as the material facts known to the Managing Member 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 Company than those generally being provided to or available from unrelated third parties or (iii) fair to the Company, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Company). The Managing Member may also adopt a resolution or course of action that has not received Special Approval. The Managing Member (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 Company 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 Managing Member (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 Managing Member (including the Conflicts Committee) to consider the interests of any Person other than -23- the Company . In the absence of bad faith by the Managing Member, the resolution, action or terms so made, taken or provided by the Managing Member 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 Act or any other law, rule or regulation. (b) Whenever this Agreement or any other agreement contemplated hereby provides that the Managing Member 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 Managing Member 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 MLP, the Company, any Member 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 Managing Member 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 MLP Agreement or any other agreement contemplated hereby or under the Act or any other law, rule or regulation. In addition, any actions taken by the Managing Member or such Affiliate consistent with the standards of "reasonable discretion" set forth in the definition of Available Cash shall not constitute a breach of any duty of the Managing Member to the Company or the Members. The Managing Member shall have no duty, express or implied, to sell or otherwise dispose of any asset of the Company Group other than in the ordinary course of business. No borrowing by any Group Member or the approval thereof by the Managing Member shall be deemed to constitute a breach of any duty of the Managing Member to the Company or the Members by reason of the fact that the purpose or effect of such borrowing is directly or indirectly to (A) enable distributions by the MLP to the General Partner or its Affiliates 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. Section 7.10 Other Matters Concerning the Managing Member. (a) The Managing Member 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 Managing Member 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 Managing Member reasonably -24- 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 Managing Member 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 Company. (d) Any standard of care and duty imposed by this Agreement or under the 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 Managing Member 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 long as such action is reasonably believed by the Managing Member to be in, or not inconsistent with, the best interests of the Company. Section 7.11 Reliance by Third Parties. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Company shall be entitled to assume that the Managing Member and any Officer authorized by the Managing Member to act on behalf of and in the name of the Company has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Company and to enter into any authorized contracts on behalf of the Company, and such Person shall be entitled to deal with the Managing Member or any such Officer as if it were the Company's sole party in interest, both legally and beneficially. Each Member 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 Managing Member or any such officer in connection with any such dealing. In no event shall any Person dealing with the Managing Member or any such officer or its representatives be obligated to ascertain that the terms of the Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the Managing Member or any such officer or its representatives. Each and every certificate, document or other instrument executed on behalf of the Company by the Managing Member 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 Company 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 Company. ARTICLE VIII OFFICERS Section 8.1 Officers. (a) Generally. The Managing Member, as set forth below, shall appoint agents of the Company, referred to as "Officers" of the Company as described in this Section 8.1, who shall be responsible for the day-to-day business affairs of the Company, subject to the overall direction and control of the Managing Member. Unless provided otherwise by Managing -25- Member, the Officers shall have the titles, power, authority and duties described below in this Section 8.1. (b) Titles and Number. The Officers shall be the President and Chief Operating Officer, the Chief Financial Officer, any and all Vice Presidents, the Chief Engineer, the Controller, the Secretary, the Treasurer, and any other Officers appointed pursuant to this Section 8.1. Any person may hold two or more offices. (i) President and Chief Operating Officer. The Managing Member shall appoint an individual to serve as President and Chief Operating Officer. The President and Chief Operating Officer shall have general charge, management and control of the administration and operation of the Company's business and general supervision of its policies and affairs, with all such powers with respect to such administration and operations as may be reasonably incident to such responsibilities. The current President and Chief Operating Officer is Nick Carter. (ii) Chief Financial Officer. The Managing Member shall appoint a Chief Financial Officer. The Chief Financial Officer shall have such powers and perform such duties as are assigned to him by the Managing Member. The current Chief Financial Officer is Dwight L. Dunlap. (iii) Vice Presidents. The Managing Member, in its discretion, may elect one or more Vice Presidents. In the absence of the President or in the event of the President's inability or refusal to act, the Vice President (or in the event there be more than one vice president, the vice presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and the Vice President, when so acting, shall have all of the powers and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties as from time to time may be assigned by the President or the Managing Member. The current Vice President is Kevin Wall. (iv) Chief Engineer. The Managing Member shall elect an individual to serve as Chief Engineer. The Chief Engineer shall have such powers and perform such duties as are assigned to him by the Managing Member. The current Chief Engineer is Kevin Wall. (v) Controller. The Managing Member shall elect an individual to serve as Controller. The Controller shall have such powers and perform such duties as are assigned to him by the Managing Member. The current Controller is Kenneth Hudson. (vi) Secretary. The Managing Member shall elect a Secretary. The Secretary shall record or cause to be recorded in books provided for that purpose the minutes of the meetings or actions of the Managing Member and of the Members, shall see that all notices are duly given in accordance with the -26- provisions of this Agreement and as required by law, shall be custodian of all records (other than financial), shall see that the books, reports, statements, certificates and all other documents and records required by law are properly kept and filed, and, in general, shall perform all duties incident to the office of Secretary and such other duties as may, from time to time, be assigned to him by this Agreement, the Managing Member or the President. The current Secretary is Dwight L. Dunlap. (vii) Treasurer. The Managing Member shall elect a Treasurer. The Treasurer shall keep or cause to be kept the books of account of the Company and shall render statements of the financial affairs of the Company in such form and as often as required by this Agreement, the Managing Member, or the President. The Treasurer, subject to the order of the Managing Member, shall have the custody of all funds and securities of the Company. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as this Agreement, the Managing Member or the President, shall designate from time to time. The current Treasurer is Dwight L. Dunlap. (c) Other Officers and Agents. The Managing Member may appoint such other Officers and agents as may from time to time appear to be necessary or advisable in the conduct of the affairs of the Company, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Managing Member. (d) Appointment and Term of Office. The Officers shall be appointed by the Managing Member at such time and for such terms as the Managing Member shall determine. Any Officer may be removed, with or without cause, only by the Managing Member. Vacancies in any office may be filled only by the Managing Member. (e) Powers of Attorney. The Managing Member may grant powers of attorney or other authority as appropriate to establish and evidence the authority of the Officers and other Persons. (f) Officers' Delegation of Authority. Unless otherwise provided by resolution of the Managing Member, no Officer shall have the power or authority to delegate to any Person such Officer's rights and powers as an Officer to manage the business and affairs of the Company. Section 8.2 Compensation. The Officers shall receive such compensation for their services as may be designated by the Managing Member. In addition, the Officers shall be entitled to be reimbursed for out-of-pocket costs and expenses incurred in the course of their service hereunder. -27- ARTICLE IX BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting The Managing Member shall keep or cause to be kept at the principal office of the Company appropriate books and records with respect to the Company's business, including all books and records necessary to provide to the Members any information required to be provided pursuant to Section 3.4(a). Any books and records maintained by or on behalf of the Company in the regular course of its business, including books of account and records of Company 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 Company shall be maintained, for financial reporting purposes, on an accrual basis in accordance with U.S. GAAP. Section 9.2 Fiscal Year. The fiscal year of the Company shall be a fiscal year ending December 31. ARTICLE X TAX MATTERS Section 10.1 Tax Returns and Information. The Company shall timely file all returns of the Company 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 the Members 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 Company'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 10.2 Tax Elections. (a) The Company shall not elect to be treated as a corporation under the Code. (b) Except as otherwise provided herein, the Managing Member shall determine whether the Company should make any other elections permitted by the Code. ARTICLE XI ADMISSION OF MEMBERS Section 11.1 Initial Member. Pursuant to the contributions described in Sections 5.1 and 5.2, the MLP is the only current Member of the Company. -28- Section 11.2 Admission of Substituted Members. By transfer of a Membership Interest in accordance with Article IV, the transferor shall be deemed to have given the transferee the right to seek admission as a Substituted Member subject to the conditions of, and in the manner permitted under, this Agreement. A transferor of a Membership Interest shall, however, only have the authority to convey to a purchaser or other transferee (a) the right to negotiate such Membership Interest to a purchaser or other transferee and (b) the right to request admission as a Substituted Member to such purchaser or other transferee in respect of the transferred Membership Interests. Each transferee of a Membership Interest shall be an Assignee and be deemed to have applied to become a Substituted Member with respect to the Interests so transferred to such Person. Such Assignee shall become a Substituted Member (x) at such time as the Members consent thereto, which consent may be given or withheld in the Members' discretion, and (y) when any such admission is shown on the books and records of the Company. If such consent is withheld, such transferee shall remain an Assignee. An Assignee shall have an interest in the Company equivalent to that of a Member with respect to allocations and distributions, including liquidating distributions, of the Company. With respect to voting rights attributable to Membership Interests that are held by Assignees, the Managing Member shall be deemed to be the Member with respect thereto and shall, in exercising the voting rights in respect of such Interests on any matter, vote such Membership Interests at the written direction of the Assignee. If no such written direction is received, such Membership Interests will not be voted. An Assignee shall have no other rights of a Member. Section 11.3 Admission of Additional Members. (a) A Person (other than a Substituted Member) who makes a Capital Contribution to the Company or acquires Company Securities in accordance with this Agreement shall be admitted to the Company as an Additional Member only upon furnishing to the Managing Member (i) evidence of acceptance in form satisfactory to the Managing Member 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 Managing Member to effect such Person's admission as an Additional Member. (b) Notwithstanding anything to the contrary in this Section 11.3, no Person shall be admitted as an Additional Member without the consent of the Managing Member, which consent may be given or withheld in the Managing Member's discretion. The admission of any Person as an Additional Member shall become effective on the date upon which the name of such Person is recorded as such in the books and records of the Company, following the consent of the Managing Member to such admission. Section 11.4 Amendment of Agreement and Certificate of Formation. To effect the admission to the Company of any Member, the Managing Member shall take all steps necessary and appropriate under the Act to amend the records of the Company to reflect such admission and, if necessary, to prepare as soon as practicable an amendment to this Agreement and, if required by law, the Managing Member shall prepare and file an amendment to the Certificate of Formation, and the Managing Member may for this purpose, among others, exercise the power of attorney granted pursuant to Section 2.6. -29- ARTICLE XII WITHDRAWAL OF MEMBERS Section 12.1 Withdrawal of Members. Without the prior written consent of the Managing Member, which may be granted or withheld in its sole discretion, and except as provided in Section 11.1, no Member shall have the right to withdraw from the Company. ARTICLE XIII DISSOLUTION AND LIQUIDATION Section 13.1 Dissolution. The Company shall not be dissolved by the admission of Substituted Members or Additional Members in accordance with the terms of this Agreement. The Company shall dissolve, and its affairs shall be wound up, upon: (a) an election to dissolve the Company by the Managing Member that is approved by all of the Members; (b) the entry of a decree of judicial dissolution of the Company pursuant to the provisions of the Act; (c) the sale, exchange or disposition of all or substantially all of the assets and properties of the Company Group; or (d) the dissolution of the MLP. Section 13.2 Liquidator. Upon dissolution of the Company, the Managing Member shall select one or more Persons to act as Liquidator. The Liquidator shall be entitled to receive such compensation for its services as may be approved by a majority of the Members. The Liquidator 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 a majority of the Members. 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 Members. 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 XIII, 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 Managing Member 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(a)) 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 -30- judgment of the Liquidator to complete the winding up and liquidation of the Company as provided for herein. Section 13.3 Liquidation. The Liquidator shall proceed to dispose of the assets of the Company, 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 Members, subject to Section 18-804 of the 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 Members on such terms as the Liquidator and such Member or Members may agree. If any property is distributed in kind, the Member receiving the property shall be deemed for purposes of Section 13.3(c) to have received cash equal to its fair market value; and contemporaneously therewith, appropriate cash distributions must be made to the other Members. The Liquidator may, in its absolute discretion, defer liquidation or distribution of the Company's assets for a reasonable time if it determines that an immediate sale or distribution of all or some of the Company's assets would be impractical or would cause undue loss to the Members. The Liquidator may, in its absolute discretion, distribute the Company'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 Members. (b) Liabilities of the Company include amounts owed to Members 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 13.3(b) shall be distributed to the Members in proportion to their ownership interests. Section 13.4 Cancellation of Certificate of Formation. Upon the completion of the distribution of Company cash and property as provided in Section 13.3 in connection with the liquidation of the Company, the Company shall be terminated and the Certificate of Formation, as well as all qualifications of the Company as a foreign limited liability company in jurisdictions other than the State of Delaware, shall be canceled and such other actions as may be necessary to terminate the Company shall be taken. Section 13.5 Return of Capital Contributions. The MLP shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Company to enable it to effectuate, the return of the Capital Contributions of the Members, or any portion thereof, it being expressly understood that any such return shall be made solely from Company assets. -31- Section 13.6 Waiver of Partition. To the maximum extent permitted by law, each Member hereby waives any right to partition of the Company property. Section 13.7 Capital Account Restoration. No Member shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Company. ARTICLE XIV AMENDMENT OF AGREEMENT Section 14.1 Amendment to be Adopted Solely by the Managing Member. Each Member agrees that the Managing Member, without the approval of any Member, 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 Company, the location of the principal place of business of the Company, the registered agent of the Company or the registered office of the Company; (b) admission, substitution, withdrawal or removal of Members in accordance with this Agreement; (c) a change that, in the sole discretion of the Managing Member, is necessary or advisable to qualify or continue the qualification of the Company as a limited liability company in which the Members have limited liability under the laws of any state or to ensure that neither the Company nor the MLP will be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes; (d) a change that, in the discretion of the Managing Member, (i) does not adversely affect the Members 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 Act) or (B) facilitate the trading of limited partner interests of the MLP (including the division of any class or classes of outstanding limited partner interests of the MLP into different classes to facilitate uniformity of tax consequences within such classes of limited partner interests of the MLP) or comply with any rule, regulation, guideline or requirement of any National Securities Exchange on which such limited partner interests are or will be listed for trading, compliance with any of which the Managing Member determines in its discretion to be in the best interests of the MLP and the limited partners of the MLP, (iii) 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 or (iv) is required to conform the provisions of this Agreement with the provisions of the MLP Agreement as the provisions of the MLP Agreement may be amended, supplemented or restated from time to time; -32- (e) a change in the fiscal year or taxable year of the Company and any changes that, in the discretion of the Managing Member, are necessary or advisable as a result of a change in the fiscal year or taxable year of the Company including, if the Managing Member shall so determine, a change in the definition of "Quarter" and the dates on which distributions are to be made by the Company; (f) an amendment that is necessary, in the Opinion of Counsel, to prevent the Company 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; (g) any amendment expressly permitted in this Agreement to be made by the Managing Member acting alone; (h) an amendment effected, necessitated or contemplated by a Merger Agreement approved in accordance with Section 15.3; (i) an amendment that, in the discretion of the Managing Member, is necessary or advisable to reflect, account for and deal with appropriately the formation by the Company of, or investment by the Company in, any corporation, partnership, joint venture, limited liability company or other entity, in connection with the conduct by the Company of activities permitted by the terms of Section 2.4; (j) a merger or conveyance pursuant to Section 15.3(d); or (k) any other amendments substantially similar to the foregoing. Section 14.2 Amendment Procedures. Except with respect to amendments of the type described in Section 14.1, 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 Managing Member which consent may be given or withheld in its sole discretion. A proposed amendment shall be effective upon its approval by the Members. ARTICLE XV MERGER Section 15.1 Authority. The Company 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 15. -33- Section 15.2 Procedure for Merger or Consolidation. Merger or consolidation of the Company pursuant to this Article XV requires the prior approval of the Managing Member. If the Managing Member shall determine, in the exercise of its discretion, to consent to the merger or consolidation, the Managing Member 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 15.4 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 Managing Member. -34- Section 15.3 Approval by Members of Merger or Consolidation. (a) Except as provided in Section 15.3(d), the Managing Member, upon its approval of the Merger Agreement, shall direct that the Merger Agreement be submitted to a vote of Members, whether at a special meeting or by written consent, in either case in accordance with the requirements of Article XIV. 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 15.3(d), the Merger Agreement shall be approved upon receiving the affirmative vote or consent of the Members. (c) Except as provided in Section 15.3(d), after such approval by vote or consent of the Members, and at any time prior to the filing of the certificate of merger pursuant to Section 15.4, the merger or consolidation may be abandoned pursuant to provisions therefor, if any, set forth in the Merger Agreement. (d) Notwithstanding anything else contained in this Article XV or in this Agreement, the Managing Member is permitted, in its discretion, without Member approval, to merge the Company or any Group Member into, or convey all of the Company'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 Company or other Group Member if (i) the Managing Member 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 Member or any limited partner in the MLP or cause the Company or the MLP 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 Company into another limited liability entity and (iii) the governing instruments of the new entity provide the Members with the same rights and obligations as are herein contained. Section 15.4 Certificate of Merger. Upon the required approval by the Managing Member and the Members 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 Act. Section 15.5 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; -35- (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 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 Member 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 Member at the address described below. Any notice to the Company or to the Managing Member shall be deemed given if received by the Managing Member at the principal office of the Company designated pursuant to Section 2.3. The Managing Member may rely and shall be protected in relying on any notice or other document from a Member, 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. Section 16.5 Creditors. -36- None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Company. 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, 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 Members. Each Member 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 Members, such action may be so taken upon the concurrence of less than all of the Members and each Member shall be bound by the results of such action. * * * * * -37- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. NATURAL RESOURCE PARTNERS L.P. By: NRP (GP) LP, its General Partner By: GP Natural Resource Partners LLC, its General Partner By: /s/ Nick Carter --------------------------------- Name: Nick Carter Title: President -41- EX-3.6 5 h04228exv3w6.txt 1ST AMENDED AGREEMENT OF LIMITED PARTNERSHIP EXHIBIT 3.6 EXECUTION VERSION NRP (GP) LP A Delaware Limited Partnership AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT October 17, 2002 TABLE OF CONTENTS ARTICLE I DEFINITIONS.................................................... 1 ARTICLE II ORGANIZATION.................................................. 8 2.1 Formation of Limited Partnership............................... 8 2.2 Name of Partnership............................................ 9 2.3 Principal Office; Registered Office............................ 9 2.4 Term of Partnership............................................ 9 2.5 Purpose of Partnership......................................... 9 2.6 Actions by Partnership......................................... 9 2.7 Reliance by Third Parties...................................... 9 ARTICLE III CAPITAL...................................................... 10 3.1 Capital Contributions.......................................... 10 3.2 Additional Capital Contributions............................... 10 3.3 Loans.......................................................... 10 3.4 Maintenance of Capital Accounts................................ 11 3.5 Capital Withdrawal Rights, Interest and Priority............... 12 ARTICLE IV DISTRIBUTIONS................................................. 12 4.1 Distributions of Available Cash................................ 12 4.2 Persons Entitled to Distributions.............................. 12 4.3 Limitations on Distributions................................... 12 ARTICLE V ALLOCATIONS.................................................... 12 5.1 Profits........................................................ 12 5.2 Losses......................................................... 13 5.3 Regulatory Allocations......................................... 13 5.4 Tax Allocations: Code Section 704(c)........................... 14 5.5 Change in Partnership Percentage............................... 15 5.6 Withholding.................................................... 15 ARTICLE VI MANAGEMENT.................................................... 16 6.1 Duties and Powers of the General Partner....................... 16 6.2 No Liability to Limited Partners............................... 17 6.3 Indemnification of General Partner............................. 17 6.4 Rights of Limited Partners..................................... 17 ARTICLE VII TRANSFERS OF PARTNERSHIP INTERESTS........................... 17 7.1 Transfer of Limited Partnership Interests...................... 17 7.2 Permitted Transferees.......................................... 18 7.3 Substitute Limited Partners.................................... 19 7.4 Effect of Admission as a Substitute Limited Partner............ 20 7.5 Consent........................................................ 20 7.6 Additional Limited Partners.................................... 20 7.7 Right of First Refusal......................................... 20
i ARTICLE VIII DISSOLUTION AND LIQUIDATION................................. 21 8.1 Dissolution of Partnership..................................... 21 8.2 Final Accounting............................................... 22 8.3 Distributions Following Dissolution and Termination............ 22 8.4 Termination of the Partnership................................. 24 8.5 No Action for Dissolution...................................... 24 ARTICLE IX ACCOUNTING; BOOKS AND RECORDS................................. 24 9.1 Fiscal Year and Accounting Method.............................. 24 9.2 Books and Records.............................................. 24 9.3 Delivery to Partners; Inspection............................... 25 9.4 Financial Statements........................................... 25 9.5 Filings........................................................ 25 9.6 Non-Disclosure................................................. 25 ARTICLE X MISCELLANEOUS.................................................. 26 10.1 Waiver of Default.............................................. 26 10.2 Amendment of Partnership Agreement............................. 26 10.3 Notices to Tax Matters Partners................................ 26 10.4 No Third Party Rights.......................................... 27 10.5 Severability................................................... 27 10.6 Nature of Interest in the Partnership.......................... 27 10.7 Binding Agreement.............................................. 27 10.8 Headings....................................................... 27 10.9 Word Meanings.................................................. 27 10.10 Counterparts................................................. 27 10.11 Entire Agreement............................................. 28 10.12 Partition.................................................... 28 10.13 Governing Law; Consent to Jurisdiction and Venue............. 28
ii AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF NRP (GP) LP THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (this "AGREEMENT") of NRP (GP) LP, a Delaware limited partnership (the "PARTNERSHIP"), is made and entered into as of this 17th day of October, 2002 by and among GP Natural Resource Partners LLC, a Delaware limited liability company, as the general partner, and the Persons listed as limited partners in Schedule I hereto (the "LIMITED PARTNERS"). This Agreement amends and restates in its entirety the original Limited Partnership Agreement dated as of April 9, 2002 between the General Partner, New Gauley, Western Pocahontas, Great Northern and Ark Land (the "Original Limited Partnership Agreement"). ARTICLE I DEFINITIONS For purposes of this Agreement: "ACCEPTANCE NOTICE" is defined in Section 7.8(b). "ACT" means the Delaware Revised Uniform Limited Partnership Act, as amended from time to time. "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to a Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Taxable Year, after giving effect to the following adjustments: (a) Credit to such Capital Account any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to Regulation Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i)(5); and (b) Debit to such Capital Account the items described in Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Sections 1.704(b)(2)(ii)(d) and shall be interpreted consistently therewith. "AFFILIATE" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "AGREEMENT" means this Amended and Restated Limited Partnership Agreement, as amended from time to time in accordance with its terms. "ARCH COAL" means Arch Coal, Inc., a Delaware corporation. "ARK LAND" means Ark Land Company, a Delaware corporation. "AVAILABLE CASH" means, with respect to a fiscal quarter, all cash and cash equivalents of the Partnership at the end of such quarter less the amount of cash reserves that is necessary or appropriate in the reasonable discretion of the General Partner to (a) provide for the proper conduct of the business of the Partnership (including reserves for future capital expenditures and for anticipated future credit needs of the Partnership) subsequent to such quarter or (b) comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which the Partnership is a party or by which it is bound or its assets or Property is subject; provided, however, that disbursements made by the Master Limited Partnership to the Partnership or cash reserves established, increased or reduced after the expiration 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, during such quarter if the General Partner so determines in its reasonable discretion. "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, with respect to any Partner, a separate account established by the Partnership and maintained for each Partner in accordance with Section 3.4 hereof. "CAPITAL CONTRIBUTION" means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any Property (other than money) contributed to the Partnership by such Partner with respect to its Partnership Interest pursuant to the terms of this Agreement. Any reference in this Agreement to the Capital Contribution of a Partner shall include a Capital Contribution of its predecessors in interest. "CERTIFICATE" means the Certificate of Limited Partnership of the Partnership filed with the Secretary of State of Delaware, as amended or restated from time to time. "CODE" means the United States Internal Revenue Code of 1986, as amended. "DEPRECIATION" means, for each Taxable Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Taxable Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Taxable Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such Taxable Year bears to 2 such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Taxable Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. "ECONOMIC RISK OF LOSS" shall have the meaning set forth in Regulation Section 1.752-2(a). "ENCUMBRANCE" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, any defect or imperfection in title, preferential arrangement or restriction, right to purchase, right of first refusal or other burden or encumbrance of any kind, other than those imposed by this Agreement. "FIRST REFUSAL NOTICE" is defined in Section 7.8(a). "GENERAL PARTNER" means GP Natural Resource Partners LLC, a Delaware limited liability company, any successor thereto, and any Persons hereafter admitted as additional general partners, each in its capacity as a general partner of the Partnership. "GREAT NORTHERN" means Great Northern Properties Limited Partnership, a Delaware limited partnership. "GROSS ASSET VALUE" means with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows and as otherwise provided in Section 3.2(b): (a) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as reasonably determined by the General Partner; in a manner that is consistent with Section 7701(g) of the Code, provided, however, that the initial Gross Asset Values of the assets contributed to the Partnership pursuant to Section 3.1 hereof shall be as set forth in such section or the schedule referred to therein; (b) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the General Partner, in a manner that is consistent with section 7701(g) of the Code, as of the following times: (i) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (ii) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property other than money as consideration for an interest in the Partnership; and (iii) the liquidation of the Partnership within the meaning of Regulation Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (i) and (ii) above shall be made only if the Tax Matters Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (c) The Gross Asset Value of any Partnership assets distributed to any Partner shall be adjusted to equal the gross fair market value of such asset on the date of 3 distribution as reasonably determined by the General Partner, in a manner that is consistent with Section 7701(g) of the Code; and (d) The Gross Asset Values of any Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Section 734(b) or the Code or Section 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(m) and clause (f) of the definition of Profits and Losses, provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent the Tax Matters Partner determines that an adjustment pursuant to the foregoing subparagraph (b) of this definition is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d). If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraphs (a), (b), or (d), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Profits and Losses. "INCENTIVE DISTRIBUTION RIGHTS" means the incentive distribution rights issued by the Master Limited Partnership. "LIMITED PARTNER" means any Person admitted to the Partnership as a Limited Partner and who is shown as such on the books and records of the Partnership. "LIMITED PARTNERSHIP INTEREST" means, a limited partnership interest in the Partnership, which refers to all of a limited partner's rights and interests in the Partnership in such Person's capacity as a limited partner thereof, all as provided in the Partnership Agreement and the Act. "LIQUIDATING TRUSTEE" is defined in Section 8.3(a). "LLC AGREEMENT" means the Second Amended and Restated Agreement Limited Liability Company Agreement of the General Partner, dated as of the date hereof, by and among Robertson Coal Management LLC and Ark Land, as the initial members, and any other Persons who become members in the General Partner as provided therein, as amended from time to time in accordance with the terms thereof. "LOSSES" is defined in the definition of "Profits" and "Losses". "MASTER LIMITED PARTNERSHIP" means Natural Resource Partners L.P., and any successor thereto. "MASTER LIMITED PARTNERSHIP AGREEMENT" means the First Amended and Restated Agreement of Limited Partnership of the Master Limited Partnership, dated as of October 17, 2002, as amended, modified, supplemented or restated from time to time in accordance with the terms thereof. "MEMBER" means a record holder of a Membership Interest. 4 "MEMBERSHIP INTEREST" means a member's limited liability company interest in the General Partner, which refers to all of a member's rights and interests in the General Partner in such Person's capacity as a member thereof, all as provided in the LLC Agreement and the Delaware Limited Liability Company Act. "MEMBERSHIP TRANSFER" is defined in Section 7.1(b). "MINIMUM GAIN" shall have the meaning assigned to that term in Regulation Section 1.704-2(d). "NEW GAULEY" shall mean New Gauley Coal Corporation, a West Virginia corporation. "NONRECOURSE DEDUCTIONS" shall have the meaning assigned to that term in Regulation Section 1.704-2(b)(1). "NONRECOURSE LIABILITY" shall have the meaning assigned to that term in Regulation Section 1.752-1(a)(2). "NON-SELLING PARTNER" is defined in Section 7.8(b). "NOTICE" means a writing, containing the information required by this Agreement to be communicated to a party, and shall be deemed to have been received (a) when personally delivered or sent by telecopy, (b) one day following delivery by overnight delivery courier with all delivery charges pre-paid, or (c) on the third Business Day following the date on which it was sent by United States mail postage prepaid, to such party at the address or fax number, as the case may be, of such party as shown on the records of the Partnership. "OFFER" is defined in Section 7.8(a). "OFFEROR" is defined in Section 7.8(a). "OMNIBUS AGREEMENT" means the Omnibus Agreement dated as of October 17, 2002 among the Partnership, the General Partner, NRP Operating LLC, the Master Limited Partnership, Arch Coal, Ark Land, New Gauley, Western Pocahontas, Great Northern and Robertson Coal Management LLC . "OPTIONED INTEREST" is defined in Section 7.8(a). "ORIGINAL LIMITED PARTNERSHIP AGREEMENT" is defined in the preamble hereof. "PARTNER" means the General Partner or any of the Limited Partners, and "Partners" means the General Partner and all of the Limited Partners. "PARTNER NONRECOURSE DEBT" shall have the meaning assigned to the term "partner nonrecourse debt" in Regulation Section 1.704-2(b)(4). "PARTNER NONRECOURSE DEBT MINIMUM GAIN" shall have the meaning assigned to the term "partner nonrecourse debt minimum gain" set forth in Regulation Section 1.704-2(i)(2). 5 "PARTNER NONRECOURSE DEDUCTIONS" shall have the meaning assigned to the term "partner nonrecourse deduction" in Regulation Section 1.704-2(i)(1). "PARTNERSHIP" is defined in the preamble hereof. "PARTNERSHIP INTEREST" means a Partner's limited partnership or general partnership interest in the Partnership which refers to all of a Partner's rights and interests in the Partnership in such Partner's capacity as a Partner, all as provided in this Agreement and the Act. "PARTNERSHIP PERCENTAGE" of a Partner means the aggregate percentage of Partnership Interests of such Partner set forth in Schedule I hereto, as the same may be modified from time to time as provided herein. "PERMITTED TRANSFER" shall mean: (a) a Transfer of all of a Partnership Interest by any Partner who is a natural person to (i) such Partner's spouse, children (including legally adopted children and stepchildren), spouses of children or grandchildren or spouses of grandchildren, (ii) a trust for the benefit of the Partner and/or any of the Persons described in clause (i), or (iii) a limited partnership or limited liability company whose sole partners or members, as the case may be, are the Partner and or any of the Persons described in clause (i) or clause (ii); provided, that in any of clauses (i), (ii), or (iii), the Partner transferring such Partnership Interest retains exclusive power to exercise all rights under this Agreement; (b) a Transfer of all of a Partnership Interest by any Partner to the Partnership; (c) a Transfer of all of a Partnership Interest by a Partner to any Affiliate of such Partner; provided, however, that such transfer shall be a Permitted Transfer only so long as such Partnership Interest is held by such Affiliate or is otherwise transferred in another Permitted Transfer. Provided, however, that no Permitted Transfer shall be effective unless and until the transferee of the Partnership Interest so transferred complies with Section 7.1(b). Except in the case of a Permitted Transfer pursuant to clause (b) above, from and after the date on which a Permitted Transfer becomes effective, the Permitted Transferee of the Partnership Interest so transferred shall have the same rights, and shall be bound by the same obligations, under this Agreement as the transferor of such Partnership Interest, or portion thereof, and shall be deemed for all purposes hereunder a Partner and such Permitted Transferee shall, as a condition to such Transfer, agree in writing to be bound by the terms of this Agreement. No Permitted Transfer shall conflict with or result in any violation of any judgment, order, decree, statute, law, ordinance, rule or regulation or require the Partnership, if not currently subject, to become subject, or if currently subject, to become subject to a greater extent, to any statute, law, ordinance, rule or regulation, excluding matters of a ministerial nature that are not materially burdensome to the Partnership. "PERMITTED TRANSFEREE" shall mean any Person who shall have acquired and who shall hold a Partnership Interest pursuant to a Permitted Transfer. 6 "PERSON" means any individual, partnership, corporation, limited liability company, trust, incorporated or unincorporated organization or other legal entity of any kind. "PROFITS" and "LOSSES" means, for each Taxable Year, an amount equal to the Partnership's net taxable income or loss for a taxable year, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in computing such taxable income or loss), with the following adjustments (without duplication): (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to such taxable income or loss; (b) Any expenditures of the Partnership described in Section 705(a)(2)(B) of the Code or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulation Section l.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, shall be subtracted from such taxable income or loss; (c) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to subparagraphs (b) or (c) of the definition of Gross Asset Value the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; (d) Gain or loss resulting from any disposition of Property (other than money) with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; (e) In lieu of the depreciation amortization, and other cost recovery deductions taken into account in computing such taxable income or loss there shall be taken into account Depreciation for such Taxable Year computed in accordance with the definition of Depreciation; (f) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulation Sections 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner's interest in the Partnership, the amount of such adjustment 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) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and (g) Any items that are allocated pursuant to the Regulatory Allocations shall not be taken into account in computing Profits and Losses. The amounts of the items of Partnership income, gain, loss or deduction available to be allocated pursuant to the 7 Regulatory Allocations shall be determined by applying rules analogous to those set forth in clauses (a) through (f) hereof. "PROPERTY" means all assets, real or intangible, that the Partnership may own or otherwise have an interest in from time to time. "REGULATIONS" means the regulations, including temporary regulations promulgated by the United States Department of Treasury with respect to the Code, as such regulations are amended from time to time or corresponding provisions of future regulations. "REGULATORY ALLOCATIONS" is defined in Section 5.3(g). "SELLING PARTNER" is defined in Section 7.8(a). "SPLs" means the special limited partnership interests in the Master Limited Partnership to be contributed to the Partnership by the Limited Partners. "TAXABLE YEAR" means the calendar year. "TAX MATTERS PARTNER" is defined in Section 6.1(c). "TRANSFER" or "TRANSFERRED" means to give, sell, exchange, assign, transfer, pledge, hypothecate, bequeath, devise or otherwise dispose of or encumber, voluntarily or involuntarily, by operation of law or otherwise. When referring to a Partnership Interest, "Transfer" shall mean the Transfer of such Partnership Interest whether of record, beneficially, by participation or otherwise. "WESTERN POCAHONTAS" shall mean Western Pocahontas Properties Limited Partnership, a Delaware limited partnership. "WPP GROUP" shall mean collectively Western Pocahontas, Great Northern and New Gauley. ARTICLE II ORGANIZATION 2.1 FORMATION OF LIMITED PARTNERSHIP The Partners have previously formed the Partnership as a limited partnership pursuant to the provisions of the Act, and the parties hereto hereby agree to amend and restate the Original Limited Partnership Agreement. The parties hereto acknowledge that they intend that the Partnership be taxed as a partnership and not as an association taxable as a corporation for federal income tax purposes. No election may be made to treat the Partnership as other than a partnership for federal income tax purposes. 8 2.2 NAME OF PARTNERSHIP The name of the Partnership is NRP (GP) LP, or such other name as the General Partner may hereafter adopt from time to time. The General Partner shall execute and file in the proper offices such certificates as may be required by any assumed name act or similar law in effect in the jurisdictions in which the Partnership may elect to conduct business. 2.3 PRINCIPAL OFFICE; REGISTERED OFFICE The principal office address of the Partnership is located at 601 Jefferson Street, Suite 3600, Houston, Texas 77002, or such other place as the General Partner designates from time to time. The registered office address and the name of the registered agent of the Partnership for service of process on the Partnership in the State of Delaware is as stated in the Certificate or as designated from time to time by the General Partner. 2.4 TERM OF PARTNERSHIP The term of the Partnership commenced on April 9, 2002, and shall continue until dissolved pursuant to Section 8.1 hereof. The legal existence of the Partnership as a separate legal entity continues until the cancellation of the Certificate. 2.5 PURPOSE OF PARTNERSHIP The Partnership is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Partnership is, (a) acting as the general partner of the Master Limited Partnership pursuant to the Master Limited Partnership Agreement, (b) holding the general partner interest in the Master Limited Partnership and a portion of the Incentive Distribution Rights and (c) engaging in any and all activities necessary or incidental to the foregoing. 2.6 ACTIONS BY PARTNERSHIP The Partnership may execute, deliver and perform all contracts, agreements and other undertakings and engage in all activities and transactions as may in the opinion of the General Partner be necessary or advisable to carry out its objects. 2.7 RELIANCE BY THIRD PARTIES Persons dealing with the Partnership are entitled to rely conclusively upon the power and authority of the General Partner as herein set forth. 9 ARTICLE III CAPITAL 3.1 CAPITAL CONTRIBUTIONS (a) On or before the date of this Agreement, each Partner agrees to make, or shall have made, a Capital Contribution consisting of cash or property as set forth opposite such Partner's name on Schedule I hereto. (b) Each Partner agrees to make Capital Contributions in proportion to such Partner's Partnership Percentage for equity issuances by the Master Limited Partnership pursuant to Section 5.2(b) of the Master Limited Partnership Agreement. 3.2 ADDITIONAL CAPITAL CONTRIBUTIONS (a) No Partner shall be required to make any additional Capital Contribution other than as required under Section 3.1. (b) The Partnership may offer additional Partnership Interests to any Person with the approval of the General Partner. If any additional Capital Contributions are made by Partners but not in proportion to their respective Percentage Interests, the Percentage Interest of each Partner shall be adjusted such that each Partner's revised Percentage Interest determined immediately following each such additional Capital Contribution shall be equal to a fraction (i) the numerator of which is the sum of (A) the positive Capital Account balance of the Partner determined immediately preceding the date such additional Capital Contribution is made (such Capital Account to be computed by adjusting the book value for Capital Account purposes of each Partnership asset to equal its Gross Asset Value as of such date, as provided in subparagraph (b) of the definition herein of "Gross Asset Value"), and (B) such additional Capital Contribution, if any, made by such Partner, and (ii) the denominator of which is the sum of the positive Capital Account balances immediately preceding the date such additional Capital Contribution is made plus additional Capital Contributions of all Partners on the date of such additional Capital Contribution, including Capital Contributions of any new Partners (in each case calculated as provided in (i) above). The names, addresses and Capital Contributions of the Partners shall be reflected in the books and records of the Partnership. 3.3 LOANS (a) No Partner shall be obligated to loan funds to the Partnership. Loans by a Partner to the Partnership shall not be considered Capital Contributions. The amount of any such loan shall be a debt of the Partnership owed to such Partner in accordance with the terms and conditions upon which such loan is made. (b) A Partner may (but shall not be obligated to) guarantee a loan made to the Partnership. If a Partner guarantees a loan made to the Partnership and is required to make payment pursuant to such guarantee to the maker of the loan, then the amounts so paid to the maker of the loan shall be treated as a loan by such Partner to the Partnership and not as an additional Capital Contribution. 10 3.4 MAINTENANCE OF CAPITAL ACCOUNTS (a) The Partnership shall maintain for each Partner a separate Capital Account with respect to the Partnership Interest owned by such Partner in accordance with the following provisions: (i) To each Partner's Capital Account there shall be credited (A) such Partner's Capital Contributions, (B) such Partner's share of Profits and any items in the nature of income or gain which are allocated to such Partner pursuant to the Regulatory Allocations and (C) the amount of any Partnership liabilities assumed by such Partner or which are secured by any Property distributed to such Partner. The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed to the Partnership by the maker of the note (or a Partner related to the maker of the note within the meaning of Regulation Section 1.704-1(b)(2)(ii)(c)) shall not be included in the Capital Account of any Partner until the Partnership makes a taxable disposition of the note or until (and only to the extent) principal payments are made on the note, all in accordance with Regulation Section l.704-l(b)(2)(iv)(d)(2); (ii) To each Partner's Capital Account there shall be debited (A) the amount of money and the Gross Asset Value of any Property distributed or treated as an advance distribution to such Partner pursuant to any provision of this Agreement (including without limitation any distributions pursuant to Section 4.1), (B) such Partner's share of Losses and any items in the nature of deduction or loss which are allocated to such Partner pursuant to the Regulatory Allocations and (C) the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any Property contributed by such Partner to the Partnership: (iii) In the event Partnership Interests are Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent such Capital Account relates to the Transferred Partnership Interests; and (iv) In determining the amount of any liability for purposes of Sections 3.4(a)(i) and (ii) there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. (b) The foregoing Section 3.4(a) and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulation Section 1.704-1(b) and, to the greatest extent practicable, shall be interpreted and applied in a manner consistent with such Regulation. The General Partner in its discretion and to the extent otherwise consistent with the terms of this Agreement shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulation Section l.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulation Section 1.704-1(b). 11 3.5 CAPITAL WITHDRAWAL RIGHTS, INTEREST AND PRIORITY Except as expressly provided in this Agreement, no Partner shall be entitled to (a) withdraw or reduce such Partner's Capital Contribution or to receive any distributions from the Partnership, or (b) receive or be credited with any interest on the balance of such Partner's Capital Contribution at any time. An unrepaid Capital Contribution is not a liability of the Partnership or of any Partner. ARTICLE IV DISTRIBUTIONS 4.1 DISTRIBUTIONS OF AVAILABLE CASH An amount equal to 100% of Available Cash with respect to each fiscal quarter of the Partnership shall be distributed to the Partners in proportion to their relative Percentage Interests within forty-five days after the end of such quarter. 4.2 PERSONS ENTITLED TO DISTRIBUTIONS All distributions of Available Cash to Partners for a fiscal quarter pursuant to Section 4.1 shall be made to the Partners shown on the records of the Partnership to be entitled thereto as of the last day of such quarter unless the transferor and transferee of any Partnership Interest otherwise agree in writing to a different distribution and such distribution is consented to in writing by the General Partner. 4.3 LIMITATIONS ON DISTRIBUTIONS (a) Notwithstanding any provision of this Agreement to the contrary no distributions shall be made except pursuant to this Article IV or Article VIII. (b) Notwithstanding any provision of this Agreement to the contrary, no distribution hereunder shall be permitted if such distribution would violate Section 17-607 of the Act or other applicable law. ARTICLE V ALLOCATIONS 5.1 PROFITS Profits for any Taxable Year shall be allocated: (a) first to those Partners to which Losses have previously been allocated pursuant to Section 5.2(d) hereof so as to bring each such Partner's Capital Account to zero, pro rata in accordance with the sum of each such Partner's Losses; and (b) second, any remaining Profits shall be allocated among the Partners in proportion to their respective Percentage Interests. 12 5.2 LOSSES Losses for any Taxable Year shall be allocated: (a) first, to the Partners to which Profits have previously been allocated pursuant to Section 5.1(b) to the extent of such Profits; (b) second, among the Partners in proportion to their respective Percentage Interests provided however that no Partner shall be allocated any loss pursuant to this Section 5.2(b) which would result in a negative Capital Account balance for such Partner. (c) third, to Partners in proportion to their positive Capital Account balances until such Capital Account balances have been reduced to zero; and (d) fourth, any remaining Losses shall be allocated to the General Partner. 5.3 REGULATORY ALLOCATIONS The following allocations shall be made in the following order: (a) Nonrecourse Deductions. Nonrecourse Deductions shall be allocated to the Partners in accordance with their Percentage Interests. (b) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions attributable to Partner Nonrecourse Debt shall be allocated to the Partners bearing the Economic Risk of Loss for such Partner Nonrecourse Debt as determined under Regulation Section 1.704-2(b)(4). If more than one Partner bears the Economic Risk of Loss for such Member Nonrecourse Debt, the Partner Nonrecourse Deductions attributable to such Partner Nonrecourse Debt shall be allocated among the Partners according to the ratio in which they bear the Economic Risk of Loss. This Section 5.3(b) is intended to comply with the provisions of Regulation Section 1.704-2(i) and shall be interpreted consistently therewith. (c) Minimum Gain Chargeback. Notwithstanding any other provision hereof to the contrary, if there is a net decrease in Minimum Gain for a Taxable Year (or if there was a net decrease in Minimum Gain for a prior Taxable Year and the Partnership did not have sufficient amounts of income and gain during prior years to allocate among the Partners under this Section 5.3(c)), items of income and gain shall be allocated to each Partner in an amount equal to such Partner's share of the net decrease in such Minimum Gain (as determined pursuant to Regulation Section 1.704-2(g)(2)). This Section 5.3(c) is intended to constitute a minimum gain chargeback under Regulation Section 1.704-2(f) and shall be interpreted consistently therewith. (d) Member Minimum Gain Chargeback. Notwithstanding any provision hereof to the contrary except Section 5.3(c) (dealing with Minimum Gain), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain for a Taxable Year (or if there was a net decrease in Partner Nonrecourse Debt Minimum Gain for a prior Taxable Year and the Company did not have sufficient amounts of income and gain during prior years to allocate among the Partners under this Section 5.3(d)), items of income and gain shall be allocated to each Partner in an amount equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum 13 Gain (as determined pursuant to Regulation Section 1.704-2(i)(4)). This Section 5.3(d) is intended to constitute a partner nonrecourse debt minimum gain chargeback under Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (e) Gross Income Allocation. In the event any Partner has an Adjusted Capital Account Deficit at the end of any Taxable Year, such Partner shall be specially allocated items of Partnership income and gain in the amount of such deficit balance as quickly as possible; provided, that, an allocation pursuant to this Section 5.3(e) shall be made only if and to the extent that such Partner would have an Adjusted Capital Account Deficit balance after all other allocations provided for in this Article V have been made. (f) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulation Sections 1.704-l(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 Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided, that, an allocation pursuant to this Section 5.3(f) shall be made only if and to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article V have been made. (g) Curative Allocations. The allocations set forth in Sections 5.3(a), (b), (c), (d), (e) and (f) hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss or deduction pursuant to this Section 5.3(g). Therefore, notwithstanding any other provision of this Article V (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of income, gain, loss or deduction in whatever mariner it determines appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of this Agreement and all such items were allocated pursuant to Sections 5.1 and 5.2 without regard to the Regulatory Allocations. 5.4 TAX ALLOCATIONS: CODE SECTION 704(C) (a) Except as otherwise provided herein, for federal income tax purposes, (i) 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 Sections 5.1 and 5.2, and (ii) each tax credit shall be allocated to the Partners in the same manner as the receipt or expenditure giving rise to such credit is allocated pursuant to Section 5.1 or 5.2. (b) In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any Property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such Property to the Partnership for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition herein of "Gross Asset Value"). The Partnership shall use the remedial method of allocations specified in 14 Treas. Reg. Section 1.704-3(d), or successor regulations, unless otherwise required by law, with respect to the initial contribution property set forth on Schedule I. (c) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to subparagraph (b) of the definition herein of "Gross Asset Value", subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. (d) Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement; provided, that the Partnership, in the discretion of the General Partner, may make, or not make, "curative" or "remedial" allocations (within the meaning of the Regulations under Code Section 704(c)) including, but not limited to, "curative" allocations which offset the effect of the "ceiling rule" for a prior Taxable Year (within the meaning of Regulation Section 1.704-3(c)(3)(ii)) and "curative" allocations from disposition of contributed property (within the meaning of Regulation Section 1.704-3(c)(3)(iii)(B)). Allocations pursuant to this Section 5.4 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. 5.5 CHANGE IN PARTNERSHIP PERCENTAGE In the event that the Partners' Partnership Percentages change during a Taxable Year, Profits and Losses shall be allocated taking into account the Partners' varying Percentage Interests for such Taxable Year, determined on a daily, monthly or other basis as determined by the General Partner, using any permissible method under Code Section 706 and the Regulations thereunder. 5.6 WITHHOLDING Each Partner hereby authorizes the Partnership to withhold from income or distributions allocable to such Partner and to pay over any taxes payable by the Partnership or any of its Affiliates as a result of such Partner's participation in the Partnership; if and to the extent that the Partnership shall be required to withhold any such taxes, such Partner shall be deemed for all purposes of this Agreement to have received a distribution from the Partnership as of the time such withholding is required to be paid, which distribution shall be deemed to be a distribution to such Partner to the extent that the Partner is then entitled to receive a distribution. To the extent that the aggregate of such distributions in respect of a Partner for any period exceeds the distributions to which such Partner is entitled for such period, the amount of such excess shall be considered a demand loan from the Partnership to such Partner, with interest at the rate of interest per annum that Citibank, N.A., or any successor entity thereto, announces from time to time as its prime lending rate, which interest shall be treated as an item of Partnership income, until discharged by such Partner by repayment, which may be made in the sole discretion of the General Partner out of distributions to which such Partner would otherwise be subsequently entitled. The withholdings referred to in this Section 5.6 shall be made at the maximum applicable statutory rate under applicable tax law unless the General Partner shall have received 15 an opinion of counsel or other evidence, satisfactory to the General Partner, to the effect that a lower rate is applicable, or that no withholding is applicable. ARTICLE VI MANAGEMENT 6.1 DUTIES AND POWERS OF THE GENERAL PARTNER (a) The business and affairs of the Partnership shall be managed by the General Partner. Except for situations in which the approval of the Limited Partners is expressly required by this Agreement or by nonwaivable provisions of applicable law, the General Partner shall have full and complete authority, power and discretion to manage and control the business, affairs and property of the Partnership, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Partnership's business. Without limiting the generality of the foregoing, the General Partner has full power and authority to execute, deliver and perform such contracts, agreements and other undertakings on behalf of the Partnership, without the consent or approval of any other Partner, and to engage in all activities and transactions, as it may deem necessary or advisable for, or as may be incidental to, the conduct of the business and affairs of the Partnership. (b) Each Limited Partner agrees to cooperate with the General Partner and to execute and deliver such documents, agreements and instruments, and do all such further acts, as deemed necessary or advisable by the General Partner to give effect to the exercise of the General Partner's powers under this Section 6.1. Without limiting the foregoing, each Limited Partner hereby irrevocably appoints the General Partner as its proxy and attorney-in-fact (with full power of substitution and resubstitution) to vote or act by written consent with respect to its Partnership Interest as a Limited Partner as determined by the General Partner on all matters requiring the vote, approval or consent of the Limited Partners. The Partners acknowledge that such proxy is coupled with an interest and is irrevocable. (c) The General Partner is the tax matters partner (the "Tax Matters Partner") for purposes of Section 6231 of the Code and analogous provisions of state law. The Tax Matters Partner has the exclusive authority and discretion to make any elections required or permitted to be made by the Partnership under any provisions of the Code or any other applicable laws; provided, however, that no election shall be made by or on behalf of the Partnership to be excluded from application of Subchapter K Chapter I of Subtitle A of the Code or from any similar provisions of any state tax laws or to be treated as a corporation for federal tax purposes. The Tax Matters Partner shall use its reasonable best efforts to keep each Partner informed of any administrative and judicial proceedings for the adjustment at the Partnership level of any item required to be taken into account by a Partner for income tax purposes or any extension of the period of limitations for making assessments of any tax against a Partner with respect to any Partnership item, or of any agreement with the Internal Revenue Service that would result in any material change either in Profits or Losses as previously reported. 16 6.2 NO LIABILITY TO LIMITED PARTNERS Except in case of gross negligence or willful malfeasance of the person (the General Partner or any of the Members, managers, directors, officers, agents or employees of the General Partner) who is sought to be held liable, neither the General Partner nor the Members, managers, directors, officers, agents or employees of the General Partner will be liable to any Limited Partner or the Partnership (i) for any action taken with respect to the Partnership which is not in violation of the provisions of this Agreement, or (ii) for any action taken by any Member, manager, director, officer, agent or employee of the General Partner. 6.3 INDEMNIFICATION OF GENERAL PARTNER The Partnership shall indemnify the General Partner, the Members, managers, directors, officers, agents and employees of the General Partner against any losses, liabilities, damages and expenses to which any of such persons may become subject, including attorneys' fees, judgments and amounts paid in settlement, actually and reasonably incurred by them, and advance all expenses to them, in connection with any threatened, pending or completed action, suit or proceeding to which any of them was or is a party or is threatened to be made a party by reason of the direct or indirect association by them with the Partnership to the maximum extent permitted by applicable law. 6.4 RIGHTS OF LIMITED PARTNERS The Limited Partners will not be personally liable for any obligations of the Partnership nor will they have any obligation to make contributions to the Partnership in excess of their respective Capital Contributions required under Section 3.1 or have any liability for the repayment or discharge of the debts and obligations of the Partnership except to the extent provided herein or as required by law. The Limited Partners shall take no part in the management, control or operation of the Partnership's business and shall have no power to bind the Partnership and no right or authority to act for the Partnership or to vote on matters other than the matters set forth in this Agreement or as required by applicable law. ARTICLE VII TRANSFERS OF PARTNERSHIP INTERESTS 7.1 TRANSFER OF LIMITED PARTNERSHIP INTERESTS (a) A Limited Partner may Transfer such Partner's Partnership Interest only in its entirety. A Limited Partner may transfer all of such Partner's Partnership Interest (i) to a Permitted Transferee pursuant to Section 7.2, or (ii) pursuant to the terms of Section 7.7; provided, however, any such Transfer under (i) or (ii) above shall comply with the terms of Section 7.1(b). Other than a Transfer permitted pursuant to clause (a) or clause (c) of the definition of Permitted Transfer, the Limited Partners who are members of the WPP Group may only transfer the entirety of their Partnership Interests collectively as a group. Any purported Transfer of a Partnership Interest in violation of the terms of this Agreement shall be null and void and of no force and effect. Except upon a Transfer of all of a Limited Partner's Partnership 17 Interest in accordance with this Section 7.1, no Limited Partner shall have the right to withdraw as a Partner of the Partnership. (b) As a condition to a Transfer by a Limited Partner of all of such Partner's Partnership Interest to a transferee as permitted under Section 7.l(a)(i) or (ii) (a "PARTNERSHIP TRANSFER"), such Partner, or such Partner's Affiliate holding a Membership Interest, as applicable, shall simultaneously Transfer (the "MEMBERSHIP TRANSFER") to such transferee an amount of such Partner's or such Partner's Affiliate's Membership Interest equal to: (i) such Partner's or such Partner's Affiliate's Membership Interest, multiplied by (ii) a percentage equal to (1) the portion of such Partner's Partnership Interest to be Transferred to such transferee, divided by (2) such Partner's Partnership Interest immediately before such Transfer. If for any reason the Membership Transfer does not occur simultaneously with the Partnership Transfer, then the Partnership Transfer shall be null and void and of no force and effect. (c) Notwithstanding any other provision of this Agreement, no Limited Partner may pledge, mortgage or otherwise subject its Limited Partnership Interest to any Encumbrance, provided, however, that any Limited Partner may pledge, mortgage, assign or grant a security interest in its right to receive distributions from or with respect to its Limited Partnership Interest to any Person. 7.2 PERMITTED TRANSFEREES (a) Notwithstanding the provisions of Section 7.7, each Limited Partner shall, subject to Section 7.1(b), have the right to Transfer (but not to substitute the transferee as a substitute Partner in such Partner's place, except in accordance with Section 7.3), by a written instrument, all of a Limited Partner's Partnership Interest to a Permitted Transferee. Notwithstanding the previous sentence, if the Permitted Transferee is such because it was an Affiliate of the transferring Limited Partner at the time of such Transfer or the Transfer was a Permitted Transfer under clause (a) of the definition herein of "Permitted Transfer" and, at any time after such Transfer, such Permitted Transferee ceases to be an Affiliate of such Limited Partner or such Transfer or such Permitted Transferee ceases to qualify under such clause (a) (a "NON-QUALIFYING TRANSFEREE"), such Transfer shall be deemed to not be a Permitted Transfer and shall be subject to Section 7.7. Pursuant to Section 7.7, such transferring Limited Partner or such transferring Limited Partner's legal representative shall deliver the First Refusal Notice promptly after the time when such transferee ceases to be an Affiliate of such transferring Limited Partner or such Transfer or such Permitted Transferee ceases to qualify under clause (a) of the definition herein of "Permitted Transfer", and such transferring Limited Partner shall otherwise comply with the terms of Section 7.7 with respect to such Transfer; provided, that the purchase price for such Transfer for purposes of Section 7.7 shall be an amount agreed upon by such transferring Limited Partner and the General Partner or, if such Limited Partner and the General Partner cannot agree on a price within five Business Days after delivery of the First Refusal Notice, such price shall be the fair market value of the Partnership Interest transferred pursuant to the Transfer as of the date the transferee ceased to be an Affiliate of such transferring Limited Partner or such Transfer or such Permitted Transferee ceases to qualify under clause (a) of the definition herein of "Permitted Transfer" (such date, the "NON-QUALIFYING DATE"), as determined at the Partnership's expense by a nationally recognized investment banking firm mutually selected by such transferring Limited Partner and the General Partner. If such transferring Limited Partner 18 and the General Partner are unable, within ten days after the expiration of such five Business Day period, to mutually agree upon an investment banking firm, then each of such transferring Limited Partner and the General Partner shall choose a nationally recognized investment banking firm and the two investment banking firms so chosen shall choose a third nationally recognized investment banking firm which shall determine the fair market value of the Partnership Interest transferred pursuant to such Transfer at the Partnership's expense. The determination of fair market value shall be based on the value that a willing buyer with knowledge of all relevant facts would pay a willing seller for all the outstanding equity securities of the Partnership in connection with an auction for the Partnership as a going concern and shall not take into account any acquisitions made by the Partnership or its Affiliates or any other events subsequent to the Non-Qualifying Date and shall not be subject to any discount for a sale of a minority interest. If such transferring Limited Partner fails to comply with all the terms of Section 7.7, such Transfer shall be null and void and of no force and effect. No Non-Qualifying Transferee shall be entitled to receive any distributions from the Partnership on or after the Non-Qualifying Date and any distributions made in respect of the Partnership Interests on or after the Non-Qualifying Date and held by such Non-Qualifying Transferee shall be paid to the Limited Partner who transferred such Partnership Interests or otherwise to the rightful owner thereof as reasonably, determined by the General Partner. (b) Unless and until admitted as a substitute Limited Partner pursuant to Section 7.3, a transferee of a Limited Partner's Partnership Interest, in whole or in part, shall be an assignee with respect to such Transferred Partnership Interest and shall not be entitled to become, or to exercise the rights of, a Limited Partner, including the right to vote, the right to require any information or accounting of the Partnership's business, or the right to inspect the Partnership's books and records. Such transferee shall only be entitled to receive, to the extent of the Partnership Interest Transferred to such transferee, the share of distributions and profits, including distributions representing the return of Capital Contributions, to which the transferor would otherwise be entitled with respect to the Transferred Partnership Interest. Subject to the provisions of Section 6.1(b), the transferor shall have the right to vote such Transferred Partnership Interest until the transferee is admitted to the Partnership as a substitute Limited Partner with respect to the Transferred Partnership Interest. 7.3 SUBSTITUTE LIMITED PARTNERS No transferee of all or part of a Limited Partner's Partnership Interest shall become a substitute Limited Partner in place of the transferor unless and until: (a) such Transfer is in compliance with the terms of Section 7.1; (b) the transferee has executed an instrument in form and substance reasonably satisfactory to the General Partner accepting and adopting, and agreeing to be bound by, the terms and provisions of the Certificate and this Agreement; and (c) the transferee has executed an instrument in form and substance reasonably satisfactory to the General Partner whereby it agrees to become a party to the Omnibus Agreement and to be bound by the noncompetition provisions of Article II of the Omnibus Agreement. 19 (d) the transferee has caused to be paid all reasonable expenses of the Partnership in connection with the admission of the transferee as a substitute Limited Partner. Upon satisfaction of all the foregoing conditions with respect to a particular transferee, the General Partner shall cause the books and records of the Partnership to reflect the admission of the transferee as a substitute Limited Partner to the extent of the Transferred Partnership Interest held by such transferee. 7.4 EFFECT OF ADMISSION AS A SUBSTITUTE LIMITED PARTNER A transferee who has become a substitute Limited Partner has to the extent of the Transferred Partnership Interest all the rights powers and benefits of and is subject to the obligations, restrictions and liabilities of a Partner under the Certificate this Agreement and the Act Upon admission of a transferee as a substitute Limited Partner the transferor of the Partnership Interest so held by the substitute Limited Partner shall cease to be a Partner of the Partnership to the extent of such Transferred Partnership Interest. 7.5 CONSENT Each Partner hereby agrees that upon satisfaction of the terms and conditions of this Article VII with respect to any proposed Transfer the transferee may be admitted as a Partner without any further action by a Partner hereunder. 7.6 ADDITIONAL LIMITED PARTNERS Subject to Section 3.2, any person acceptable to the General Partner may become an additional Limited Partner of the Partnership for such consideration as the General Partner shall determine, provided that such additional Limited Partner complies with all the requirements of a transferee under Section 7.3 (b), (c) and (d). 7.7 RIGHT OF FIRST REFUSAL The Limited Partners shall have the following right of first refusal: (a) If at any time any of the Limited Partners (a "SELLING PARTNER") has received and wishes to accept a bona fide offer (the "OFFER") for cash from a third party (the "OFFEROR") for all of such Selling Partner's Partnership Interest (and a proportionate amount of such Selling Partner's (or it's Affiliate's) Membership Interest in accordance with Section 7.1(b)) such Selling Partner shall give Notice thereof (the "FIRST REFUSAL NOTICE") to each of the other Partners and the Partnership. The First Refusal Notice shall state the portion of the Selling Partner's Partnership Interest and the Selling Partner's (or its Affiliate's) Membership Interest that the Selling Partner and its Affiliate, if applicable, wish to sell (the "OPTIONED INTEREST"), the price and all other material terms of the Offer, the name of the Offeror, and certification from the Selling Partner affirming that the Offer is bona fide and that the description thereof is true and correct and that the Offeror has stated that it will purchase the Optioned Interest if the rights of first refusal herein described are not exercised. 20 (b) Each of the Limited Partners other than the Selling Partner (the "NON-SELLING PARTNERS") shall have the right exercisable by Notice (an "ACCEPTANCE NOTICE") given to the Selling Partner and the Partnership within 20 days after receipt of the First Refusal Notice, to agree that it will purchase up to 100% of the Optioned Interest on the terms set forth in the First Refusal Notice; provided, however, if the Non-Selling Partners in the aggregate desire to purchase more than 100% of the Optioned Interest, each such Non-Selling Partner's right to purchase the Optioned Interest shall be reduced (pro rata based on the percentage of the Optioned Interest for which such Non-Selling Partner has exercised its right to purchase hereunder compared to all other Non-Selling Partners, but not below such Non-Selling Partner's Partnership Interest as a percentage of the aggregate Partnership Interests of all Non-Selling Partners who have exercised their right to purchase) so that such Non-Selling Partners purchase no more than 100% of the Optioned Interest. If a Non-Selling Partner does not submit an Acceptance Notice within the 20 day period set forth in this Section 7.7(b), such Non-Selling Partner shall be deemed to have rejected the offer to purchase any portion of the Optioned Interest. (c) If the Non-Selling Partners do not in the aggregate exercise the right to purchase all of the Optioned Interest by the expiration of the 20 day period set forth in Section 7.7(b), then any Acceptance Notice shall be void and of no effect, and the Selling Partner shall be entitled to complete the proposed sale at any time in the 30 day period commencing on the date of the First Refusal Notice, but only upon the terms set forth in the First Refusal Notice. If no such sale is completed in such 30 day period, the provisions hereof shall apply again to any proposed sale of the Optioned Interest. (d) If any Non-Selling Partner exercises the right to purchase the Optioned Interest as provided herein and such Non-Selling Partner(s) have elected to purchase all of the Optioned Interest, the purchase of such Optioned Interest shall be completed within the 30 day period commencing on the date of delivery of the First Refusal Notice on the terms set forth in the First Refusal Notice. If such Non-Selling Partner does not consummate the Purchase of such Optioned Interest, (x) the Selling Partner shall be entitled to all expenses of collection, (y) the Selling Partner shall be entitled to pursue all available legal remedies against the Non-Selling Partner, including specific enforcement of the purchase of the Optioned Interest on the terms set forth in the First Refusal Notice and (z) notwithstanding the specific enforcement remedy, the Selling Partner may complete the sale of the Optioned Interest to the third party on the terms set forth in the First Refusal Notice. (e) With respect to the Limited Partners who are members of the WPP Group, the provisions of Section 7.7 will apply to the sale of the collective Partnership Interests of all of the members of the WPP Group, and no Offer will be deemed to be valid unless it is an Offer for the entirety of the collective Partnership Interests of the WPP Group and the associated Membership Interests to be offered pursuant to Section 7.1(b). 21 ARTICLE VIII DISSOLUTION AND LIQUIDATION 8.1 DISSOLUTION OF PARTNERSHIP (a) The Partnership shall be dissolved and its affairs wound up upon the first to occur of the following events: (i) the written election of the General Partner, in its sole discretion, to dissolve the Partnership; (ii) the occurrence of any event that results in the General Partner ceasing to be the general partner of the Partnership under the Act, provided that the Partnership will not be dissolved and required to be wound up in connection with any such event if (A) at the time of the occurrence of such event there is at least one remaining general partner of the Partnership who is hereby authorized to and does carry on the business of the Partnership, or (B) within 90 days after the occurrence of such event, all of the Limited Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, if required, of one or more additional general partners of the Partnership; (iii) the Transfer of all or substantially all of the assets of the Partnership and the receipt and distribution of all the proceeds therefrom; (iv) at any time that there are no limited partners of the Partnership, unless the business of the Partnership is continued in accordance with the Act; and (v) the entry of a decree of judicial dissolution under Section 17-802 of the Act. (b) The withdrawal, death, dissolution, retirement, resignation, expulsion, liquidation or bankruptcy of a Partner, the admission to the Partnership of a new General Partner or Limited Partner, the withdrawal of a Partner from the Partnership, or the transfer by a Partner of its Partnership Interest to a third party shall not, in and of itself, cause the Partnership to dissolve. 8.2 FINAL ACCOUNTING Upon dissolution and winding up of the Partnership, an accounting will be made of the accounts of the Partnership and each Partner and of the Partnership's assets, liabilities and operations from the date of the last previous accounting to the date of such dissolution. 8.3 DISTRIBUTIONS FOLLOWING DISSOLUTION AND TERMINATION (a) Liquidating Trustee. Upon the dissolution of the Partnership, such party as is designated by the General Partner will act as liquidating trustee of the Partnership (the "LIQUIDATING TRUSTEE") and proceed to wind up the business and affairs of the Partnership in accordance with the terms of this Agreement and applicable law. The Liquidating Trustee will use its commercially reasonable efforts to sell all Partnership assets (except cash) under the 22 circumstances then presented, that it deems in the best interest of the Partners. The Liquidating Trustee will attempt to convert all assets of the Partnership to cash so long as it can do so consistently with prudent business practice. The Partners and their respective designees will have the right to purchase any Partnership property to be sold on liquidation, provided that the terms on which such sale is made are no less favorable than would otherwise be available from third parties. The gains and losses from the sale of the Partnership assets, together with all other revenue, income, gain, deduction, expense, loss and credit during the period, will be allocated in accordance with Article V. A reasonable amount of time shall be allowed for the period of winding up in light of prevailing market conditions and so as to avoid undue loss in connection with any sale of the Partnership's assets. This Agreement shall remain in full force and effect during the period of winding up. In addition, upon request of the General Partner and if the Liquidating Trustee determines that it would be imprudent to dispose of any non-cash assets of the Partnership, such assets may be distributed in kind to the Partners in lieu of cash, proportionately to their right to receive cash distributions under this Agreement. (b) Accounting. Upon completion of its efforts under Section 8.3(a), the Liquidating Trustee will cause proper accounting to be made of the Capital Account of each Partner, including recognition of gain or loss on any asset to be distributed in kind as if such asset had been sold for consideration equal to the fair market value of the asset at the time of the distribution. The Partners intend that the allocations provided herein shall result in Capital Account balances in proportion to the Partnership Percentages of the Partners. (c) Liquidating Distributions. In settling accounts after dissolution of the Partnership, the assets of the Partnership shall be paid to creditors of the Partnership and to the Partners in the following order: (i) to creditors of the Partnership (including Partners) in the order of priority as provided by law whether by payment or the making of reasonable provision for payment thereof, and in connection therewith there shall be withheld such reasonable reserves for contingent, conditioned or unconditioned liabilities as the Liquidating Trustee in its reasonable discretion deems adequate, such reserves (or balances thereof) to be held and distributed in such manner and at such times as the Liquidating Trustee, in its discretion, deems reasonably advisable; provided, however, that such amounts will be maintained in a separate bank account and that any amounts in such bank account remaining after three years be distributed to the Partners or their successors and assigns as if such amount had been available for distribution under Section 8.3(c)(ii), and then (ii) to the Partners in proportion to the positive balances of their Capital Accounts, as fully adjusted pursuant to Section 3.4, including adjustment for all gains and losses actually or deemed realized upon disposition or distribution of assets in connection with the liquidation and winding up of the Partnership. Any distribution to the Partners in liquidation of the Partnership shall be made by the later of the end of the taxable year in which the liquidation occurs or 90 days after the date of such liquidation. For purposes of the preceding sentence, the term "liquidation" shall have the same meaning as set forth in Regulation Section 1.704-2(b)(2)(ii) as in effect at such time and liquidating distributions shall be further deemed to be made pursuant to this Agreement upon the 23 event of a liquidation as defined in such Regulation for which no actual liquidation occurs with a deemed recontribution by the Partners of such deemed liquidating distributions to the continuing Partnership pursuant to this Agreement. (d) The provisions of this Agreement, including, without limitation, this Section 8.3, are intended solely to benefit the Partners and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Partnership. No such creditor of the Partnership shall be a third-party beneficiary of this Agreement, and no Partner shall have any duty or obligation to any creditor of the Partnership to issue any call for capital pursuant to this Agreement. 8.4 TERMINATION OF THE PARTNERSHIP The Partnership shall terminate when all assets of the Partnership, after payment or due provision for all debts, liabilities and obligations of the Partnership, shall have been distributed to the Partners in the manner provided for in this Article VIII, and the Certificate shall have been canceled in the manner required by the Act. 8.5 NO ACTION FOR DISSOLUTION The Limited Partners acknowledge that irreparable damage would be done to the goodwill and reputation of the Partnership if any Limited Partner should bring an action in court to dissolve the Partnership under circumstances where dissolution is not required by Section 8.1. Accordingly, except where the General Partner has failed to cause the liquidation of the Partnership as required by Section 8.1 and except as specifically provided in Section 17-802 of the Act, each Limited Partner hereby to the fullest extent permitted by law waives and renounces his or its right to initiate legal action to seek dissolution of the Partnership or to seek the appointment of a receiver or trustee to wind up the affairs of the Partnership, except in the cases of fraud, violation of law, bad faith, gross negligence, willful misconduct or willful violation of this Agreement. ARTICLE IX ACCOUNTING; BOOKS AND RECORDS 9.1 FISCAL YEAR AND ACCOUNTING METHOD The fiscal year and taxable year of the Partnership shall be the calendar year. The Partnership shall use an accrual method of accounting. 9.2 BOOKS AND RECORDS The Partnership shall maintain at its principal office, or such other office as may be determined by the General Partner, all the following: (a) A current list of the full name and last known business or residence address of each Partner, together with information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each Partner and 24 which each Partner has agreed to contribute in the future, and the date on which each Partner became a Partner of the Partnership; (b) A copy of the Certificate and this Agreement, including any and all amendments to either thereof, together with executed copies of any powers of attorney pursuant to which the Certificate, this Agreement, or any amendments have been executed; (c) Copies of the Partnership's Federal, state, and local income tax or information returns and reports, if any, which shall be retained for at least six fiscal years; (d) The financial statements of the Partnership; and (e) The Partnership's books and records. 9.3 DELIVERY TO PARTNERS; INSPECTION Upon the request of any Limited Partner, for any purpose reasonably related to such Partner's interest as a partner of the Partnership, the General Partner shall cause to be made available to the requesting Partner the information required to be maintained by clauses (a) through (e) of Section 9.2 and such other information regarding the business and affairs and financial condition of the Partnership as any Partner may reasonably request. 9.4 FINANCIAL STATEMENTS The General Partner shall cause to be prepared for the Partners at least annually, at the Partnership's expense, financial statements of the Partnership, and its subsidiaries, prepared in accordance with generally accepted accounting principles and audited by a nationally recognized accounting firm. The financial statements so furnished shall include a balance sheet, statement of income or loss, statement of cash flows, and statement of Partners' equity. In addition, the General Partner shall provide on a timely basis to the Partners monthly and quarterly financial statements, any available internal budgets or forecast or other available financial reports, as well as any reports or notices as are provided by the Partnership, or any of its subsidiaries to any financial institution. 9.5 FILINGS At the Partnership's expense, the General Partner shall cause the income tax returns for the Partnership to be prepared and timely filed with the appropriate authorities and to have prepared and to furnish to each Partner a schedule K-1 and such other information with respect to the Partnership as is necessary (or as may be reasonably requested by a Partner) to enable the Partners to prepare their Federal, state and local income tax returns. The General Partner, at the Partnership's expense, shall also cause to be prepared and timely filed, with appropriate Federal, state and local regulatory and administrative bodies, all reports required to be filed by the Partnership with those entities under then current applicable laws, rules, and regulations. The reports shall be prepared on the accounting or reporting basis required by the regulatory bodies. 25 9.6 NON-DISCLOSURE Each Limited Partner agrees that, except as otherwise consented to by the General Partner in writing, all non-public and confidential information furnished to it pursuant to this Agreement will be kept confidential and will not be disclosed by such Partner, or by any of its agents, representatives, or employees, in any manner whatsoever, in whole or in part, except that (a) each Partner shall be permitted to disclose such information to those of its agents, representatives, and employees who need to be familiar with such information in connection with such Partner's investment in the Partnership (collectively, "REPRESENTATIVES") and are apprised of the confidential nature of such information, (b) each Partner shall be permitted to disclose information to the extent required by law, legal process or regulatory requirements so long as such Partner shall have used its reasonable efforts to first afford the Partnership with a reasonable opportunity to contest the necessity of disclosing such information; provided that each Partner and its Affiliates may disclose any information required to be disclosed under the federal securities laws without affording the Partnership such opportunity, (c) each Partner shall be permitted to disclose such information to possible purchasers of the Partner's Partnership Interest, provided that such prospective purchaser shall execute a suitable confidentiality agreement in a form approved by the General Partner and containing terms not less restrictive than the terms set forth herein, and (d) each Partner shall be permitted to disclose information to the extent necessary for the enforcement of any right of such Partner arising under this Agreement. Each Partner shall be responsible for any breach of this Section 9.6 by any of its Representatives. ARTICLE X MISCELLANEOUS 10.1 WAIVER OF DEFAULT No consent or waiver, express or implied, by the Partnership or a Partner with respect to any breach or default by the Partnership or a Partner under this Agreement shall be deemed or construed to be a consent or waiver with respect to any other breach or default by any party of the same provision or any other provision of this Agreement. Failure on the part of the Partnership or a Partner to complain of any act or failure to act of the Partnership or a Partner or to declare such party in default shall not be deemed or constitute a waiver by the Partnership or the Partner of any rights under this Agreement. 10.2 AMENDMENT OF PARTNERSHIP AGREEMENT (a) Except as otherwise expressly provided elsewhere in this Agreement, this Agreement shall not be altered, modified or changed except by an amendment approved by the General Partner. (b) In addition to any amendments otherwise authorized herein, the General Partner may make any amendments to any of the Schedules to this Agreement from time to time to reflect transfers of Partnership Interests and issuances of additional Partnership Interests. Copies of such amendments shall be delivered to the Partners promptly upon execution thereof. 26 (c) The General Partner shall cause to be prepared and filed any amendment to the Certificate that may be required to be filed under the Act as a consequence of any amendment to this Agreement. (d) Any modification or amendment to this Agreement or the Certificate made in accordance with this Section 10.2 shall be binding on all Partners. 10.3 NOTICES TO TAX MATTERS PARTNERS Any Partner that receives a notice of an administrative proceeding under Section 6233 of the Code relating to the Partnership shall promptly provide Notice to the Tax Matters Partner of the treatment of any Partnership item on such Partner's Federal income tax return that is or may be inconsistent with the treatment of that item on the Partnership's return. Any Partner that enters into a settlement agreement with the Internal Revenue Service or any other government agency or official with respect to any Partnership item shall provide Notice to the Tax Matters Partner of such agreement and its terms within 60 days after the date of such agreement. 10.4 NO THIRD PARTY RIGHTS Except as provided in Section 6.2 and Section 6.3, none of the provisions contained in this Agreement shall be for the benefit of or enforceable by any third parties, including creditors of the Partnership. 10.5 SEVERABILITY In the event any provision of this Agreement is held to be illegal invalid or unenforceable to any extent the legality validity and enforceability of the remainder of this Agreement shall not be affected thereby and shall remain in full force and effect and shall be enforced to the greatest extent permitted by law. 10.6 NATURE OF INTEREST IN THE PARTNERSHIP A Partner's Partnership Interest shall be personal property for all purposes. 10.7 BINDING AGREEMENT The provisions of this Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective heirs, personal representatives, successors and permitted assigns 10.8 HEADINGS The headings of the sections of this Agreement are for convenience only and shall not be considered in construing or interpreting any of the terms or provisions hereof. 27 10.9 WORD MEANINGS The words "herein" "hereinafter", "hereof", and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural, and vice versa unless the context otherwise requires. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". When verbs are used as nouns, the nouns correspond to such verbs and vice-versa. 10.10 COUNTERPARTS This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto notwithstanding that all the parties have not signed the same counterpart. 10.11 ENTIRE AGREEMENT This Agreement contains the entire agreement between the parties hereto and thereto and supersedes all prior writings or agreements with respect to the subject matter hereof. 10.12 PARTITION The Partners agree that the Property is not and will not he suitable for partition Accordingly, each of the Partners hereby irrevocably waives any and all right such Partner may have to maintain any action for partition of any of the Property. No Partner shall have any right to any specific assets of the Partnership upon the liquidation of, or any distribution from, the Partnership. 10.13 GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE This Agreement shall be construed according to and governed by the laws of the State of Delaware without regard to principles of conflict of laws. The parties hereby submit to the exclusive jurisdiction and venue of the Court of Chancery of the State of Delaware and the United States District Court for the Southern District of Texas and of the United States District Court for the District of Delaware, as the case may be, and agree that the Partnership or Partners may, at their option, enforce their rights hereunder in such courts. [SIGNATURE PAGE FOLLOWS] 28 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written GENERAL PARTNER: GP NATURAL RESOURCE PARTNERS LLC By: /s/ Nick Carter --------------------------------- Name: Nick Carter Title: President LIMITED PARTNERS: NEW GAULEY COAL CORPORATION By: /s/ Nick Carter --------------------------------- Name: Nick Carter Title: President WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP By: Western Pocahontas Corporation, its general partner By: /s/ Nick Carter --------------------------------- Name: Nick Carter Title: President GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP By: GNP Management Corporation, its general partner By: /s/ Dwight L. Dunlap --------------------------------- Name: Dwight L. Dunlap Title: Chief Financial Officer ARK LAND COMPANY By: /s/ Steven E. McCurdy --------------------------------- Name: Steven E. McCurdy Title: President 29 SCHEDULE I PARTNERS, CAPITAL CONTRIBUTIONS AND PERCENTAGE INTERESTS GENERAL PARTNER:
INITIAL CAPITAL ACCOUNTS/ CASH GROSS TOTAL CAPITAL PERCENTAGE NAME AND ADDRESS CONTRIBUTED ASSET VALUE CONTRIBUTION INTEREST ---------------- ----------- ----------- ------------ -------- GP Natural Resource Partners LLC $ .01 $0.00 $ .01 .001%
LIMITED PARTNERS:
TOTAL CASH GROSS ASSET CAPITAL PERCENTAGE NAME AND ADDRESS CONTRIBUTED VALUE OF SPLs CONTRIBUTION INTEREST ---------------- ----------- ------------- ------------ -------- New Gauley Coal Corporation $ 18.40 $ 170,534.90 $ 170,553.30 1.8399816% Western Pocahontas Properties Limited Partnership $460.80 $4,270,787.14 $4,271,247.94 46.0795392% Great Northern Properties Limited Partnership $ 98.30 $ 911,064.18 $ 911,162.48 9.8299017% Ark Land Company $422.50 $3,915,815.03 $3,916,237.53 42.2495775%
SCHEDULE I-1 EX-3.8 6 h04228exv3w8.txt 2ND AMENDED TO LIMITED LIABILITY COMPANY AGREEMENT EXHIBIT 3.8 EXECUTION VERSION SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GP NATURAL RESOURCE PARTNERS LLC DATED AS OF OCTOBER 17, 2002 ARTICLE I DEFINITIONS ARTICLE II GENERAL 2.1 Formation........................................................................................ 9 2.2 Principal Office................................................................................. 9 2.3 Registered Office and Registered Agent........................................................... 10 2.4 Purpose of the Company........................................................................... 10 2.5 Date of Dissolution.............................................................................. 10 2.6 Qualification.................................................................................... 10 2.7 Members.......................................................................................... 10 2.8 Reliance by Third Parties........................................................................ 11 ARTICLE III CAPITALIZATION OF THE COMPANY 3.1 Initial Capital Contributions.................................................................... 11 3.2 Additional Capital Contributions................................................................. 11 3.3 Loans............................................................................................ 11 3.4 Maintenance of Capital Accounts.................................................................. 12 3.5 Capital Withdrawal Rights, Interest and Priority................................................. 13 ARTICLE IV DISTRIBUTIONS 4.1 Distributions of Available Cash.................................................................. 13 4.2 Persons Entitled to Distributions................................................................ 13 4.3 Limitations on Distributions..................................................................... 13 ARTICLE V ALLOCATIONS 5.1 Profits.......................................................................................... 13 5.2 Losses........................................................................................... 13 5.3 Regulatory Allocations........................................................................... 14 5.4 Tax Allocations: Code Section 704(c)............................................................. 15 5.5 Change in Percentage Interests................................................................... 16 5.6 Withholding...................................................................................... 16 ARTICLE VI MEMBERS' MEETINGS 6.1 Meetings of Members; Place of Meetings........................................................... 16 6.2 Quorum; Voting Requirement....................................................................... 17 6.3 Proxies.......................................................................................... 17
i 6.4 Action Without Meeting........................................................................... 17 6.5 Notice........................................................................................... 17 6.6 Waiver of Notice................................................................................. 17 ARTICLE VII MANAGEMENT AND CONTROL 7.1 Management by Board of Directors and Executive Officers.......................................... 17 7.2 Board of Directors............................................................................... 18 7.3 Meetings of the Board............................................................................ 19 7.4 Quorum and Acts of the Board..................................................................... 19 7.5 Electronic Communications........................................................................ 20 7.6 Committees of Directors.......................................................................... 20 7.7 Compensation of Directors........................................................................ 20 7.8 Directors as Agents.............................................................................. 21 7.9 Officers; Agents................................................................................. 21 7.10 Specific Matters Requiring Board Approval........................................................ 21 ARTICLE VIII LIABILITY AND INDEMNIFICATION 8.1 Limitation on Liability of Members, Directors and Officers....................................... 23 8.2 Indemnification.................................................................................. 23 ARTICLE IX TRANSFERS OF MEMBERSHIP INTERESTS 9.1 General Restrictions............................................................................. 24 9.2 Permitted Transferees............................................................................ 25 9.3 Substitute Members............................................................................... 26 9.4 Effect of Admission as a Substitute Member....................................................... 27 9.5 Consent.......................................................................................... 27 9.6 Additional Members............................................................................... 27 9.7 Right of First Refusal........................................................................... 27 ARTICLE X DISSOLUTION AND TERMINATION 10.1 Events Causing Dissolution....................................................................... 28 10.2 Final Accounting................................................................................. 28 10.3 Distributions Following Dissolution and Termination.............................................. 29 10.4 Termination of the Company....................................................................... 30 10.5 No Action for Dissolution........................................................................ 30 ARTICLE XI TAX MATTERS 11.1 Tax Matters Member............................................................................... 30
ii 11.2 Certain Authorizations........................................................................... 30 11.3 Indemnity of Tax Matters Member.................................................................. 31 11.4 Information Furnished............................................................................ 31 11.5 Notice of Proceedings, etc....................................................................... 32 11.6 Notices to Tax Matters Member.................................................................... 32 11.7 Preparation of Tax Returns....................................................................... 32 11.8 Tax Elections.................................................................................... 32 11.9 Taxation as a Partnership........................................................................ 32 ARTICLE XII ACCOUNTING AND BANK ACCOUNTS 12.1 Fiscal Year and Accounting Method................................................................ 32 12.2 Books and Records................................................................................ 32 12.3 Delivery to Members; Inspection.................................................................. 33 12.4 Financial Statements............................................................................. 33 12.5 Filings.......................................................................................... 33 12.6 Non-Disclosure................................................................................... 33 ARTICLE XIII MISCELLANEOUS 13.1 Waiver of Default................................................................................ 34 13.2 Amendment........................................................................................ 34 13.3 No Third Party Rights............................................................................ 35 13.4 Severability..................................................................................... 35 13.5 Nature of Interest in the Company................................................................ 35 13.6 Binding Agreement................................................................................ 35 13.7 Headings......................................................................................... 35 13.8 Word Meanings.................................................................................... 35 13.9 Counterparts..................................................................................... 35 13.10 Entire Agreement................................................................................. 35 13.11 Partition........................................................................................ 35 13.12 Governing Law; Consent to Jurisdiction and Venue................................................. 36
iii SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GP NATURAL RESOURCE PARTNERS LLC THIS SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this "AGREEMENT") of GP NATURAL RESOURCE PARTNERS LLC, a Delaware limited liability company (the "COMPANY"), is made and entered into as of the 17th day of October, 2002 by and among the Persons executing this Agreement on the signature pages hereto as a member (together with such other Persons that may hereafter become members as provided herein, referred to collectively as the "MEMBERS" or individually, as a "MEMBER"). WHEREAS, Corbin J. Robertson, Jr. ("CJR") and Ark Land Company, a Delaware corporation ("ARK LAND"), as the Company's initial members, formed the Company on April 9, 2002 as a limited liability company under the Act (as defined below) by causing a certificate of formation of the Company to be filed with the Delaware Secretary of State and made capital contributions to the Company: WHEREAS, CJR and Ark Land entered into that certain Limited Liability Company Agreement of GP Natural Resource Partners LLC dated as of April 9, 2002 (the "ORIGINAL AGREEMENT"); WHEREAS, CJR formed Robertson Coal Management LLC, a Delaware limited liability company ("ROBERTSON COAL MANAGEMENT"), and contributed the entirety of his Membership Interest in the Company to Robertson Coal Management in exchange for all of the limited liability company interests in Robertson Coal Management; WHEREAS, Ark Land and Robertson Coal Management entered into that certain First Amended and Restated Limited Liability Company Agreement of GP Natural Resource Partners LLC dated as of July 12, 2002, which amended and restated the Original Agreement (the "FIRST AMENDED AND RESTATED AGREEMENT"); WHEREAS, Robertson Coal Management and Ark Land desire to enter into this Agreement to amend the First Amended and Restated Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements contained herein, the parties hereto hereby amend the First Amended and Restated Agreement and, as so amended, restate it in its entirety as follows: ARTICLE I DEFINITIONS As used herein, the following terms shall have the following meanings, unless the context otherwise requires: "ACCEPTANCE NOTICE" is defined in Section 9.8(b). "ACT" means the Delaware Limited Liability Company Act. 6 Del. C. Section 18-101, et seq., as amended from time to time. "ADJUSTED CAPITAL ACCOUNT DEFICIT" means with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Taxable Year, after giving effect to the following adjustments: (a) Credit to such Capital Account any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to Regulation Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i)(5); and (b) Debit to such Capital Account the items described in Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "AFFILIATE" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled' have meanings correlative to the foregoing. "AGREEMENT" shall have the meaning set forth in the preamble hereof, as the same may be amended from time to time in accordance with the terms hereof. "ARCH COAL" means Arch Coal, Inc., a Delaware corporation. "ARK LAND" is defined in the recitals hereof. "AUDIT COMMITTEE" is defined in Section 7.6(b). "AUTHORIZED REPRESENTATIVE" is defined in Section 6.1. "AVAILABLE CASH" means, with respect to a fiscal quarter, all cash and cash equivalents of the Company at the end of such quarter less the amount of cash reserves that is necessary or appropriate in the reasonable discretion of the Board to (a) provide for the proper conduct of the business of the Company (including reserves for future capital expenditures and for anticipated future credit needs of the Company) subsequent to such quarter or (b) comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which the Company is a party or by which it is bound or its assets or Property is subject; provided, however, that disbursements made by the Partnership to the Company or cash reserves established, increased or reduced after the expiration of such quarter but on or before the date of determination of Available Cash with respect to such quarter shall be deemed to have 2 been made, established, increased or reduced, for purposes of determining Available Cash, during such quarter if the Board so determines in its reasonable discretion. "BOARD" means the Board of Directors of the Company. "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 with respect to any Member, a separate account established by the Company and maintained for each Member in accordance with Section 3.4 hereof. "CAPITAL CONTRIBUTION" means, with respect to any Member, the amount of money and the initial Gross Asset Value of any Property (other than money) contributed to the Company by such Member with respect to its Membership Interest pursuant to the terms of this Agreement. Any reference in this Agreement to the Capital Contribution of a Member shall include a Capital Contribution of its predecessors in interest. "CERTIFICATE" means the Certificate of Formation of the Company filed with the Secretary of State of Delaware, as amended or restated from time to time. "CJR" is defined in the recitals hereof. "CODE" means the United States Internal Revenue Code of 1986, as amended. "COMPANY" is defined in the preamble hereof. "COMPANY AFFILIATE" is defined in Section 8.2. "COMPENSATION COMMITTEE" is defined in Section 7.6(c). "CONFLICTS COMMITTEE" is defined in the MLP Partnership Agreement. "DEPRECIATION" means, for each Taxable Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Taxable Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Taxable Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such Taxable Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Taxable Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Board. "DIRECTORS" is defined in Section 7.2(a). "ECONOMIC RISK OF LOSS" is defined in Regulation Section 1.752-2(a). 3 "ENCUMBRANCE" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, any defect or imperfection in title, preferential arrangement or restriction, right to purchase, right of first refusal or other burden or encumbrance of any kind other than those imposed by this Agreement. "FIRST AMENDED AND RESTATED AGREEMENT" is defined in the recitals hereof. "FIRST REFUSAL NOTICE" is defined in Section 9.8(a). "GENERAL PARTNER" means the General Partner of the MLP. "GENERAL PARTNER'S PERCENTAGE" means the Percentage Interest as to the General Partner (with respect to its General Partner Interest) as such terms are defined in the MLP Partnership Agreement. "GREAT NORTHERN" means Great Northern Properties Limited Partnership, a Delaware limited partnership. "GROSS ASSET VALUE" means with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows and as otherwise provided in Section 3.2(b): (a) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as reasonably determined by the Board, in a manner that is consistent with Section 7701(g) of the Code; provided, however, that the initial Gross Asset Values of the assets contributed to the Company pursuant to Section 3.1 hereof shall be as set forth in such section or the schedule referred to therein; (b) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the Board, in a manner that is consistent with Section 7701(g) of the Code, as of the following times: (i) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the distribution by the Company to a Member of more than a de minimis amount of Company property other than money as consideration for an interest in the Company; and (iii) the liquidation of the Company within the meaning of Regulation Section l.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (i) and (ii) above shall be made only if the Tax Matters Member reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company. (c) The Gross Asset Value of any Company assets distributed to any Member shall be adjusted to equal the gross fair market value of such asset on the date of distribution as reasonably determined by the Board, in a manner that is consistent with Section 7701(g) of the Code. (d) The Gross Asset Values of any Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Section 734(b) of the Code or Section 743(b) of the Code, but only to the extent that such 4 adjustments are taken into account in determining Capital Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(m) and clause (f) of the definition of Profits and Losses, provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent the Tax Matters Member determines that an adjustment pursuant to the foregoing subparagraph (b) of this definition is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d). If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraphs (a), (b) or (d), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Profits and Losses. "INDEPENDENT DIRECTOR" means a Director who is eligible to serve on the Conflicts Committee (as defined, and provided for in the MLP Partnership Agreement) and is otherwise independent as defined in Sections 303.01(B)(2)(a) and (3) or any successor provisions of the listing standards of the New York Stock Exchange. "INITIAL DIRECTORS" is defined in Section 7.2(a)(i). "LIMITED PARTNERSHIP INTEREST" means a limited partnership interest in the Partnership which refers to all of a limited partner's rights and interests in the Partnership in such Person's capacity as a limited partner thereof, all as provided in the Partnership Agreement and the Delaware Revised Uniform Limited Partnership Act. "LIQUIDATING TRUSTEE" is defined in Section 10.3. "LOSSES" is defined in the definition of "Profits" and "Losses". "MEMBER" OR "MEMBERS" is defined in the preamble hereof. "MEMBERSHIP INTEREST" means a Member's limited liability company interest in the Company, which refers to all of a Member's rights and interests in the Company in such Member's capacity as a Member, all as provided in this Agreement and the Act. "MEMBER NONRECOURSE DEBT" shall have the meaning assigned to the term "partner nonrecourse debt" in Regulation Section 1.704-2(b)(4). "MEMBER NONRECOURSE DEBT MINIMUM GAIN" shall have the meaning assigned to the term "partner nonrecourse debt minimum gain" set forth in Regulation Section 1.704-2(i)(2). "MEMBER NONRECOURSE DEDUCTIONS" shall have the meaning assigned to the term "partner nonrecourse deduction" in Regulation Section 1.704-2(i)(1). "MEMBERSHIP TRANSFER" is defined in Section 9.1(b). "MINIMUM GAIN" is defined in Regulation Section 1.704-2(d). "MLP" means Natural Resource Partners L.P., a Delaware limited partnership. 5 "MLP PARTNERSHIP AGREEMENT" means the First Amended and Restated Agreement of Limited Partnership of Natural Resource Partners L.P., as amended from time to time. "NEW GAULEY" means New Gauley Coal Corporation, a West Virginia corporation. "NONRECOURSE DEDUCTIONS" is defined in Regulation Section 1.704-2(b)(1). "NONRECOURSE LIABILITY" is defined in Regulation Section 1.752-1(a)(2). "NON-SELLING MEMBERS" is defined in Section 9.8(b). "NOTICE" means a writing, containing the information required by this Agreement to be communicated to a party, and shall be deemed to have been received (a) when personally delivered or sent by telecopy, (b) one day following delivery by overnight delivery courier, with all delivery charges prepaid, or (c) on the third Business Day following the date on which it was sent by United States mail, postage prepaid, to such party at the address or fax number, as the case may be, of such party as shown on the records of the Company. "OFFER" is defined in Section 9.8(a). "OFFEROR" is defined in Section 9.8(a). "OFFICER" is defined in Section 7.8. "OMNIBUS AGREEMENT" means the Omnibus Agreement dated as of October 17, 2002 among the Company, the General Partner, the Operating Company, the MLP, Arch Coal, Ark Land, New Gauley, Western Pocahontas, Great Northern and Robertson Coal Management. "OPERATING COMPANY" means NRP (Operating) LLC, a Delaware limited liability company. "OPTIONED INTEREST" is defined in Section 9.8(a). "ORIGINAL AGREEMENT" is defined in the recitals hereof. "PARTNERSHIP" means NRP (GP) LP, a Delaware limited partnership. "PARTNERSHIP AGREEMENT" means the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of the date hereof, by and between the Company, as the general partner, New Gauley, Western Pocahontas, Great Northern, Ark Land, and any other Persons who become partners in the Partnership as provided therein, as amended from time to time in accordance with the terms thereof. "PARTNERSHIP TRANSFER" is defined in Section 9.1(b). "PERCENTAGE INTEREST" of a Member means the aggregate percentage of Membership Interests of such Member set forth on Schedule 1 hereto, as the same may be modified from time to time as provided herein. 6 "PERMITTED TRANSFER" means: (a) a Transfer of all of a Membership Interest by any Member who is a natural person to (i) such Member's spouse, children (including legally adopted children and stepchildren), spouses of children or grandchildren or spouses of grandchildren; (ii) a trust for the benefit of the Member and/or any of the Persons described in clause (i); or (iii) a limited partnership or limited liability company whose sole partners or members, as case may be, are the Member and/or any of the Persons described in clause (i) or clause (ii); provided, that in any of clauses (i), (ii) or (iii), the Member transferring such Membership Interest retains exclusive power to exercise all rights under this Agreement; (b) a Transfer of all of a Membership Interest by any Member to the Company; or (c) a Transfer of all of a Membership Interest by a Member to any Affiliate of such Member; provided, however, that such transfer shall be a Permitted Transfer only so long as such Membership Interest is held by such Affiliate or is otherwise transferred in another Permitted Transfer. Provided, however, that no Permitted Transfer shall be effective unless and until the transferee of the Membership Interest so transferred complies with Section 9.1(b). Except in the case of a Permitted Transfer pursuant to clause (b) above, from and after the date on which a Permitted Transfer becomes effective, the Permitted Transferee of the Membership Interest so transferred shall have the same rights, and shall be bound by the same obligations, under this Agreement as the transferor of such Membership Interest and shall be deemed for all purposes hereunder a Member and such Permitted Transferee shall, as a condition to such Transfer, agree in writing to be bound by the terms of this Agreement. No Permitted Transfer shall conflict with or result in any violation of any judgment, order, decree, statute, law, ordinance, rule or regulation or require the Company, if not currently subject, to become subject, or if currently subject, to become subject to a greater extent, to any statute, law, ordinance, rule or regulation, excluding matters of a ministerial nature that are not materially burdensome to the Company. "PERMITTED TRANSFEREE" means any Person who shall have acquired and who shall hold a Membership Interest pursuant to a Permitted Transfer. "PERSON" means any individual, partnership, corporation, limited liability company, trust, incorporated or unincorporated organization or other legal entity of any kind. "PROFITS" and "LOSSES" means, for each Taxable Year, an amount equal to the Company's net taxable income or loss for a taxable year, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in computing such taxable income or loss), with the following adjustments (without duplication): (a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to such taxable income or loss; 7 (b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulation Section l.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, shall be subtracted from such taxable income or loss; (c) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraphs (b) or (c) of the definition of Gross Asset Value, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; (d) Gain or loss resulting from any disposition of the Property (other than money) with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; (e) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Taxable Year, computed in accordance with the definition of Depreciation; (f) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member's interest in the Company, the amount of such adjustment 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) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and (g) Any items that are allocated pursuant to the Regulatory Allocations shall not be taken into account in computing Profits and Losses. The amounts of the items of Company income, gain, loss or deduction available to be allocated pursuant to the Regulatory Allocations shall be determined by applying rules analogous to those set forth in clauses (a) through (f) hereof. "PROPERTY" means all assets, real or intangible, that the Company may own or otherwise have an interest in from time to time. "REGULATIONS" means the regulations, including temporary regulations, promulgated by the United States Department of Treasury with respect to the Code, as such regulations are amended from time to time, or corresponding provisions of future regulations. "REGULATORY ALLOCATIONS" is defined in Section 5.3(c). "RESTRICTED BUSINESS" is defined in the Omnibus Agreement. 8 "ROBERTSON COAL MANAGEMENT" is defined in the recitals hereof. "SELLING MEMBER" is defined in Section 9.8(a). "SUBSIDIARY" means, with respect to a Person, any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of either (x) the partnership or other similar ownership interest thereof or (y) the stock or equity interest of such partnership, association or other business entity's general partner managing member or other similar controlling Person, is at the time owned or controlled, directly or indirectly, by such Person or one or more Subsidiaries of that Person or a combination thereof. For purposes of this Agreement, with respect to the Company, each of the Partnership and the MLP and each of their respective Subsidiaries, shall be a Subsidiary of the Company. "SUPERMAJORITY" means, with respect to a decision of the Board, the affirmative vote of six of the eight Directors. "TAXABLE YEAR" means the calendar year. "TAX MATTERS MEMBER" is defined in Article 11. "TRANSFER OR TRANSFERRED" means to give, sell exchange, assign, transfer, pledge, hypothecate, bequeath, devise or otherwise dispose of or encumber, voluntarily or involuntarily, by operation of law or otherwise. When referring to a Membership Interest, "Transfer" shall mean the Transfer of such Membership Interest whether of record, beneficially, by participation or otherwise. "WESTERN POCAHONTAS" shall mean Western Pocahontas Properties Limited Partnership, a Delaware limited partnership. ARTICLE II GENERAL 2.1 FORMATION. The name of the Company is GP Natural Resource Partners LLC. The rights and liabilities of the Members shall be as provided in the Act for Members except as provided herein. To the extent that the rights or obligations of any Member are different by reason of any provision of this Agreement than they would be in the absence of such provision, to the extent permitted by the Act, this Agreement shall control. 2.2 PRINCIPAL OFFICE. The principal office of the Company shall be located at 601 Jefferson Street, Suite 3600, Houston, Texas 77002 or at such other place(s) as the Board may determine from time to time. 9 2.3 REGISTERED OFFICE AND REGISTERED AGENT. The location of the registered office and the name of the registered agent of the Company in the State of Delaware shall be as stated in the Certificate or as determined from time to time by the Board. 2.4 PURPOSE OF THE COMPANY. The Company's purposes, and the nature of the business to be conducted and promoted by the Company, are (a) to act as the general partner of the Partnership in accordance with the terms of the Partnership Agreement, (b) as general partner of the Partnership, to manage the MLP on behalf of the Partnership, in its capacity as general partner of the MLP and (c) to engage in any and all activities necessary, advisable, convenient or incidental to the foregoing. 2.5 DATE OF DISSOLUTION. The Company shall have perpetual existence unless the Company is dissolved pursuant to Article 10 hereof. The existence of the Company as a separate legal entity shall continue until cancellation of the Certificate in the manner required by the Act. 2.6 QUALIFICATION. The Chief Executive Officer, the President and Chief Operating Officer, any Vice President, the Secretary and any Assistant Secretary of the Company is hereby authorized to qualify the Company to do business as a foreign limited liability company in any jurisdiction in which the Company may wish to conduct business and each is hereby designated as an authorized person, within the meaning of the Act, to execute, deliver and file any amendments or restatements of the Certificate and any other certificates and any amendments or restatements thereof necessary for the Company to so qualify to do business in any such state or territory. 2.7 MEMBERS. (a) Powers of Members. The Members shall have the power to exercise any and all rights or powers granted to the Members pursuant to the express terms of this Agreement. Except as expressly provided herein, the Members shall have no power to bind the Company and no authority to act on behalf of the Company. (b) Partition. Each Member waives any and all rights that it may have to maintain an action for partition of the Company's Property. (c) Resignation. Except upon a Transfer of all of its Membership Interest in accordance with this Agreement, a Member may not resign from the Company prior to the dissolution and winding up of the Company. A Member ceases to be a Member only upon: (i) a Permitted Transfer of all of such Member's Membership Interest and the transferee's admission as a substitute Member, all in accordance with the terms of this Agreement, or (ii) completion of dissolution and winding up of the Company pursuant to Article 10. (d) Ownership. Each Member shall be entitled to receive a Membership Interest in exchange for a Capital Contribution. Each Membership Interest shall correspond to a "limited liability company interest" as is provided in the Act. The Company shall be the owner of the Property. No Member shall have any ownership interest or right in the Property, including Property conveyed by a Member to the Company, except indirectly by virtue of a Member's ownership of a Membership Interest. 10 2.8 RELIANCE BY THIRD PARTIES. Except with respect to certain tax matters, Persons dealing with the Company shall be entitled to rely conclusively upon the power and authority of an Officer. ARTICLE III CAPITALIZATION OF THE COMPANY 3.1 INITIAL CAPITAL CONTRIBUTIONS. On April 9, 2002 in connection with the formation of the Company, CJR made an initial Capital Contribution to the Company of $577.50, and Ark Land made an initial Capital Contribution to the Company of $422.50. On July 9, 2002, in connection with the formation of Robertson Coal Management, CJR transferred the entirety of his Membership Interest in the Company to Robertson Coal Management. The initial Percentage Interest of the Members following such Capital Contributions are as set forth on Schedule 1 hereto, which shall be amended from time to time in accordance with the terms hereof (including, but not limited to, upon the making of additional Capital Contributions pursuant to Section 3.2(b)) to reflect appropriate adjustments to such Percentage Interests and Capital Contributions. 3.2 ADDITIONAL CAPITAL CONTRIBUTIONS. (a) Except for Capital Contributions from each Member in proportion to such Member's then outstanding Percentage Interest in respect of the General Partner's Percentage for equity issuances by the MLP, and for equity issuances approved pursuant to Section 7.10(b)(v), no Member shall be required to make any additional Capital Contribution. (b) Subject to the approval of a Supermajority of the Board pursuant to Section 7.10, the Company may offer additional Membership Interests to any Person. If any additional Capital Contributions are made by Members but not in proportion to their respective Percentage Interests, the Percentage Interest of each Member shall be adjusted such that each Member's revised Percentage Interest determined immediately following each such additional Capital Contribution shall be equal to a fraction (i) the numerator of which is the sum of (A) the positive Capital Account balance of the Member determined immediately preceding the date such additional Capital Contribution is made (such Capital Account to be computed by adjusting the book value for Capital Account purposes of each Company asset to equal its Gross Asset Value as of such date, as provided in subparagraph (b) of the definition herein of "GROSS ASSET VALUE"), and (B) such additional Capital Contribution, if any, made by such Member, and (ii) the denominator of which is the sum of the positive Capital Account balances immediately preceding the date such additional Capital Contribution is made plus additional Capital Contributions of all Members on the date of such additional Capital Contribution, including Capital Contributions of any new Members (in each case calculated as provided in (i) above). The names, addresses and Capital Contributions of the Members shall be reflected in the books and records of the Company. 3.3 LOANS. (a) No Member shall be obligated to loan funds to the Company. Loans by a Member to the Company shall not be considered Capital Contributions. The amount of any such 11 loan shall be a debt of the Company owed to such Member in accordance with the terms and conditions upon which such loan is made. (b) A Member may (but shall not be obligated to) guarantee a loan made to the Company. If a Member guarantees a loan made to the Company and is required to make payment, pursuant to such guarantee, to the maker of the loan, then the amounts so paid to the maker of the loan shall be treated as a loan by such Member to the Company and not as an additional Capital Contribution. 3.4 MAINTENANCE OF CAPITAL ACCOUNTS. (a) The Company shall maintain for each Member a separate Capital Account with respect to the Membership Interest owned by such Member in accordance with the following provisions: (i) To each Member's Capital Account there shall be credited (A) such Member's Capital Contributions, (B) such Member's share of Profits and any items in the nature of income or gain which are allocated to such Member pursuant to the Regulatory Allocations and (C) the amount of any Company liabilities assumed by such Member or which are secured by any Property distributed to such Member. The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed to the Company by the maker of the note (or a Member related to the maker of the note within the meaning of Regulation Section l.704-1(b)(2)(ii)(c)) shall not be included in the Capital Account of any Member until the Company makes a taxable disposition of the note or until (and only to the extent) principal payments are made on the note, all in accordance with Regulation Section 1 .704-1(b)(2)(iv)(d)(2); (ii) To each Member's Capital Account there shall be debited (A) the amount of money and the Gross Asset Value of any Property distributed or treated as an advance distribution to such Member pursuant to any provision of this Agreement (including without limitation any distributions pursuant to Section 4.1), (B) such Member's share of Losses and any items in the nature of deduction or loss which are allocated to such Member pursuant to the Regulatory Allocations and (C) the amount of any liabilities of such Member assumed by the Company or which are secured by any Property contributed by such Member to the Company; (iii) In the event Membership Interests are Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent such Capital Account relates to the Transferred Membership Interests; (iv) In determining the amount of any liability for purposes of Sections 3.4(a)(i) and (ii) there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations; and (b) The foregoing Section 3.4(a) and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulation Section 1.704-1(b) and, to the greatest extent practicable, shall be interpreted and applied in a manner 12 consistent with such Regulation. The Board in its discretion and to the extent otherwise consistent with the terms of this Agreement shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of capital reflected on the Company's balance sheet, as computed for book purposes, in accordance with Regulation Section l.704-l(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulation Section 1.704-1(b). 3.5 CAPITAL WITHDRAWAL RIGHTS, INTEREST AND PRIORITY. Except as expressly provided in this Agreement, no Member shall be entitled to (a) withdraw or reduce such Member's Capital Contribution or to receive any distributions from the Company, or (b) receive or be credited with any interest on the balance of such Member's Capital Contribution at any time. An unrepaid Capital Contribution is not a liability of the Company or of any Member. ARTICLE IV DISTRIBUTIONS 4.1 DISTRIBUTIONS OF AVAILABLE CASH. An amount equal to 100% of Available Cash with respect to each fiscal quarter of the Partnership shall be distributed simultaneously to the Members in proportion to their relative Percentage Interests within forty-five days after the end of such quarter. 4.2 PERSONS ENTITLED TO DISTRIBUTIONS. All distributions of Available Cash to Members for a fiscal quarter pursuant to Section 4.1 shall be made to the Members shown on the records of the Company to be entitled thereto as of the last day of such quarter, unless the transferor and transferee of any Membership Interest otherwise agree in writing to a different distribution and such distribution is consented to in writing by the Board. 4.3 LIMITATIONS ON DISTRIBUTIONS. Notwithstanding any provision of this Agreement to the contrary, no distributions shall be made except pursuant to this Article 4 or Article 10. (b) Notwithstanding any provision of this Agreement to the contrary, no distribution hereunder shall be permitted if such distribution would violate Section 18-607 of the Act or other applicable law. ARTICLE V ALLOCATIONS 5.1 PROFITS. Profits for any Taxable Year shall be allocated: (a) first, to those Members to which Losses have previously been allocated pursuant to Section 5.2(c) hereof so as to bring each such Member's Capital Account to zero, pro rata in accordance with the sum of each such Member's Losses; and (b) second, any remaining Profits shall be allocated among the Members in proportion to their respective Percentage Interests. 5.2 LOSSES. Losses for any Taxable Year shall be allocated: 13 (a) first, to the Members to which Profits have previously been allocated pursuant to Section 5.1(b) to the extent of such Profits; (b) second, to Members in proportion to their positive Capital Account balances until such Capital Account balances have been reduced to zero; and (c) third, any remaining Losses shall be allocated among the Members in proportion to their respective Percentage Interests. 5.3 REGULATORY ALLOCATIONS. The following allocations shall be made in the following order: (a) Nonrecourse Deductions. Nonrecourse Deductions shall be allocated to the Members in accordance with their Percentage Interests. (b) Member Nonrecourse Deductions. Member Nonrecourse Deductions attributable to Member Nonrecourse Debt shall be allocated to the Members bearing the Economic Risk of Loss for such Member Nonrecourse Debt as determined under Regulation Section 1.704-2(b)(4). If more than one Member bears the Economic Risk of Loss for such Member Nonrecourse Debt, the Member Nonrecourse Deductions attributable to such Member Nonrecourse Debt shall be allocated among the Members according to the ratio in which they bear the Economic Risk of Loss. This Section 5.03(b) is intended to comply with the provisions of Regulation Section 1.704-2(i) and shall be interpreted consistently therewith. (c) Minimum Gain Chargeback. Notwithstanding any other provision hereof to the contrary, if there is a net decrease in Minimum Gain for a Taxable Year (or if there was a net decrease in Minimum Gain for a prior Taxable Year and the Company did not have sufficient amounts of income and gain during prior years to allocate among the Members under this Section 5.03(c)), items of income and gain shall be allocated to each Member in an amount equal to such Member's share of the net decrease in such Minimum Gain (as determined pursuant to Regulation Section 1.704-2(g)(2)). This Section 5.03(c) is intended to constitute a minimum gain chargeback under Regulation Section 1.704-2(f) and shall be interpreted consistently therewith. (d) Member Minimum Gain Chargeback. Notwithstanding any provision hereof to the contrary except Section 5.03(c) (dealing with Minimum Gain), if there is a net decrease in Member Nonrecourse Debt Minimum Gain for a Taxable Year (or if there was a net decrease in Member Nonrecourse Debt Minimum Gain for a prior Taxable Year and the Company did not have sufficient amounts of income and gain during prior years to allocate among the Members under this Section 5.03(d)), items of income and gain shall be allocated to each Member in an amount equal to such Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain (as determined pursuant to Regulation Section 1.704-2(i)(4)). This Section 5.03(d) is intended to constitute a partner nonrecourse debt minimum gain chargeback under Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (e) Gross Income Allocation. In the event any Member has an Adjusted Capital Account Deficit at the end of any Taxable Year, such Member shall be specially allocated items of Company income and gain in the amount of such deficit balance as quickly as possible; 14 provided, that an allocation pursuant to this Section 5.3(e) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit balance after all other allocations provided for in this Article 5 have been made. (f) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Regulation Sections 1.704-l(b)(2)(ii)(d)(4), 1.704-l(b)(2)(ii)(d)(5) or 1.704-l(b)(2)(ii)(d)(6), items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided, that an allocation pursuant to this Section 5.3(f) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article 5 have been made. (g) Curative Allocations. The allocations set forth in Sections 5.3(a), (b), (c), (d), (e) and (f) hereof (the "REGULATORY ALLOCATIONS") are intended to comply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 5.3(g). Therefore, notwithstanding any other provision of this Article 5 (other than the Regulatory Allocations), the Board shall make such offsetting special allocations of income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement and all such items were allocated pursuant to Sections 5.1 and 5.2 without regard to the Regulatory Allocations. 5.4 TAX ALLOCATIONS: CODE SECTION 704(C). (a) Except as otherwise provided herein, for federal income tax purposes, (i) each item of income, gain, loss and deduction shall be allocated among the Members in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Sections 5.1 and 5.2, and (ii) each tax credit shall be allocated to the Members in the same manner as the receipt or expenditure giving rise to such credit is allocated pursuant to Section 5.1 or 5.2. (b) In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any Property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such Property to the Company for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition herein of "GROSS ASSET VALUE"). The Company shall use the remedial method of allocations specified in Regulation Section 1.704-3(d) or successor regulations, unless otherwise required by law, with respect to the initial contribution set forth on Schedule 1. (c) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraph (b) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the 15 adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. (d) Any elections or other decisions relating to such allocations shall be made by the Board in any manner that reasonably reflects the purpose and intention of this Agreement; provided, that the Company, in the discretion of the Board, may make, or not make, "curative" or "remedial" allocations (within the meaning of the Regulations under Code Section 704(c)) including, but not limited to "curative" allocations which offset the effect of the "ceiling rule" for a prior Taxable Year (within the meaning of Regulation Section 1.704-3(c)(3)(ii)) and "curative" allocations from disposition of contributed property (within the meaning of Regulation Section 1.704-3(c)(3)(iii)(B)). Allocations pursuant to this Section 5.4 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. 5.5 CHANGE IN PERCENTAGE INTERESTS. In the event that the Members' Percentage Interests change during a Taxable Year, Profits and Losses shall be allocated taking into account the Members' varying Percentage Interests for such Taxable Year, determined on a daily, monthly or other basis as determined by the Board, using any permissible method under Code Section 706 and the Regulations thereunder. 5.6 WITHHOLDING. Each Member hereby authorizes the Company to withhold from income or distributions allocable to such Member and to pay over any taxes payable by the Company or any of its Affiliates as a result of such Member's participation in the Company; if and to the extent that the Company shall be required to withhold any such taxes, such Member shall be deemed for all purposes of this Agreement to have received a distribution from the Company as of the time such withholding is required to be paid, which distribution shall be deemed to be a distribution to such Member to the extent that the Member is then entitled to receive a distribution. To the extent that the aggregate of such distributions in respect of a Member for any period exceeds the distributions to which such Member is entitled for such period, the amount of such excess shall be considered a demand loan from the Company to such Member, with interest at the rate of interest per annum that Citibank, N.A., or any successor entity thereto, announces from time to time as its prime lending rate, which interest shall be treated as an item of Company income, until discharged by such Member by repayment, which may be made in the sole discretion of the Board out of distributions to which such Member would otherwise be subsequently entitled. The withholdings referred to in this Section 5.6 shall be made at the maximum applicable statutory rate under applicable tax law unless the Board shall have received an opinion of counsel or other evidence, satisfactory to the Board, to the effect that a lower rate is applicable, or that no withholding is applicable. ARTICLE VI MEMBERS' MEETINGS 6.1 MEETINGS OF MEMBERS; PLACE OF MEETINGS. Regular meetings of the Members shall be held on an annual basis or more frequently as determined by the Members or the Board. All meetings of the Members shall be held at a location either within or outside the State of Delaware as designated from time to time by the Board and stated in the Notice of the meeting or 16 in a duly executed waiver of the Notice thereof. Special meetings of the Members may be held for any purpose or purposes, unless otherwise prohibited by law, and may be called by the Board or by any Member. A Member expecting to be absent from a meeting shall be entitled to designate in writing (or orally; provided, that such oral designation is later confirmed in writing) a proxy (an "AUTHORIZED REPRESENTATIVE") to act on behalf of such Member with respect to such meeting (to the same extent and with the same force and effect as the Member who has designated such Authorized Representative). Such Authorized Representative shall have full power and authority to act and take actions or refrain from taking actions as the Member by whom such Authorized Representative has been designated. Members and Authorized Representatives may participate in a meeting of the Members by means of conference telephone or other similar communication equipment whereby all Members or Authorized Representatives participating in the meeting can hear each other. Participation in a meeting in this manner shall constitute presence in person at the meeting, except when a Member or Authorized Representative participates for the express purpose of objecting to the transaction of any business on the ground that the meeting was not lawfully called or convened. 6.2 QUORUM; VOTING REQUIREMENT. The presence, in person or by proxy, of a majority of the Members (but if there are less than three Members, all Members) shall constitute a quorum for the transaction of business by the Members. The affirmative vote of all of the Members present at a meeting shall constitute a valid decision of the Members. 6.3 PROXIES. At any meeting of the Members, every Member having the right to vote thereat shall be entitled to vote in person or by proxy appointed by an instrument in writing signed by such Member and bearing a date not more than one year prior to the date of such meeting. 6.4 ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of Members of the Company may be taken without a meeting, without prior Notice and without a vote if a consent in writing setting forth the action so taken is signed by all of the Members. 6.5 NOTICE. Notice stating the place, day and hour of the meeting of Members and the purpose for which the meeting is called shall be delivered personally or sent by mail or by telecopier not less than two Business Days nor more than 60 days before the date of the meeting by or at the direction of the Board or other Persons calling the meeting, to each Member entitled to vote at such meeting. 6.6 WAIVER OF NOTICE. When any Notice is required to be given to any Member hereunder, a waiver thereof in writing signed by the Member, whether before, at or after the time stated therein, shall be equivalent to the giving of such Notice. ARTICLE VII MANAGEMENT AND CONTROL 7.1 MANAGEMENT BY BOARD OF DIRECTORS AND EXECUTIVE OFFICERS. Except as delegated to the executive officers appointed pursuant to Section 7.9 hereof or as otherwise provided hereunder, the business and affairs of the Company shall be managed by or under the 17 direction of the Board. The Directors and executive officers shall collectively constitute "managers" of the Company within the meaning of the Act. Except as otherwise specifically provided in this Agreement, the authority and functions of the Board, on the one hand, and the executive officers, on the other hand, shall be identical to the authority and functions of the board of directors and officers, respectively, of a corporation organized under the General Corporate Law of the State of Delaware. The executive officers shall be vested with such powers and duties as are set forth in Section 7.9 hereof and as may be further specified by the Board from time to time. Accordingly, except as otherwise specifically provided in this Agreement, the business and affairs of the Company shall be managed under the direction of the Board, and the day-to-day activities of the Company shall be conducted on the Company's behalf by the executive officers who shall be agents of the Company. In addition to the powers and authorities expressly conferred on the Board by this Agreement, the Board may exercise all such powers of the Company and do all such acts and things as are not restricted by the Act, this Agreement or applicable law. 7.2 BOARD OF DIRECTORS. (a) The Board shall consist of eight individuals designated as directors of the Company (the "DIRECTORS") as follows: (i) Robertson Coal Management shall be entitled to designate five Directors, two of whom shall be Independent Directors and (ii) Ark Land shall be entitled to designate three Directors, one of whom shall be an Independent Director. As of the date hereof, the Directors shall be the individuals set forth on Schedule 7.2 to this Agreement (the "INITIAL DIRECTORS"), each to hold office until his or her successor is elected pursuant to this Section 7.2(a) or until his or her earlier death, resignation or removal. The Independent Directors shall be appointed as soon as possible following the date of this Agreement. A Member shall assign its right to designate Directors (including Independent Directors) in connection with the transfer of all of such Member's Membership Interest in compliance with the provisions of Article IX. (b) At each annual meeting of the Members and at each special meeting of the Members called for the purpose of electing Directors, each Member shall be entitled to designate the number of Directors as set forth in Section 7.2(a). Each Member shall cooperate with respect to calling and attending meetings of Members and electing the Directors designated by the Members, including voting in favor of Directors designated pursuant to Section 7.2(a) and any replacement Directors pursuant to Section 7.2(c); provided, that the failure to hold any such meetings shall not limit or eliminate a Member's right to designate Directors pursuant to Section 7.2(a). The initial term of the Initial Directors, and any successors thereto, shall expire on the first anniversary of the date hereof. Thereafter, Directors shall be elected to serve annual terms expiring on the date of the annual meeting of Members following such election. Each Director shall hold office until his or her successor is elected pursuant to this Section 7.2(a) or until his or her earlier death, resignation or removal. (c) Any individual designated by a Member as a Director (other than Independent Directors) may be removed at any time, with or without cause, only by such designating Member, and the Members shall cooperate with respect to such removal, including voting in favor of such removal. Persons elected as an Independent Director may be removed at any time, 18 with or without cause, by a vote of a Supermajority of the Board. In the event of the death, resignation or removal of a Director (including an Independent Director), the Member that designated such Director may designate a replacement Director. (d) Notwithstanding the foregoing, if at any time the Minority Sponsor or any of its Affiliates (each term used as defined in the Omnibus Agreement for purposes of this 7.2(d) only) is required by Section 2.1(b)(ii) of the Omnibus Agreement to cause its Directors to resign from the Board, (i) the Minority Sponsor shall immediately deliver a Notice to the Members informing them of such event, and from such time the Minority Sponsor shall have no further right to designate any Directors to the Board, (ii) each Director (other than the Independent Director) designated by the Minority Sponsor shall immediately deliver a letter of resignation to the Members and (iii) Robertson Coal Management shall convene a special meeting of the Members to fill the vacancies on the Board. The Independent Director designated by the Minority Sponsor shall deliver a letter of resignation immediately prior to the next annual meeting. Thereafter, at each annual or special meeting of the Members called for the purpose of electing Directors (or with respect to any action to elect Directors taken by consent pursuant to Section 6.4), Robertson Coal Management shall be entitled to designate all of the Directors (including the Independent Directors); provided, however, if the Minority Sponsor or its Affiliate divests itself of its interest in the Restricted Business and Section 2.1(b)(ii) of the Omnibus Agreement is no longer applicable, at the next annual meeting of the Members called for the purpose of electing Directors (or with respect to any action to elect Directors taken by consent pursuant to Section 6.4) and thereafter, the Minority Sponsor shall again have the right to designate Directors (including Independent Directors). 7.3 MEETINGS OF THE BOARD. The Board may hold meetings, both regular and special, within or outside the State of Delaware. Regular meetings of the Board may be called by the Chief Executive Officer or two or more of the Directors upon delivery of written Notice at least 10 days prior to the date of such meeting. Special meetings of the Board may be called at the request of the Chief Executive Officer or any two or more of the Directors upon delivery of written Notice sent to each other Director, such notice to be received at least 24 hours prior to the time of such meeting. Notwithstanding anything contained herein to the contrary, such Notice may be telephonic if no other reasonable means are available. Such Notices shall be accompanied by a proposed agenda or statement of purpose. A Director expecting to be absent from a meeting shall be entitled to designate in writing (or orally; provided, that such oral designation is later confirmed in writing) an Authorized Representative to act on behalf of such Director with respect to such meeting (to the same extent and with the same force and effect as the Director who has designated such Authorized Representative). Such Authorized Representative shall have full power and authority to act and take actions or refrain from taking actions as the Director by whom such Authorized Representative has been designated. 7.4 QUORUM AND ACTS OF THE BOARD. A majority of the Directors shall constitute a quorum for the transaction of business at all meetings of the Board, and, except as otherwise provided in this Agreement, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board. If a quorum shall not be present at any meeting of the Board, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may 19 be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 7.5 ELECTRONIC COMMUNICATIONS. Members of the Board and their Authorized Representatives, or any committee designated by the Board, may participate in a meeting of the Board or any committee thereof by means of conference telephone or similar communications equipment through which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. If all the participants are participating by conference telephone or similar communications equipment, the meeting shall be deemed to be held at the Company's principal place of business. 7.6 COMMITTEES OF DIRECTORS. (a) The Board may establish committees of the Board and may delegate certain of its responsibilities to such committees. (b) The Board shall have an audit committee comprised of three Directors (the "AUDIT COMMITTEE"), all of whom shall be Independent Directors. Such Audit Committee shall establish a written audit committee charter in accordance with the rules of the New York Stock Exchange, Inc. (the "NYSE"), as amended from time to time. (c) The Board shall have a Conflicts Committee comprised of three Directors, all of whom shall be Independent Directors. Such Conflicts Committee shall act in accordance with the provisions of the MLP Partnership Agreement. Any matter approved by the Conflicts Committee in the manner provided for in the MLP Partnership Agreement shall be conclusively deemed to be fair and reasonable to the General Partner and to the MLP, and not a breach by the Company of any fiduciary or other duties owed to the General Partner or to the MLP by the Company. (d) The Board shall have a compensation committee comprised of three Directors (the "COMPENSATION COMMITTEE"). The Compensation Committee shall be charged with setting compensation for officers of the Company, as well as administering any incentive plans put in place by the Company. (e) A majority of any committee may determine its action and fix the time and place of its meetings unless the Board shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Section 7.3. The Board shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not Directors; provided, however, that no such committee shall have or may exercise any authority of the Board. 7.7 COMPENSATION OF DIRECTORS. Each Director shall be entitled to reimbursement from the Company for all reasonable direct out-of-pocket expenses incurred by such Director in connection with attending Board and committee meetings and such compensation as may be approved by the Members. 20 7.8 DIRECTORS AS AGENTS. No Director, in such capacity, acting singly or with any other Director, shall have any authority or right to act on behalf of or bind the Company other than by exercising the Director's voting power as a member of the Board, unless specifically authorized by the Board in each instance. 7.9 OFFICERS; AGENTS. The Board shall have the power to appoint any Person or Persons as the Company's officers (the "OFFICERS") to act for the Company and to delegate to such Officers such of the powers as are granted to the Board hereunder. Any decision or act of an Officer within the scope of the Officer's designated or delegated authority shall control and shall bind the Company (and any business entity for which the Company exercises direct or indirect executory authority). The Officers may have such titles as the Board shall deem appropriate, which may include (but need not be limited to) Chairman of the Board, President, Chief Executive Officer, Vice President, Chief Operating Officer, Chief Financial Officer, Treasurer, Controller or Secretary. A Director may be an Officer. The initial Officers are set forth on Schedule 7.9. Any one person may hold one or more offices. Unless the authority of an Officer is limited by the Board, any Officer so appointed shall have the same authority to act for the Company as a corresponding officer of a Delaware corporation would have to act for a Delaware corporation in the absence of a specific delegation of authority. The Officers shall hold office until their respective successors are chosen and qualify or until their earlier death, resignation or removal. Any Officer elected or appointed by the Board may be removed at any time by the affirmative vote of a majority of the Board. Any vacancy occurring in any office of the Company shall be filled by a majority of the Board. 7.10 SPECIFIC MATTERS REQUIRING BOARD APPROVAL. (a) Without the prior approval of the Board, the Company shall not, and shall not permit the Partnership to, effect any: (i) except for distributions of Available Cash pursuant to Section 4.1 and distributions pursuant to Section 10.3, and distributions required or permitted pursuant to the Partnership Agreement (as amended from time to time in accordance with the terms thereof), declaration or payment of any dividends or other distributions on the Membership Interests, partnership interests, capital stock or other debt or equity securities by the Company or the Partnership, including, without limitation, any dividend or other distribution by means of a redemption or repurchase of such securities; (ii) (a) incurrence of any indebtedness by the Company or the Partnership, (b) the assumption, incurrence, or undertaking by the Company or the Partnership of, or the grant by the Company or the Partnership of any security (other than a pledge of substantially all of the properties or assets of the Company or the Company and any of its Subsidiaries taken as a whole) for, any financial commitment of any type whatsoever, including without limitation, any purchase, sale, lease, loan, contract, borrowing or expenditure, or (c) the lending of money by the Company or the Partnership to, or the guarantee by the Company or the Partnership of the debts of, any other Person; 21 (iii) capital expenditures, or commitment to make capital expenditures, in excess of 15% of the amount budgeted for capital expenditures in any fiscal year by the Company or the Partnership; or (iv) any repurchase or redemption by the Company of any of its Membership Interests, or other debt or equity securities or any repurchase or redemption by the Partnership of any of its partnership interests, or other debt or equity securities. (b) Without the prior approval of a Supermajority of the Board, the Company shall not, and shall not permit any of its Subsidiaries to, effect any: (i) merger, consolidation or share exchange into or with any other Person, or any other similar business combination transaction (other than any such transaction entered into solely between the Company and any of its Subsidiaries or among any of them) involving the Company or any of its Subsidiaries or financial restructuring of the Company or the Partnership; provided, however, that in the event not all Members (or their Affiliates in the case of the Partnership, if applicable) receive identical consideration, whether in their capacity as a Member or as a limited partner of the Partnership, both in form and amount (in proportion to their Membership Interests or Limited Partner Interests, as the case may be) in such transaction, such transaction shall require the prior written consent of any Member (or such Member's Affiliate in the case of the Partnership, if applicable) receiving consideration that differs from the consideration to be received by the other Member(s) or limited partners, as applicable; (ii) voluntary filing for bankruptcy, liquidation, dissolution or winding up of the Company or any of its Subsidiaries or any event that would cause a dissolution or winding up of the Company or any of its Subsidiaries or any consent by the Company or any of its Subsidiaries to any action brought by any other Person relating to any of the foregoing; (iii) amendment or repeal of the Certificate, the Partnership Agreement or the Partnership's certificate of limited partnership; (iv) sale, lease, transfer, pledge or other disposition of all or substantially all of the properties or assets of the Company or the Company and any of its Subsidiaries taken as a whole, other than sales, leases, transfers, pledges or other dispositions of assets in the ordinary course of business or as security for the indebtedness incurred pursuant to any credit agreement or any indenture; (v) other than equity securities issued upon exercise of convertible securities subsequently approved pursuant to this Section 7.10, authorization, sale and/or issuance by the Company or the Partnership of any of their respective Membership Interests, partnership interests, capital stock, or other equity securities, whether in a private or public offering, including an initial public offering, or the grant, sale or issuance of other securities (including rights, warrants and options) convertible into, exchangeable for or exercisable for any of their respective Membership Interests, partnership interests, capital 22 stock, or other equity securities, whether or not presently convertible, exchangeable or exercisable; and (vi) admission of any person as an additional member of the Company pursuant to Section 9.6 hereof. ARTICLE VIII LIABILITY AND INDEMNIFICATION 8.1 LIMITATION ON LIABILITY OF MEMBERS, DIRECTORS AND OFFICERS. No Member (when not acting in violation of this Agreement or applicable law), Director or Officer shall have any liability to the Company or the Members for any losses sustained or liabilities incurred as a result of any act or omission of such Member, Director or Officer in connection with the conduct of the business of the Company if, in the case of an Officer, the Officer acted in a manner he or she reasonably believed to be in, or not opposed to, the interests of the Company or applicable law and to be within the scope of his or her authority and, in the case of a Member (when not acting in violation of this Agreement or applicable law), Director or Officer, the conduct did not constitute bad faith, fraud, gross negligence or willful misconduct. To the fullest extent permitted by Section 18-1101(c) of the Act, a Director (other than Independent Directors) in performing his or her obligations under this Agreement, shall be entitled to act or omit to act at the direction of the Member who designated such Director, considering only such factors, including the separate interests of the designating Member, as such Director or the designating Member chooses to consider, and any action of a Director or failure to act, taken or omitted in good faith reliance on the foregoing provisions of this Section 8.1 shall not constitute a breach of any duty including any fiduciary duty on the part of the Director or designating Member to the Company or any other Member or Director. Except as required by the Act, the Company's debts, obligations, and liabilities, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Officer, Member or Director shall be personally responsible for any such debt, obligation or liability of the Company solely by reason of being an Officer, Member or Director. No Member shall be responsible for any debts, obligations or liabilities, whether arising in contract, tort or otherwise, of any other Member. 8.2 INDEMNIFICATION. (a) The Company shall indemnify and hold harmless the Members (when not acting in violation of this Agreement or applicable law), Directors and Officers (individually a "COMPANY AFFILIATE") from and against any and all losses, claims, demands, costs, damages, liabilities, expenses of any nature (including reasonable attorneys' fees and disbursements), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, in which a Company Affiliate may be involved, or threatened to be involved, as a party or otherwise, arising out of or incidental to the business of the Company, regardless of whether a Company Affiliate continues to be a Company Affiliate at the time any such liability or expense is paid or incurred, if, in the case of an Officer, such Officer acted in a manner he or she reasonably believed to be in, or not opposed to, the interests of the Company or applicable law and to be in the scope of his or her authority and, in the case of a Member (when not acting in violation of this Agreement or applicable law), Director or Officer, the conduct of the Member, Director or Officer did not 23 constitute fraud, bad faith, gross negligence or willful misconduct and with respect to any criminal proceeding, had no reason to believe his, her or its conduct was unlawful. (b) Expenses incurred by a Company Affiliate in defending any claim, demand, action, suit or proceeding subject to Section 8.2(a) shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Company Affiliate to repay such amounts if it is ultimately determined that the Company Affiliate is not entitled to be indemnified as authorized in this Section 8.2. (c) The indemnification provided by this Section 8.2 shall be in addition to any other rights to which a Company Affiliate may be entitled pursuant to any approval of the Board, as a matter of law or equity, or otherwise, and shall continue as to a Company Affiliate who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns, and administrators of such Company Affiliate. The Company shall not be required to indemnify any Member in connection with any losses, claims, demands, actions, disputes, suits or proceedings, of any Member against any other Member. (d) The Company may purchase and maintain directors and officers insurance or similar coverage for its Directors and Officers in such amounts and with such deductibles or self-insured retentions as determined in the sole discretion of the Board. (e) Any indemnification hereunder shall be satisfied only out of the assets of the Company, and the Members shall not be subject to personal liability by reason of the indemnification provisions under this Section 8.2. (f) A Company Affiliate shall not be denied indemnification in whole or in part under this Section 8.2 because the Company Affiliate 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 and all material facts relating to such indemnitee's interest were adequately disclosed to the Board at the time the transaction was consummated. (g) Subject to Section 8.2(c), the provisions of this Section 8.2 are for the benefit of the Company Affiliates and the heirs, successors, assigns and administrators of the Company Affiliates and shall not be deemed to create any rights for the benefit of any other Persons. (h) Any repeal or amendment of any provisions of this Section 8.2 shall be prospective only and shall not adversely affect any Company Affiliates' rights existing at the time of such repeal or amendment. ARTICLE IX TRANSFERS OF MEMBERSHIP INTERESTS 9.1 GENERAL RESTRICTIONS. (a) A Member may Transfer its Membership Interest only in its entirety. A Member may Transfer all of such Member's Membership Interest (i) to a Permitted Transferee pursuant to Section 9.2, or (ii) pursuant to the terms of Section 9.7; provided, however, any such Transfer 24 under (i) or (ii) above shall comply with the terms of Section 9.1(b). Any purported Transfer of a Membership Interest in violation of the terms of this Agreement shall be null and void and of no force and effect. Except upon a Transfer of all of a Member's Membership Interest in accordance with this Section 9.1, no Member shall have the right to withdraw as a Member of the Company. (b) As a condition to a Transfer by a Member of all of such Member's Membership Interest to a transferee as permitted under Section 9.1(a)(i) or (ii), (a "MEMBERSHIP TRANSFER"), such Member or such Member's Affiliate holding a Limited Partnership Interest, as applicable, shall simultaneously Transfer (the "PARTNERSHIP TRANSFER") to such transferee the entirety of such Member's or such Member's Affiliate's Limited Partnership Interest. If for any reason the Partnership Transfer does not occur simultaneously with the Membership Transfer, then the Membership Transfer and the Partnership Transfer shall be null and void and of no force and effect. (c) Notwithstanding any other provision of this Agreement, no Member may pledge, mortgage or otherwise subject its Member Interest to any Encumbrance. 9.2 PERMITTED TRANSFEREES. (a) Notwithstanding the provisions of Section 9.7, each Member shall, subject to Section 9.1(b), have the right to Transfer (but not to substitute the transferee as a substitute Member in such Member's place, except in accordance with Section 9.3), by a written instrument, all of a Member's Membership Interest to a Permitted Transferee. Notwithstanding the previous sentence, if the Permitted Transferee is such because it was an Affiliate of the transferring Member at the time of such Transfer or the Transfer was a Permitted Transfer under clause (a) of the definition of Permitted Transfer and, at any time after such Transfer, such Permitted Transferee ceases to be an Affiliate of such Member or such Transfer or such Permitted Transferee ceases to qualify under such clause (a) (a "NON-QUALIFYING TRANSFEREE"), such Transfer shall be deemed to not be a Permitted Transfer and shall be subject to Section 9.7. Pursuant to Section 9.7, such transferring Member, or such transferring Member's legal representative, shall deliver the First Refusal Notice promptly after the time when such transferee ceases to be an Affiliate of such transferring Member, or such Transfer or such Permitted Transferee ceases to qualify under clause (a) of the definition of Permitted Transfer, and such transferring Member shall otherwise comply with the terms of Section 9.7 with respect to such Transfer; provided, that the purchase price for such Transfer for purposes of Section 9.7 shall be an amount agreed upon by such transferring Member and the Board, or, if such Member and the Board cannot agree on a price within five Business Days after delivery of the First Refusal Notice, such price shall be the fair market value of the Membership Interest transferred pursuant to the Transfer as of the date the transferee ceased to be an Affiliate of such transferring Member or such Transfer or such Permitted Transferee ceases to qualify under clause (a) of the definition of Permitted Transfer (such date, the "NON-QUALIFYING DATE"), as determined at the Company's expense by a nationally recognized investment banking firm mutually selected by such transferring Member and the Board. If such transferring Member and the Board are unable, within 10 days after the expiration of such five Business Day period, to mutually agree upon an investment banking firm, then each of such transferring Member and the Board shall choose a nationally recognized investment banking firm and the two investment banking firms so chosen 25 shall choose a third nationally recognized investment banking firm which shall determine the fair market value of the Membership Interest transferred pursuant to such Transfer at the Company's expense. The determination of fair market value shall be based on the value that a willing buyer with knowledge of all relevant facts would pay a willing seller for all the outstanding equity securities of the Company in connection with an auction for the Company as a going concern and shall not take into account any acquisitions made by the Company or its Affiliates or any other events subsequent to the Non-Qualifying Date and shall not be subject to any discount for a sale of a minority interest. If such transferring Member fails to comply with all the terms of Section 9.7, such Transfer shall be null and void and of no force and effect. No Non-Qualifying Transferee shall be entitled to receive any distributions from the Company on or after the Non-Qualifying Date and any distributions made in respect of the Membership Interests on or after the Non-Qualifying Date and held by such Non-Qualifying Members shall be paid to the Member who transferred such Membership Interest or otherwise to the rightful owner thereof as reasonably determined by the Board. (b) Unless and until admitted as a substitute Member pursuant to Section 9.3, a transferee of a Member's Membership Interest in whole or in part shall be an assignee with respect to such Transferred Membership Interest and shall not be entitled to participate in the management of the business and affairs of the Company or to become, or to exercise the rights of, a Member, including the right to designate Directors, the right to vote, the right to require any information or accounting of the Company's business, or the right to inspect the Company's books and records. Such transferee shall only be entitled to receive, to the extent of the Transferred Membership Interest, the share of distributions and profits, including distributions representing the return of Capital Contributions, to which the transferor would otherwise be entitled with respect to the Transferred Membership Interest. The transferor shall have the right to vote such Transferred Membership Interest until the transferee is admitted to the Company as a substitute Member with respect to the Transferred Membership Interest. 9.3 SUBSTITUTE MEMBERS. No transferee of all or part of a Member's Membership Interest shall become a substitute Member in place of the transferor unless and until: (a) Such Transfer is in compliance with the terms of Section 9.1; (b) the transferee has executed an instrument in form and substance reasonably satisfactory to the Board accepting and adopting, and agreeing to be bound by, the terms and provisions of the Certificate and this Agreement; (c) the transferee has executed an instrument in form and substance reasonably satisfactory to the Board whereby it agrees to become a party to the Omnibus Agreement and to be bound by the noncompetition provisions of Article II of the Omnibus Agreement. (d) the transferee has caused to be paid all reasonable expenses of the Company in connection with the admission of the transferee as a substitute Member. Upon satisfaction of all the foregoing conditions with respect to a particular transferee, the appropriate officers shall cause the books and records of the Company to reflect the admission of 26 the transferee as a substitute Member to the extent of the Transferred Membership Interest held by such transferee. 9.4 EFFECT OF ADMISSION AS A SUBSTITUTE MEMBER. A transferee who has become a substitute Member has, to the extent of the Transferred Membership Interest, all the rights, powers and benefits of, and is subject to the obligations, restrictions and liabilities of a Member under, the Certificate, this Agreement and the Act. Upon admission of a transferee as a substitute Member, the transferor of the Membership Interest so held by the substitute Member shall cease to be a Member of the Company to the extent of such Transferred Membership Interest. 9.5 CONSENT. Each Member hereby agrees that upon satisfaction of the terms and conditions of this Article 9 with respect to any proposed Transfer, the transferee may be admitted as a Member without any further action by a Member hereunder. 9.6 ADDITIONAL MEMBERS. Subject to Section 3.2 and Section 7.10, any Person acceptable to a Supermajority of the Board may become an additional Member of the Company for such consideration as the Board shall determine, provided that such additional Member complies with all the requirements of a transferee under Section 9.3(b), (c) and (d). 9.7 RIGHT OF FIRST REFUSAL. The Members shall have the following right of first refusal: (a) If at any time any of the Members (a "SELLING MEMBER") has received and wishes to accept a bona fide offer (the "OFFER") for cash from a third party (the "OFFEROR") for all of such Selling Member's Membership Interest (and such Selling Member's (or its Affiliate's) Limited Partnership Interest in accordance with Section 9.1(b)), such Selling Member shall give Notice thereof (the "FIRST REFUSAL NOTICE") to each of the other Members and the Company. The First Refusal Notice shall state the amount of the Selling Member's Membership Interest and the Selling Member's or its Affiliate's Limited Partnership Interest that the Selling Member and its Affiliate, if applicable, wishes to sell (the "OPTIONED INTEREST"), the price and all other material terms of the Offer, the name of the Offeror, and certification from the Selling Member affirming that the Offer is bona fide and that the description thereof is true and correct, and that the Offeror has stated that it will purchase the Optioned Interest if the rights of first refusal herein described are not exercised. (b) Each of the Members other than the Selling Member (the "NON-SELLING MEMBERS") shall have the right exercisable by Notice (an "ACCEPTANCE NOTICE") given to the Selling Member and the Company within 20 days after receipt of the First Refusal Notice, to agree that it will purchase up to 100% of the Optioned Interest on the terms set forth in the First Refusal Notice; provided, however, if the Non-Selling Members in the aggregate desire to purchase more than 100% of the Optioned Interest, each such Non-Selling Member's right to purchase the Optioned Interest shall be reduced (pro rata based on the percentage of Optioned Interest for which such Non-Selling Member has exercised its right to purchase hereunder compared to all other Non-Selling Members, but not below such Non-Selling Member's Membership Interest as a percentage of the aggregate Membership Interests of all Non-Selling Members who have exercised their right to purchase) so that such Non-Selling Members 27 purchase no more than 100% of the Optioned Interest. If a Non-Selling Member does not submit an Acceptance Notice within the 20 day period set forth in this Section 9.7(b), such Non-Selling Member shall be deemed to have rejected the offer to purchase any portion of the Optioned Interest. (c) If the Non-Selling Members do not in the aggregate exercise the right to purchase all of the Optioned Interest by the expiration of the 20 day period set forth in Section 9.7(b), then any Acceptance Notice shall be void and of no effect, and the Selling Member shall be entitled to complete the proposed sale at any time in the 30 day period commencing on the date of the First Refusal Notice, but only upon the terms set forth in the First Refusal Notice. If no such sale is completed in such 30 day period, the provisions hereof shall apply again to any proposed sale of the Optioned Interest. (d) If any Non-Selling Member exercises the right to purchase the Optioned Interest as provided herein and such Non-Selling Member(s) have elected to purchase all of the Optioned Interest, the purchase of such Optioned Interest shall be completed within the 30 day period commencing on the date of delivery of the First Refusal Notice. If such Non-Selling Member does not consummate the Purchase of such Optioned Interest, (x) the Selling Member shall be entitled to all expenses of collection, (y) the Selling Member shall be entitled to pursue all available legal remedies against the Non-Selling Member, including specific enforcement of the purchase of the Optioned Interest on the terms set forth in the First Refusal Notice and (z) notwithstanding the specific enforcement remedy, the Selling Member may complete the sale of the Optioned Interest to the third party on the terms set forth in the First Refusal Notice. ARTICLE X DISSOLUTION AND TERMINATION 10.1 EVENTS CAUSING DISSOLUTION. (a) The Company shall be dissolved and its affairs wound up upon the first to occur of the following events: (i) The decision of a Supermajority of the Board to dissolve; (ii) The Transfer of all or substantially all of the assets of the Company and the receipt and distribution of all the proceeds therefrom; or (iii) The entry of a decree of judicial dissolution pursuant to Section 18-802 of the Act. (b) The withdrawal, death, retirement, resignation, expulsion, bankruptcy or dissolution of any Member or the occurrence of any other event that terminates the continued membership of any Member in the Company shall not, in and of itself, cause the Company's dissolution. 10.2 FINAL ACCOUNTING. Upon dissolution and winding up of the Company, an accounting will be made of the accounts of the Company and each Member and of the 28 Company's assets, liabilities and operations from the date of the last previous accounting to the date of such dissolution. 10.3 DISTRIBUTIONS FOLLOWING DISSOLUTION AND TERMINATION. (a) Liquidating Trustee. Upon the dissolution of the Company, such party as is designated by the Members holding a majority in interest of the Membership Interests will act as liquidating trustee of the Company (the "LIQUIDATING TRUSTEE") and proceed to wind up the business and affairs of the Company in accordance with the terms of this Agreement and applicable law. The Liquidating Trustee will use its commercially reasonable efforts to sell all Company assets (except cash) under the circumstances then presented, that it deems in the best interest of the Members. The Liquidating Trustee will attempt to convert all assets of the Company to cash so long as it can do so consistently with prudent business practice. The Members and their respective designees will have the right to purchase any Company property to be sold on liquidation, provided that the terms on which such sale is made are no less favorable than would otherwise be available from third parties. The gains and losses from the sale of the Company assets, together with all other revenue, income, gain, deduction, expense, loss and credit during the period, will be allocated in accordance with Article 5. A reasonable amount of time shall be allowed for the period of winding up in light of prevailing market conditions and so as to avoid undue loss in connection with any sale of the Company's assets. This Agreement shall remain in full force and effect during the period of winding up. In addition, upon request of the Board and if the Liquidating Trustee determines that it would be imprudent to dispose of any non-cash assets of the Company, such assets may be distributed in kind to the Members in lieu of cash, proportionately to their right to receive cash distributions under this Agreement. (b) Accounting. Upon completion of its efforts under section 10.3(a), the Liquidating Trustee will cause proper accounting to be made of the Capital Account of each Member, including recognition of gain or loss on any asset to be distributed in kind as if such asset had been sold for consideration equal to the fair market value of the asset at the time of the distribution. The Members intend that the allocations provided herein shall result in Capital Account balances in proportion to the Percentage Interests of the Members. (c) Liquidating Distributions. In settling accounts after dissolution of the Company, the assets of the Company shall be paid to creditors of the Company and to the Members in the following order: (i) to creditors of the Company (including Members) in the order of priority as provided by law whether by payment or the making of reasonable provision for payment thereof, and in connection therewith there shall be withheld such reasonable reserves for contingent, conditioned or unconditioned liabilities as the Liquidating Trustee in its reasonable discretion deems adequate, such reserves (or balances thereof) to be held and distributed in such manner and at such times as the Liquidating Trustee, in its discretion, deems reasonably advisable; provided, however, that such amounts will be maintained in a separate bank account and that any amounts in such bank account remaining after three years be distributed to the Members or their successors and assigns as if such amount had been available for distribution under Section 10.3(c)(ii); and then 29 (ii) to the Members in proportion to the positive balances of their Capital Accounts, as fully adjusted pursuant to Section 3.4, including adjustment for all gains and losses actually or deemed realized upon disposition or distribution of assets in connection with the liquidation and winding up of the Company. Any distribution to the Members in liquidation of the Company shall be made by the later of the end of the taxable year in which the liquidation occurs or 90 days after the date of such liquidation. For purposes of the preceding sentence, the term "liquidation" shall have the same meaning as set forth in Regulation Section l.704-l(b)(2)(ii) as in effect at such time and liquidating distributions shall be further deemed to be made pursuant to this Agreement upon the event of a liquidation as defined in such Regulation for which no actual liquidation occurs with a deemed recontribution by the Members of such deemed liquidating distributions to the continuing Company pursuant to this Agreement. (d) The provisions of this Agreement, including, without limitation, this Section 10.3, are intended solely to benefit the Members and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Company. No such creditor of the Company shall be a third-party beneficiary of this Agreement, and no Member or Director shall have any duty or obligation to any creditor of the Company to issue any call for capital pursuant to this Agreement. 10.4 TERMINATION OF THE COMPANY. The Company shall terminate when all assets of the Company, after payment or due provision for all debts, liabilities and obligations of the Company, shall have been distributed to the Members in the manner provided for in this Article 10, and the Certificate shall have been canceled in the manner required by the Act. 10.5 NO ACTION FOR DISSOLUTION. The Members acknowledge that irreparable damage would be done to the goodwill and reputation of the Company if any Member should bring an action in court to dissolve the Company under circumstances where dissolution is not required by Section 10.1. Accordingly, except where the Board has failed to cause the liquidation of the Company as required by Section 10.1 and except as specifically provided in Section 18-802, each Member hereby to the fullest extent permitted by law waives and renounces his or its right to initiate legal action to seek dissolution of the Company or to seek the appointment of a receiver or trustee to wind up the affairs of the Company, except in the cases of fraud, violation of law, bad faith, gross negligence, willful misconduct or willful violation of this Agreement. ARTICLE XI TAX MATTERS 11.1 TAX MATTERS MEMBER. Robertson Coal Management shall be the tax matters member (the "TAX MATTERS MEMBER") of the Company as provided in the Regulations under Section 6231 of the Code and analogous provisions of state law. The Board shall have the authority to remove or replace the Tax Matters Member of the Company and designate its successor. 11.2 CERTAIN AUTHORIZATIONS. The tax matters member (the "TAX MATTERS MEMBER") shall represent the Company, at the Company's expense, in connection with all examinations of 30 the Company's affairs by tax authorities including any resulting administrative or judicial proceedings. Without limiting the generality of the foregoing, and subject to the restrictions set forth herein, the Tax Matters Member, but only with the consent of the Board, is hereby authorized: (a) to enter into any settlement agreement with respect to any tax audit or judicial review, in which agreement the Tax Matters Member may expressly state that such agreement shall bind the other Members except that such settlement agreement shall not bind any Member that has not approved such settlement agreement in writing; (b) if a notice of a final administrative adjustment at the Company level of any item required to be taken into account by a Member for tax purposes is mailed to the Tax Matters Member, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court, the District Court of the United States for the district in which the Company's principal place of business is located, or elsewhere as allowed by law, or the United States Claims Court; (c) to intervene in any action brought by any other Member for judicial review of a final adjustment; (d) to file a request for an administrative adjustment at any time and, if any part of such request is not allowed, to file a petition for judicial review with respect to such request; (e) to enter into an agreement with the Internal Revenue Service to extend the period for assessing any tax that is attributable to any item required to be taken into account by a Member for tax purposes, or an item affected by such item; and (f) to take any other action on behalf of the Members (with respect to the Company) or the Company in connection with any administrative or judicial tax proceeding to the extent permitted by applicable law or the Regulations. Each Member shall have the right to participate in any such actions and proceedings to the extent provided for under the Code and Regulations. 11.3 INDEMNITY OF TAX MATTERS MEMBER. To the maximum extent permitted by applicable law and without limiting Article 8, the Company shall indemnify and reimburse the Tax Matters Member for all expenses (including reasonable legal and accounting fees) incurred as Tax Matters Member pursuant to this Article 11 in connection with any administrative or judicial proceeding with respect to the tax liability of the Members as long as the Tax Matters Member has determined in good faith that the Tax Matters Member's course of conduct was in, or not opposed to, the best interest of the Company. The taking of any action and the incurring of any expense by the Tax Matters Member in connection with any such proceeding, except to the extent provided herein or required by law, is a matter in the sole discretion of the Tax Matters Member. 11.4 INFORMATION FURNISHED. To the extent and in the manner provided by applicable law and Regulations, the Tax Matters Member shall furnish the name, address, profits and loss interest, and taxpayer identification number of each Member to the Internal Revenue Service. 31 11.5 NOTICE OF PROCEEDINGS, ETC. The Tax Matters Member shall use its reasonable best efforts to keep each Member informed of any administrative and judicial proceedings for the adjustment at the Company level of any item required to be taken into account by a Member for income tax purposes or any extension of the period of limitations for making assessments of any tax against a Member with respect to any Company item, or of any agreement with the Internal Revenue Service that would result in any material change either in Profits or Losses as previously reported. 11.6 NOTICES TO TAX MATTERS MEMBER. Any Member that receives a notice of an administrative proceeding under Section 6233 of the Code relating to the Company shall promptly provide Notice to the Tax Matters Member of the treatment of any Company item on such Member's Federal income tax return that is or may be inconsistent with the treatment of that item on the Company's return. Any Member that enters into a settlement agreement with the Internal Revenue Service or any other government agency or official with respect to any Company item shall provide Notice to the Tax Matters Member of such agreement and its terms within 60 days after the date of such agreement. 11.7 PREPARATION OF TAX RETURNS. The Tax Matters Member shall arrange for the preparation and timely filing of all returns of Company income, gains, deductions, losses and other items necessary for Federal, state and local income tax purposes and shall use all reasonable efforts to furnish to the Members within 60 days of the close of the taxable year a Schedule K-1 and such other tax information reasonably required for Federal, state and local income tax reporting purposes. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the cash or accrual method of accounting for Federal income tax purposes, as the Board shall determine in its sole discretion in accordance with applicable law. 11.8 TAX ELECTIONS. Subject to Section 11.9, the Board shall, in its sole discretion, determine whether to make any available election. 11.9 TAXATION AS A PARTNERSHIP. No election shall be made by the Company or any Member for the Company to be excluded from the application of any of the provisions of Subchapter K, Chapter I of Subtitle A of the Code or from any similar provisions of any state tax laws or to be treated as a corporation for federal tax purposes. ARTICLE XII ACCOUNTING AND BANK ACCOUNTS 12.1 FISCAL YEAR AND ACCOUNTING METHOD. The fiscal year and taxable year of the Company shall be the calendar year. The Company shall use an accrual method of accounting. 12.2 BOOKS AND RECORDS. The Company shall maintain at its principal office, or such other office as may be determined by the Board, all the following: (a) A current list of the full name and last known business or residence address of each Member, and of each member of the Board, together with information regarding the amount of cash and a description and statement of the agreed value of any other property or services 32 contributed by each Member and which each Member has agreed to contribute in the future, and the date on which each Member became a Member of the Company; (b) A copy of the Certificate and this Agreement, including any and all amendments to either thereof, together with executed copies of any powers of attorney pursuant to which the Certificate, this Agreement, or any amendments have been executed; (c) Copies of the Company's Federal, state, and local income tax or information returns and reports, if any, which shall be retained for at least six fiscal years; (d) The financial statements of the Company; and (e) The Company's books and records. 12.3 DELIVERY TO MEMBERS; INSPECTION. Upon the request of any Member, for any purpose reasonably related to such Member's interest as a member of the Company, the Officers shall cause to be made available to the requesting Member the information required to be maintained by clauses (a) through (e) of Section 12.2 and such other information regarding the business and affairs and financial condition of the Company as any Member may reasonably request. 12.4 FINANCIAL STATEMENTS. The Officers shall cause to be prepared for the Members at least annually, at the Company's expense, financial statements of the Company, and its subsidiaries, prepared in accordance with generally accepted accounting principles and audited by a nationally recognized accounting firm. The financial statements so furnished shall include a balance sheet, statement of income or loss, statement of cash flows, and statement of Members' equity. In addition, the Officers shall provide on a timely basis to the Members monthly and quarterly financial statements, any available internal budgets or forecast or other available financial reports, as well as any reports or notices as are provided by the Company, or any of its Subsidiaries to any financial institution. 12.5 FILINGS. At the Company's expense, the Officers shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities and to have prepared and to furnish to each Member such information with respect to the Company as is necessary (or as may be reasonably requested by a Member) to enable the Members to prepare their Federal, state and local income tax returns. The Officers, at the Company's expense, shall also cause to be prepared and timely filed, with appropriate Federal, state and local regulatory and administrative bodies, all reports required to be filed by the Company with those entities under then current applicable laws, rules, and regulations. The reports shall be prepared on the accounting or reporting basis required by the regulatory bodies. 12.6 NON-DISCLOSURE. Each Member agrees that, except as otherwise consented to by the Board in writing, all non-public and confidential information furnished to it pursuant to this Agreement will be kept confidential and will not be disclosed by such Member, or by any of its agents, representatives, or employees, in any manner whatsoever, in whole or in part, except that (a) each Member shall be permitted to disclose such information to those of its agents, representatives, and employees who need to be familiar with such information in 33 connection with such Member's investment in the Company (collectively "Representatives") and are apprised of the confidential nature of such information; (b) each Member shall be permitted to disclose information to the extent required by law, legal process or regulatory requirements, so long as such Member shall have used its reasonable efforts to first afford the Company with a reasonable opportunity to contest the necessity of disclosing such information, provided that each member and its Affiliates may disclose any information required to be disclosed under the federal securities laws without affording the Company such opportunity; (c) each Member shall be permitted to disclose such information to possible purchasers of all or a portion of the Member's Membership Interest, provided that such prospective purchaser shall execute a suitable confidentiality agreement in a form approved by the Company containing terms not less restrictive than the terms set forth herein; and (d) each Member shall be permitted to disclose information to the extent necessary for the enforcement of any right of such Member arising under this Agreement. Each Member shall be responsible for any breach of this Section 12.6 by its Representatives. ARTICLE XIII MISCELLANEOUS 13.1 WAIVER OF DEFAULT. No consent or waiver, express or implied, by the Company or a Member with respect to any breach or default by the Company or a Member under this Agreement shall be deemed or construed to be a consent or waiver with respect to any other breach or default by any party of the same provision or any other provision of this Agreement. Failure on the part of the Company or a Member to complain of any act or failure to act of the Company or a Member or to declare such party in default shall not be deemed or constitute a waiver by the Company or the Member of any rights under this Agreement. 13.2 AMENDMENT. (a) Except as otherwise expressly provided elsewhere in this Agreement, this Agreement shall not be altered, modified or changed except by an amendment approved by a Supermajority of the Board; provided, however, that no modification of the terms of this Agreement that (i) increases or extends any financial obligation or liability of a Member, (ii) alters the method of division of profits and losses or a method of distributions made to a Member, (iii) adversely affects a Member's ability to designate Directors or (iv) otherwise adversely affects the obligations or rights of a Member (as a Member under this Agreement) in a manner different than the other Member(s) shall be effective without the prior written consent of such Member. (b) In addition to any amendments otherwise authorized herein, the Board may make any amendments to any of the Schedules to this Agreement from time to time to reflect transfers of Membership Interests and issuances of additional Membership Interests. Copies of such amendments shall be delivered to the Members upon execution thereof. 34 (c) The Board shall cause to be prepared and filed any amendment to the Certificate that may be required to be filed under the Act as a consequence of any amendment to this Agreement. (d) Any modification or amendment to this Agreement or the Certificate made in accordance with this Section 13.2 shall be binding on all Members and the Board. 13.3 NO THIRD PARTY RIGHTS. Except as provided in Article 8, none of the provisions contained in this Agreement shall be for the benefit of or enforceable by any third parties, including creditors of the Company. 13.4 SEVERABILITY. In the event any provision of this Agreement is held to be illegal, invalid or unenforceable to any extent, the legality, validity and enforceability of the remainder of this Agreement shall not be affected thereby and shall remain in full force and effect and shall be enforced to the greatest extent permitted by law. 13.5 NATURE OF INTEREST IN THE COMPANY. A Member's Membership Interest shall be personal property for all purposes. 13.6 BINDING AGREEMENT. The provisions of this Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 13.7 HEADINGS. The headings of the sections of this Agreement are for convenience only and shall not be considered in construing or interpreting any of the terms or provisions hereof. 13.8 WORD MEANINGS. The words "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural, and vice versa, unless the context otherwise requires. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." When verbs are used as nouns, the nouns correspond to such verbs and vice versa. 13.9 COUNTERPARTS. This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all the parties have not signed the same counterpart. 13.10 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties hereto and thereto and supersedes all prior writings or agreements with respect to the subject matter hereof. 13.11 PARTITION. The Members agree that the Property is not and will not be suitable for partition. Accordingly, each of the Members hereby irrevocably waives any and all right such Member may have to maintain any action for partition of any of the Property. No Member shall have any right to any specific assets of the Company upon the liquidation of, or any distribution from, the Company. 35 13.12 GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. This Agreement shall be construed according to and governed by the laws of the State of Delaware without regard to principles of conflict of laws. The parties hereby submit to the exclusive jurisdiction and venue of the Court of Chancery of the State of Delaware and the United States District Court for the Southern District of Texas and of the United States District Court for the District of Delaware, as the case may be, and agree that the Company or Members may, at their option, enforce their rights hereunder in such courts. [SIGNATURE PAGE FOLLOWS] 36 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. ROBERTSON COAL MANAGEMENT LLC By: /s/ Corbin J. Robertson, Jr. ------------------------------- Name: Corbin J. Robertson, Jr. Title: Sole Member ARK LAND COMPANY By: /s/ Steven E. McCurdy ------------------------------- Name: Steven E. McCurdy Title: President 37 SCHEDULE 1 Members, Capital Contributions and Percentage Interests
TOTAL CAPITAL PERCENTAGE NAME AND ADDRESS CASH CONTRIBUTED GROSS ASSET VALUE CONTRIBUTION INTEREST ---------------- ---------------- ----------------- ------------ -------- Robertson Coal Management LLC $ 577.50 -- $ 577.50 57.75% Ark Land Company $ 422.50 -- $ 422.50 42.25%
SCHEDULE 7.2 INITIAL DIRECTORS Corbin J. Robertson, Jr. Steven F. Leer S. Reed Morian David B. Peugh W. W. Scott, Jr. SCHEDULE 7.9 INITIAL SLATE OF OFFICERS
NAME TITLE ---- ----- Corbin J. Robertson, Jr. Chairman and Chief Executive Officer Nick Carter President and Chief Operating Officer Dwight L. Dunlap Chief Financial Officer, Secretary and Treasurer Kevin Wall Vice President and Chief Engineer Kenneth Hudson Controller
EX-10.1 7 h04228exv10w1.txt CREDIT AGREEMENT EXECUTION COPY EXHIBIT 10.1 CREDIT AGREEMENT BY AND AMONG NRP (OPERATING) LLC, AS BORROWER, THE LENDERS PARTY HERETO, PNC BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT, BRANCH BANKING AND TRUST COMPANY, AS SYNDICATION AGENT, AND BANK OF MONTREAL AND BNP PARIBAS, AS DOCUMENTATION AGENTS, DATED AS OF OCTOBER 17, 2002 PNC CAPITAL MARKETS, INC., AS LEAD ARRANGER TABLE OF CONTENTS
Page ---- 1. DEFINITIONS......................................................................................... 1 1.1 DEFINED TERMS................................................................................ 1 1.2 ACCOUNTING PRINCIPLES........................................................................ 16 1.3 OTHER DEFINITIONAL CONVENTIONS AND RULES OF CONSTRUCTION..................................... 16 2. THE REVOLVING CREDIT LOANS.......................................................................... 17 2.1 REVOLVING CREDIT LOANS....................................................................... 17 2.1a REVOLVING CREDIT FACILITY.................................................................... 17 2.1b REVOLVING CREDIT COMMITMENT OF EACH LENDER................................................... 17 2.1c REVOLVING CREDIT NOTES....................................................................... 17 2.1d REVOLVING CREDIT LOAN REQUEST................................................................ 17 2.1e MAKING REVOLVING CREDIT LOANS................................................................ 18 2.2 INTEREST RATES, INTEREST PAYMENT AND CERTAIN PROVISIONS RELATING TO INTEREST AND FEES........ 18 2.2a PAYMENTS OF INTEREST......................................................................... 18 2.2b INTEREST RATE OPTIONS........................................................................ 19 2.2c INTEREST PERIODS; LIMITATIONS ON ELECTIONS................................................... 19 2.2d ELECTION, CONVERSION OR RENEWAL OF INTEREST RATE OPTIONS..................................... 20 2.2e NOTIFICATION OF ELECTION OF AN INTEREST RATE OPTION.......................................... 20 2.2f INTEREST AFTER DEFAULT....................................................................... 20 2.3 YIELD-PROTECTION, CAPITAL ADEQUACY AND MISCELLANEOUS PROVISIONS RELATING TO EURO-RATE........ 21 2.3a YIELD PROTECTION............................................................................. 21 2.3b CAPITAL ADEQUACY............................................................................. 22 2.3c EURO-RATE UNASCERTAINABLE.................................................................... 23 2.3d ILLEGALITY................................................................................... 23 2.4 FEES......................................................................................... 24 2.4a COMMITMENT FEE............................................................................... 24 2.4b AGENT'S FEE.................................................................................. 24 2.4c LETTER OF CREDIT FEE AND FRONTING FEE........................................................ 24 2.5 CALCULATION OF INTEREST AND CERTAIN FEES..................................................... 24 2.6 LETTER OF CREDIT SUB-FACILITY................................................................ 24 2.6a ISSUANCE OF LETTERS OF CREDIT................................................................ 25 2.6b LETTER OF CREDIT FEES........................................................................ 25 2.6c LETTER OF CREDIT FEES UPON DEFAULT........................................................... 25 2.6d DISBURSEMENTS, REIMBURSEMENT................................................................. 25 2.6e REPAYMENT OF PARTICIPATION ADVANCES.......................................................... 27 2.6f DOCUMENTATION................................................................................ 27 2.6g DETERMINATIONS TO HONOR DRAWING REQUESTS..................................................... 27 2.6h NATURE OF PARTICIPATION AND REIMBURSEMENT OBLIGATIONS........................................ 27 2.6i INDEMNITY.................................................................................... 29 2.6j LIABILITY FOR ACTS AND OMISSIONS............................................................. 29 2.6k UNIFORM CUSTOMS.............................................................................. 29 2.7 SUBSTITUTION OR REPLACEMENT OF A LENDER...................................................... 30 2.8 LOAN REPAYMENT AND PREPAYMENT................................................................ 30
- i - TABLE OF CONTENTS
Page ---- 2.8a VOLUNTARY PREPAYMENTS........................................................................ 30 2.8b SCHEDULED REPAYMENT.......................................................................... 31 2.9 ADDITIONAL PAYMENTS BY THE BORROWER.......................................................... 31 2.10 CHANGES OF COMMITMENTS; VOLUNTARY REDUCTION OF AVAILABILITY.................................. 31 2.11 LOAN ACCOUNT................................................................................. 32 2.12 PAYMENT FROM ACCOUNTS MAINTAINED BY BORROWER................................................. 32 2.13 TIME, PLACE AND MANNER OF PAYMENTS........................................................... 32 2.14 GUARANTY..................................................................................... 33 3. REPRESENTATIONS AND WARRANTIES...................................................................... 33 3.1 EXISTENCE.................................................................................... 33 3.2 CAPITALIZATION: OWNERSHIP.................................................................... 33 3.3 SUBSIDIARIES AND OTHER INVESTMENTS........................................................... 33 3.4 CORPORATE AUTHORITY.......................................................................... 33 3.5 ENFORCEABILITY............................................................................... 34 3.6 NO RESTRICTIONS, NO DEFAULT.................................................................. 34 3.7 FINANCIAL MATTERS............................................................................ 34 3.7a FINANCIAL STATEMENTS......................................................................... 34 3.7b PRO FORMA FINANCIALS......................................................................... 35 3.8 ABSENCE OF LITIGATION........................................................................ 35 3.9 TAX RETURNS AND PAYMENTS..................................................................... 35 3.10 PENSION PLANS................................................................................ 35 3.11 FISCAL YEAR.................................................................................. 36 3.12 CONDITION OF AND TITLE TO ASSETS............................................................. 36 3.13 INSURANCE.................................................................................... 36 3.14 LABOR AND EMPLOYMENT MATTERS................................................................. 36 3.15 COMPLIANCE WITH APPLICABLE LAWS.............................................................. 36 3.16 ENVIRONMENTAL MATTERS........................................................................ 36 3.17 CONSENTS AND APPROVALS....................................................................... 37 3.18 REGULATIONS T, U AND X....................................................................... 37 3.19 INVESTMENT COMPANY ACT....................................................................... 37 3.20 PUBLIC UTILITY HOLDING COMPANY ACT........................................................... 37 3.21 SENIOR DEBT STATUS........................................................................... 37 3.22 INTELLECTUAL PROPERTY........................................................................ 37 3.23 LEASES....................................................................................... 37 3.24 SOLVENCY..................................................................................... 38 3.25 TAX TREATMENT................................................................................ 38 3.26 DISCLOSURE................................................................................... 38 3.27 TRANSACTIONS WITH AFFILIATES................................................................. 38 4. AFFIRMATIVE COVENANTS............................................................................... 38 4.1 USE OF PROCEEDS.............................................................................. 38 4.2 FURNISHING INFORMATION....................................................................... 39 4.3 VISITATION................................................................................... 42 4.4 PRESERVATION OF EXISTENCE; QUALIFICATION..................................................... 42 4.5 COMPLIANCE WITH LAWS AND CONTRACTS........................................................... 42
- ii - TABLE OF CONTENTS
Page ---- 4.6 PAYMENT OF TAXES AND OTHER LIABILITIES....................................................... 42 4.7 INSURANCE.................................................................................... 42 4.8 MAINTENANCE OF PROPERTIES.................................................................... 43 4.9 PLANS AND BENEFIT ARRANGEMENT................................................................ 43 4.10 SENIOR DEBT STATUS........................................................................... 43 4.11 LEASES; MATERIAL CONTRACTS................................................................... 43 4.12 CLEAN-DOWN PERIOD............................................................................ 43 4.13 ENVIRONMENTAL INDEMNIFICATION................................................................ 44 5. NEGATIVE COVENANTS.................................................................................. 44 5.1 DIVIDENDS, ETC............................................................................... 44 5.2 ENCUMBRANCES................................................................................. 44 5.3 FINANCIAL COVENANTS.......................................................................... 45 5.3a LEVERAGE RATIO............................................................................... 45 5.3b INTEREST COVERAGE RATIO...................................................................... 45 5.3c CALCULATION OF CONSOLIDATED EBITDDA.......................................................... 45 5.4 ACQUISITIONS................................................................................. 45 5.5 INDEBTEDNESS................................................................................. 46 5.6 LOANS, ACQUISITIONS AND INVESTMENTS.......................................................... 46 5.7 SALES OF ASSETS.............................................................................. 47 5.8 MERGER....................................................................................... 47 5.9 REGULATION T, U AND X COMPLIANCE............................................................. 47 5.10 ERISA........................................................................................ 47 5.11 NO LIMITATION ON DIVIDENDS AND DISTRIBUTIONS................................................. 48 5.12 NEGATIVE PLEDGES............................................................................. 48 5.13 CHANGES IN ORGANIZATIONAL DOCUMENTS.......................................................... 48 5.14 CHANGE IN NATURE OF BUSINESS................................................................. 48 5.15 CHANGES IN OMNIBUS AGREEMENT................................................................. 48 5.16 TRANSACTIONS WITH AFFILIATES................................................................. 49 6. CONDITIONS PRECEDENT TO DISBURSEMENTS AND ISSUANCE OF LETTERS OF CREDIT............................. 49 6.1 ALL DISBURSEMENTS............................................................................ 49 6.1a NO DEFAULT................................................................................... 49 6.1b REPRESENTATIONS CORRECT...................................................................... 49 6.1c NO MATERIAL ADVERSE CHANGE................................................................... 49 6.1d LOAN REQUEST/APPLICATION..................................................................... 49 6.1d LOAN REQUEST/APPLICATION..................................................................... 49 6.2 CONDITIONS PRECEDENT TO INITIAL BORROWINGS................................................... 49 7. DEFAULTS............................................................................................ 52 7.1 PAYMENT DEFAULT.............................................................................. 52 7.2 NONPAYMENT OF OTHER INDEBTEDNESS............................................................. 52 7.3 INSOLVENCY................................................................................... 52 7.3a INVOLUNTARY PROCEEDINGS...................................................................... 52 7.3b VOLUNTARY PROCEEDINGS........................................................................ 52
- iii - TABLE OF CONTENTS
Page ---- 7.4 TERMINATION OF EXISTENCE..................................................................... 52 7.5 FAILURE TO COMPLY WITH LOAN DOCUMENTS........................................................ 53 7.5a FAILURE TO COMPLY WITH ARTICLE V COVENANTS AND CERTAIN ARTICLE IV COVENANTS.................. 53 7.5b FAILURE TO COMPLY WITH OTHER COVENANTS AND LOAN DOCUMENTS.................................... 53 7.6 MISREPRESENTATION............................................................................ 53 7.7 ADVERSE JUDGMENTS, ETC....................................................................... 53 7.8 INVALIDITY OR UNENFORCEABILITY............................................................... 53 7.9 ERISA........................................................................................ 53 7.10 CHANGE IN CONTROL............................................................................ 53 7.11 CONSEQUENCES OF AN EVENT OF DEFAULT.......................................................... 54 7.12 REMEDIES UPON DEFAULT........................................................................ 54 7.13 CASH COLLATERAL.............................................................................. 54 8. AGREEMENT AMONG LENDERS............................................................................. 55 8.1 APPOINTMENT AND GRANT OF AUTHORITY........................................................... 55 8.2 DELEGATION OF DUTIES......................................................................... 55 8.3 RELIANCE BY AGENT ON LENDERS FOR FUNDING..................................................... 55 8.4 NON-RELIANCE ON AGENT........................................................................ 56 8.5 RESPONSIBILITY OF AGENT AND OTHER MATTERS.................................................... 56 8.5a MINISTERIAL NATURE OF DUTIES................................................................. 56 8.5b LIMITATION OF LIABILITY...................................................................... 56 8.5c RELIANCE..................................................................................... 57 8.6 ACTIONS IN DISCRETION OF AGENT: INSTRUCTIONS FROM THE LENDERS................................ 57 8.7 INDEMNIFICATION.............................................................................. 57 8.8 AGENT'S RIGHTS AS A LENDER................................................................... 58 8.9 PAYMENT TO LENDERS........................................................................... 58 8.10 PRO RATA SHARING............................................................................. 58 8.11 SUCCESSOR AGENT.............................................................................. 58 8.11a RESIGNATION OF AGENT......................................................................... 58 8.11b RIGHTS OF THE FORMER AGENT................................................................... 59 8.12 NOTICE OF DEFAULT............................................................................ 59 8.13 NOTICES...................................................................................... 59 8.14 HOLDERS OF REVOLVING CREDIT NOTES............................................................ 59 8.15 CALCULATIONS................................................................................. 59 8.16 BENEFICIARIES................................................................................ 59 9. GENERAL PROVISIONS.................................................................................. 60 9.1 AMENDMENTS AND WAIVERS....................................................................... 60 9.2 EXPENSES..................................................................................... 61 9.3 NOTICES...................................................................................... 61 9.3a NOTICE TO THE BORROWER....................................................................... 62 9.3b NOTICE TO THE AGENT.......................................................................... 62 9.3c NOTICE TO THE LENDERS........................................................................ 63 9.4 TAX WITHHOLDING.............................................................................. 63 9.5 SUCCESSORS AND ASSIGNS....................................................................... 64
- iv - TABLE OF CONTENTS
Page ---- 9.6 ASSIGNMENTS AND PARTICIPATIONS............................................................... 64 9.6a ASSIGNMENTS.................................................................................. 64 9.6b ASSIGNMENT REGISTER.......................................................................... 66 9.6c PARTICIPATIONS............................................................................... 66 9.6d PROVISIONS FOR SPECIAL PURPOSE FUNDING VEHICLES.............................................. 66 9.7 SEVERABILITY................................................................................. 67 9.8 SURVIVAL..................................................................................... 67 9.9 GOVERNING LAW................................................................................ 67 9.10 NON-BUSINESS DAYS............................................................................ 67 9.11 INTEGRATION.................................................................................. 67 9.12 HEADINGS, ETC................................................................................ 68 9.13 SET-OFF...................................................................................... 68 9.14 CONSENT TO FORUM............................................................................. 68 9.15 WAIVER OF JURY TRIAL......................................................................... 68 9.16 INDEMNITY.................................................................................... 68 9.17 COUNTERPARTS................................................................................. 69 9.18 LIMITATION ON RECOURSE TO GENERAL PARTNER.................................................... 69 9.19 CONFIDENTIALITY.............................................................................. 69
Exhibit A - Form of Revolving Credit Notes Exhibit B - Form of Revolving Credit Loan Request Exhibit C - Form of Compliance Certificate Exhibit D-1 - Form of Guaranty Agreement (Parent) Exhibit D-2 - Form of Guaranty Agreement (Subsidiary) Exhibit E - Form of Opinion of Special Counsel to the Borrower Exhibit F - Form of Assignment and Assumption Agreement Exhibit G - Form of Pro Forma Compliance Certificate - v - CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of October 17, 2002, by and among NRP (OPERATING) LLC, a Delaware limited liability company (as further defined below, the "Borrower"), the financial institutions listed on the signature pages hereto, and each other financial institution which, from time to time, becomes a party hereto in accordance with Subsection 9.6a (individually, a "Lender" and collectively, the "Lenders") and PNC BANK, NATIONAL ASSOCIATION, a national banking association, as Administrative Agent for the Lenders (in such capacity, and as further defined below, the "Agent"), BANK OF MONTREAL and BNP PARIBAS, as Documentation Agents for the Lenders, and BRANCH BANKING AND TRUST COMPANY, as Syndication Agent for the Lenders. WITNESSETH: WHEREAS, the Borrower desires to obtain a Revolving Credit Commitment (as defined below) from each of the Lenders pursuant to which Revolving Credit Loans, in a maximum aggregate principal amount at any one time outstanding not to exceed $100,000,000, will be made to the Borrower from time to time prior to the Termination Date (as defined below); and WHEREAS, each Lender is willing, on the terms and subject to the conditions hereinafter set forth, to extend such Revolving Credit Commitment and make such Revolving Credit Loans to the Borrower. NOW, THEREFORE, in consideration of mutual promises contained herein and other valuable consideration and with the intent to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS. 1.1 DEFINED TERMS. As used herein the following terms shall have the meaning specified unless the context otherwise requires: "Adjusted Euro-Rate" has the meaning set forth in item (ii) of Subsection 2.2b. "Affiliate" as to any Person shall mean any other Person (i) which directly or indirectly controls, is controlled by, or is under common control with such Person, (ii) which beneficially owns or holds 10% or more of any class of the voting or other equity interests of such Person, or (iii) 10% or more of any class of voting interests or other equity interests of which is beneficially owned or held, directly or indirectly, by such Person. Control, as used in this definition, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, including the power to elect a majority of the directors or trustees of a corporation or trust, as the case may be. "Agent" means PNC Bank, National Association in its capacity as Administrative Agent or its successor appointed pursuant to Section 8.11 hereof and as the issuer of Letters of Credit. "Agent's Fees" means those certain fees for the sole account of the Agent set forth in the Agent's Letter. "Agent's Letter" has the meaning set forth in Subsection 2.4b. "Agreement" means this Credit Agreement, together with the exhibits and schedules hereto and all extensions, renewals, amendments, modifications, substitutions and replacements hereto and hereof. "Applicable Euro-Rate Margin" means for each Euro-Rate Portion of all Revolving Credit Loans, the percentage expressed in basis points per annum determined from time to time based upon the ratio of the Parent's Consolidated Total Indebtedness as at the end of each Fiscal Quarter to the Parent's Consolidated EBITDDA for the four most recently completed Fiscal Quarters treated as a single accounting period set forth under the relevant column heading below, all as determined by the Parent's financial statements and Compliance Certificate for the preceding Fiscal Quarter or Fiscal Year delivered to the Agent pursuant to Section 4.2 below:
RATIO OF CONSOLIDATED TOTAL INDEBTEDNESS TO CONSOLIDATED EBITDDA APPLICABLE EURO-RATE MARGIN ---------------------------- --------------------------- LEVEL I Less than or equal to 1.25 to 1.00 125 Basis Points LEVEL II Greater than 1.25 to 1.00 but less than or equal 150 Basis Points to 1.75 to 1.00 LEVEL III Greater than 1.75 to 1.00 175 Basis Points
Adjustments to the Applicable Euro-Rate Margin resulting from changes in the ratio of the Parent's Consolidated Total Indebtedness to Consolidated EBITDDA shall be made without notice to the Borrower. Such adjustments will be effective on the date on which the Parent's financial statements and Compliance Certificate are due to be delivered to the Lenders pursuant to Section 4.2; provided, however, that if the Borrower has failed to deliver, or caused to be delivered, such financial statements and Compliance Certificate on or before the date such delivery is due, then the ratio of the Parent's Consolidated Total Indebtedness to Consolidated EBITDDA shall be deemed, solely for the purposes of this definition, to be greater than 1.75 to 1.00 until such time as they are actually delivered. "Arch Coal" means Arch Coal, Inc., a Delaware corporation. "Ark Land " means Ark Land Company, a Delaware corporation. "Assignment and Assumption Agreement" means an Assignment and Assumption Agreement in the form of Exhibit "F" hereto. - 2 - "Authorized Officer" means the President, any Vice President, the Chief Financial Officer, the Treasurer or the principal accounting officer of the respective Loan Party or general partner if such Loan Party is a partnership or managing member if such Loan Party is a limited liability company. The Agent and the Lenders shall be entitled to rely on the incumbency certificates delivered pursuant to Section 6.2 for the initial designation of each Authorized Officer. Additions or deletions to the list of Authorized Officers may be made by the respective Loan Party at any time by delivering to the Agent for redelivery to each Lender a revised incumbency certificate. "Available Cash" has the meaning set forth in Section 1.1 of the MLP Agreement as in effect on the Closing Date with the following clarifications: (i) in clause (a)(ii) the words "Working Capital Borrowings" are intended to refer to "any Distribution Loan," and (ii) cash reserves necessary to comply with clause (b)(ii) are intended to include without limitation any General Revolving Loan then outstanding. "Bank Indebtedness" means (i) the Revolving Credit Loans then outstanding, together with all increases or refinancings thereof, (ii) the aggregate stated amount of Letters of Credit outstanding hereunder, (iii) the aggregate amount of unreimbursed draws on Letters of Credit issued hereunder, (iv) all interest, fees and any other amounts due hereunder or under any of the other Loan Documents, including by reason of advances by the Lenders, made to, or for the account of, the Borrower pursuant to this Agreement or any other Loan Document, and (v) all reasonable out-of-pocket expenses incurred by the Lenders and the Agent (including but not limited to fees and expenses of counsel). "Base Rate" means, for any day, the higher of (i) the sum of (A) the Federal Funds Effective Rate for such day plus (B) fifty (50) basis points (.50%) per annum and (ii) the Prime Rate, as of such day. "Base Rate Option" means the interest rate option described in item (i) of Subsection 2.2b. "Base Rate Portion" means a Revolving Credit Loan or a portion thereof which bears, or is to bear, interest at the Base Rate. "Borrower" means NRP (Operating) LLC, a Delaware limited liability company and its successors and permitted assigns. "Borrowing Date" means the date on which any Disbursements are to be made hereunder. "Business Day" means, any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required to be closed for business in Pittsburgh, Pennsylvania or New York, New York and, if the applicable Business Day relates to any Disbursement to which the Euro-Rate Option applies, such day must also be a day on which dealings are carried on in the London interbank market. "Capital Adequacy Event" has the meaning given it in Subsection 2.3b. - 3 - "Capital Compensation Amount" has the meaning given it in Subsection 2.3b. "Cash Collateral Account" has the meaning given it in Section 7.13. "Change in Control" means (i) such time as the Parent ceases to own directly all of the member interests of the Borrower, (ii) such time as the General Partner ceases to own directly all of the general partner interests of the Parent, or (iii) such time as Corbin J. Robertson, Jr., the WPP Group and/or one or more of their direct or indirect, wholly-owned Subsidiaries cease to own more than 50% of the partnership interests of the General Partner. "Closing" means the execution and delivery of this Agreement which execution and delivery shall occur at the offices of Buchanan Ingersoll Professional Corporation in Pittsburgh, Pennsylvania, at 10:00 A.M. (eastern time) on October 17, 2002, or such other date and time as is mutually agreeable to the parties hereto. "Closing Date" means the day on which the Closing occurs. "Coal" shall mean all types of marketable coal, including without limitation, bituminous and sub-bituminous coal, and lignite. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation thereto, together with all regulations promulgated and rulings issued thereunder. "Commitment Fee" means the fee described in Subsection 2.4a. "Commitment Fee Rate" means a rate per annum equal to fifty basis points (0.50%). "Compliance Certificate" means a Compliance Certificate substantially in the form of Exhibit "C". "Consolidated" means the consolidation of the accounts of any two or more Persons in accordance with GAAP. "Consolidated EBITDDA" means, for any period, Consolidated Net Income for such period, (x) excluding therefrom (A) any non-cash extraordinary items of gain or loss (including without limitation those items created by mandated changes in accounting treatment) and (B) any gain or loss of any other Person accounted for on the equity method, except to the extent of cash distributions received during the relevant period (y) plus the aggregate amounts deducted in determining Consolidated Net Income for such period in respect of (i) Consolidated Interest Expense, (ii) income taxes, (iii) depletion expense, (iv) depreciation expense and (iv) amortization expense. Notwithstanding the foregoing, in the calculation of Consolidated EBITDDA for each of the Fiscal Quarters ending September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003 and September 30, 2003, respectively, Consolidated EBITDDA shall be determined as follows: (i) for the Fiscal Quarter ending September 30, 2002, Consolidated EBITDDA shall be Historical EBITDDA, (ii) for the Fiscal Quarter ending December 31, 2002, Consolidated EBITDDA shall be the Historical EBITDDA multiplied by the - 4 - sum of 365 minus the number of days elapsed from the Closing Date until December 31, 2002 divided by 365, plus Consolidated EBITDDA of the Parent for the period beginning on the Closing Date and ending December 31, 2002, (iii) for the Fiscal Quarter ending March 31, 2003, Consolidated EBITDDA shall be the Historical EBITDDA of the Parent multiplied by the sum of 365 minus the number of days elapsed from the Closing Date until March 31, 2002 divided by 365, plus Consolidated EBITDDA of the Parent for the period beginning on the Closing Date and ending March 31, 2003, (iv) for the Fiscal Quarter ending June 30, 2003, Consolidated EBITDDA shall be Historical EBITDDA multiplied by the sum of 365 minus the number of days elapsed from the Closing Date until June 30, 2003, plus Consolidated EBITDDA of the Parent for the period beginning on the Closing Date and ending June 30, 2003, and (v) for the Fiscal Quarter ending September 30 2003, Consolidated EBITDDA shall be Historical EBITDDA multiplied by the sum of 365 minus the number of days elapsed from the Closing Date until September 30, 2003, plus Consolidated EBITDDA of the Parent for the period beginning on the Closing Date and ending September 30, 2003. "Consolidated Interest Expense" means, for the relevant period, on a Consolidated basis, the sum of all interest (including the interest portion of any capitalized lease obligations) and letter of credit fees or commissions due and payable by the Parent and its Consolidated Subsidiaries with regard to Indebtedness for such period. "Consolidated Net Income" means the net income (or deficit) of the Parent and its Consolidated Subsidiaries, for the period in question, after deducting all operating expenses, provisions for all taxes and reserves (including reserves for all deferred income taxes, if applicable) and all other proper deductions, all determined on a Consolidated basis. "Consolidated Subsidiaries" shall mean the Subsidiaries of the Borrower whose accounts are consolidated in accordance with GAAP. "Consolidated Total Indebtedness" means the Indebtedness of the Parent and its Consolidated Subsidiaries determined on a Consolidated basis. "Contamination" means the uncontained presence of Hazardous Substances at any real property of the Borrower or any Subsidiary of the Borrower, whether owned or leased, which may require clean-up or remediation under any applicable Environmental Law. "Contributors" has the meaning given it in Section 3.7a. "Disbursement" means each advance of funds by a Lender hereunder of a Revolving Credit Loan. "Distribution Loan" has the meaning given it in Subsection 2.1a. "Dollars" or "$" means the legal tender of the United States of America. "Drawing Date" has the meaning given it in Subsection 2.6d(ii). - 5 - "Encumbrance" means any encumbrance, mortgage, lien, charge, pledge, security interest, priority payment, conditional sales agreement right, or other title retention agreement right (including any right under a lease which, in accordance with GAAP, would be treated as a capitalized item) in, upon or against any asset of any Person. "Environmental Claim" means any claim, suit, notice, order, demand or other written communication made by any Person with respect to the Borrower or any Subsidiary of the Borrower or any of their respective properties, whether owned or leased, that: (i) asserts a violation of an applicable Environmental Law; (ii) asserts a liability under an applicable Environmental Law; (iii) orders investigation, corrective action, remediation or other legally enforceable response under an applicable Environmental Law; (iv) demands information under an applicable Environmental Law; (v) alleges personal injury or property damage resulting from exposure to or the presence of Hazardous Substances; or (vi) alleges that there is or may be Contamination. "Environmental Law(s)" means any and all Governmental Rules and any and all decrees, permits, licenses, agreements, authorizations or other governmental restrictions of any Governmental Authority relating to the environment or the release of any Hazardous Substances into the environment, whether now in existence or hereafter enacted, agreed to, adopted, issued or otherwise becoming effective. "ERISA" means the Employee Retirement Income Security Act of 1974, together with the regulations thereunder, as now in effect and as hereafter from time to time amended or any successor statute. "ERISA Affiliate" means, as of any date, the Borrower and any member of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities, which, together with the Borrower, are treated as of such date as a single employer under Section 414 of the Code. "Euro-Rate" means, with respect to portions of the Revolving Credit Loans to which the Euro-Rate Option applies for any Interest Period, the interest rate per annum determined by the Agent by dividing (the resulting quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum) (i) the rate of interest determined by the Agent in accordance with its usual procedures (which determination shall be conclusive, absent manifest error) to be the average of the London interbank offered rates for U.S. Dollars quoted by the British Bankers' Association as set forth on Dow Jones Markets Service (formerly known as Telerate) display page 3750 (or appropriate successor or, if British Bankers' Association or its successor ceases to provide such quotes, a comparable replacement determined by the Agent), two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Revolving Credit Loan and having a Borrowing Date and a maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The Euro-Rate may also be expressed by the following formula: - 6 - Average of London interbank offered rates on Dow Jones Markets Service display page 3750 Euro-Rate = as quoted by BBA or appropriate successor -------------------------------------------- 1.00 - Euro-Rate Reserve Percentage
"Euro-Rate Option" means the interest rate option described in item (ii) of Subsection 2.2b. "Euro-Rate Portion" means a Revolving Credit Loan, or portion thereof, which bears, or is to bear, interest at the Adjusted Euro-Rate. "Euro-Rate Reserve Percentage" means, as of any day, the maximum effective percentage (expressed as a decimal, rounded upward to the nearest 1/100th of 1%), as determined in good faith by the Agent (which determination shall be conclusive), which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). "Event of Default" has the meaning given it in Article VII. "Federal Funds Effective Rate" means, for any day, the rate per annum (based on a year of 360 days and the actual days elapsed and rounded upward to the nearest 1/100th of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day, as computed and announced by Federal Reserve Bank New York (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day for which such rate was announced. "Fees" means collectively the Agent's Fee, the Fronting Fee, the Letter of Credit Fee and the Commitment Fee. "Fiscal Quarter" means the three month fiscal period of the Parent or the Borrower, as the case may be, beginning on each October 1, January 1, April 1 and July 1 and ending on the succeeding December 31, March 31, June 30 and September 30, respectively. "Fiscal Year" means each fiscal period of the Parent or the Borrower, as the case may be, beginning January 1 and ending on the next succeeding December 31. "Form S-1" means the Parent's Form S-1 Registration Statement No. 333-86582, as amended. "Fronting Fee" has the meaning given it in Subsection 2.6b. - 7 - "GAAP" means generally accepted accounting principles as are in effect from time to time in the United States of America, subject to the provision of Section 1.2, which shall include, but not be limited to, the official interpretations thereof as defined by the Financial Accounting Standards Board, its predecessors and its successors, and applied on a consistent basis both as to classification of items and amounts. "General Partner" means NRP (GP) LP, a Delaware limited partnership and the sole general partner of the Parent. "General Revolving Loan" " has the meaning given it in Subsection 2.1a. "Governmental Acts" has the meaning given it in Subsection 2.6i. "Governmental Authority" means the government of the United States or the government of any state or locality therein, any political subdivision or any governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body or entity, or other regulatory bureau, authority, body or entity of the United States or any state or locality therein, including the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System, and any central bank of any other country or any comparable authority. "Governmental Rule" means any law, statute, rule, regulation, ordinance, order, judgment, guideline or decision of any Governmental Authority. "Granting Lender" has the meaning given it in Subsection 9.6d. "Guarantor" means the Parent and each Subsidiary of the Parent (other than the Borrower) in existence on the Closing Date and each Person which becomes a Subsidiary of the Parent after the Closing Date. "Guaranty" or "Guarantee" means any obligation, direct or indirect, by which a Person undertakes to guaranty, assume or remain liable for the payment or performance of another Person's obligations, including but not limited to (i) endorsements of negotiable instruments, (ii) discounts with recourse, (iii) agreements to pay or perform upon a second Person's failure to pay or perform, (iv) remaining liable on obligations assumed by a second Person, (v) agreements to maintain the capital, working capital solvency or general financial condition of a second Person and (vi) agreements for the purchase or other acquisition of products, materials, supplies or services, if in any case payment therefor is to be made regardless of the non-delivery of such products, materials or supplies or the non-furnishing of such services. "Guaranty Agreement" means any guaranty agreement executed by a Guarantor in favor of the Agent and the Lenders and in the form of Exhibit "D-1 or "D-2" hereto, as applicable, together with all extensions, renewals, amendments, substitutions and replacements thereof or thereto. "Hazardous Substances" means any (i) hazardous, toxic or polluting substances or wastes as defined by any Environmental Law or (ii) petroleum products. - 8 - "Hedging Obligation" means, with respect to any Person, all liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Historical EBITDDA" means $40,250,000. "Indebtedness" as applied to any Person means, without duplication, all liabilities of such Person for borrowed money (other than trade accounts payable arising in the ordinary course of business), direct or contingent (excluding any FASB 5 adjustments or accruals), whether evidenced by a bond, note, debenture, book entry or otherwise, and all obligations and liabilities in the nature of a capitalized lease obligation, deferred purchase price arrangement, title retention device, letter of credit obligation, Hedging Obligation, reimbursement agreement, or Guaranty, however evidenced. "Interest Period" means, subject to the provisions of Subsection 2.2c, any individual period of one (1), two (2), three (3) or six (6) months selected by the Borrower commencing on the Borrowing Date, conversion date or renewal date of a Euro-Rate Portion to which such period shall apply. "Lease" means any lease, mineral lease, mining agreement or other agreement to which the Borrower or any Subsidiary is a party and pursuant to which one Person transfers or grants to another Person the right to extract, mine or otherwise remove coal. "Lender" has the meaning given in the preamble to this Agreement. "Letter of Credit" has the meaning given it in Subsection 2.6a. "Letter of Credit Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made and shall not have been converted into a Revolving Credit Loan under Subsection 2.6d(ii). "Letter of Credit Fee" has the meaning given it in Subsection 2.6b. "Letters of Credit Outstanding" means at any time the sum of (i) the aggregate undrawn face amount of outstanding Letters of Credit and (ii) the aggregate amount of all unpaid and outstanding Reimbursement Obligations. "Loan Account" means the loan account maintained by the Agent as more fully described in Section 2.11. "Loan Documents" means collectively this Agreement, the Revolving Credit Notes, each Guaranty Agreement, each Letter of Credit and any application relating thereto, and any other documents executed and delivered in connection herewith. "Loan Party" means the Borrower and each Guarantor. - 9 - "Margin Stock" is defined herein as defined in Regulation U. "Material Adverse Change" means any set of circumstances or events which (a) has or could reasonably be expected to have any material adverse effect upon the validity or enforceability of this Agreement or any of the other Loan Documents, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition or results of operations of the Parent, the Borrower and its Subsidiaries, taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of the Parent, the Borrower and its Subsidiaries taken as a whole to duly and punctually pay their Indebtedness, or (d) impairs materially or could reasonably be expected to impair materially the ability of the Agent or any of the Lenders to enforce their legal remedies pursuant to this Agreement or any other Loan Document. "Material Contract" means any individual Lease or, collectively, group of Leases, from the Borrower or any of its Subsidiaries to a single operator or such operator's Affiliates which either (i) accounted for fifteen percent (15%) or more of the gross revenues from royalties of the Borrower and its Subsidiaries for the previous Fiscal Year, or (ii) is projected to account for fifteen percent (15%) or more of the gross revenues from royalties of the Borrower and its Subsidiaries for the current Fiscal Year, as shown on the projections delivered to the Agent by the Borrower pursuant to Section 4.2(x) below. "MLP Agreement" means the First Amended and Restated Partnership Agreement of the Parent dated October 17, 2002, as amended, restated, or replaced from time to time to the extent permitted under the Loan Documents. "Multiemployer Plan" means any employee benefit plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which the Borrower or any ERISA Affiliate is then making or accruing an obligation to make contributions or, within the preceding five Plan years, has made or had an obligation to make such contributions. "Moody's" means Moody's Investors Service, Inc. and its successors. "Omnibus Agreement" means that certain Omnibus Agreement, dated October 17, 2002, by and among the General Partner, the Parent, the Borrower, GP Natural Resource Partners LLC, WPP Group, Arch Coal, Ark Land Company, and Robertson Coal Management LLC, which provides, among other things, certain non-competition provisions and indemnities for environmental and tax liabilities. "Option" means any one or both of the Base Rate Option or the Euro-Rate Option. "Parent" means Natural Resource Partners L.P., a Delaware limited partnership and its successors and permitted assigns. "Participant" means any financial institution or other Person to which a Lender sells a Participation in its Revolving Credit Loan in accordance with Subsection 9.6c. - 10 - "Participation" means the sale by a Lender to any Participant of an undivided interest in all or any part of such Lender's Revolving Credit Loan. "Participation Advance" means, with respect to any Lender, such Lender's payment in respect of its participation in a Letter of Credit Borrowing according to its Ratable Share pursuant to Subsection 2.6d. "PBGC" means the Pension Benefit Guaranty Corporation or any successor Person. "Permitted Acquisition" has the meaning given it in Section 5.4. "Permitted Assets" means (i) Property substantially of the type owned by, and commonly used in the lines of business engaged by, the general and limited partners of the General Partner, the Parent, the Borrower and their respective Subsidiaries on the date hereof, (ii) any property interests in Coal and related rights and interests, (iii) creation and/or restoration of wetlands and wetlands credits, and (iv) any and all Property, real or personal, held for use or useful in connection with the operating, working or development of any of the foregoing and including any and all surface leases, rights-of-way, easements and servitudes. "Permitted Encumbrance" means, as to any Person, any of the following: (i) Encumbrances for taxes, assessments, governmental charges or levies on any of such Person's properties, which taxes, assessments, governmental charges or levies are at the time not due and payable or if they can thereafter be paid without penalty or are being contested in good faith by appropriate proceedings diligently conducted and with respect to which the affected Person has created adequate reserves; (ii) Pledges or deposits to secure payment of workers' compensation obligations, unemployment insurance, deposits or indemnities to secure public or statutory obligations or for similar purposes; (iii) Encumbrances arising out of judgments or awards against such Person not giving rise to an Event of Default, provided that such judgment or award is paid within thirty (30) days of its entry unless such judgment is subject to an appeal in which case adequate reserves shall have been set aside for the payment thereof; (iv) Mechanics', carriers', workmen's, repairmen's, operator's, vendor's, warehousemen's, supplier's, worker's, materialmen's, construction, securities intermediaries or other similar Encumbrances arising by operation of law and incurred in the ordinary course of such Person's business, so long as the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings diligently conducted; (v) Security interests in favor of lessors of personal property, which property is the subject of a true lease between such lessor and such Person: - 11 - (vi) Encumbrances securing Indebtedness existing on the Closing Date without enlargement or extension of the Indebtedness secured thereby or the assets encumbered thereby (any such Encumbrance securing Indebtedness on the Closing Date is listed on Schedule 5.2); (vii) Easements, rights-of-way, restrictions, leases or subleases to others or other similar Encumbrances created in the ordinary course of business which Encumbrances do not interfere in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (viii) Encumbrances arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies and burdening only deposit accounts or other funds maintained with a creditor depository institution, provided that (a) no such deposit account is a dedicated cash collateral account or is subject to restrictions against access by the depositor in excess of those set forth by regulations promulgated by the Board of Governors of the Federal Reserve System, and (b) no such deposit account is intended by the Borrower or any of its Subsidiaries to provide collateral to the depository institution; (ix) Encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of property or services), easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any property of the Borrower or any Subsidiary, for the purpose of roads, pipelines, transmission lines, transportation lines, distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment and defects, irregularities, zoning restrictions and deficiencies in title of any property that in the aggregate do not materially impair the use of such property for the purposes of which such property is held by the Borrower or any Subsidiary or materially impair the value of such property subject thereto; and (x) Encumbrances securing (i) the performance (not more than 60 days delinquent) of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other obligations of a like nature (so long as the performance of such obligations is not more than 60 days delinquent); in each case, incurred in the ordinary course of business, provided all such Encumbrances in the aggregate does not or could not (even if enforced) reasonably be expected to cause a Material Adverse Change. "Permitted Investments" means the following: (i) Readily marketable direct obligations of the Government of the United States or any agency or instrumentality thereof or obligations unconditionally guaranteed by the full faith and credit of the Government of the United States and having a maturity not greater than twelve (12) months; - 12 - (ii) Commercial paper maturing in 180 days or less rated not lower than A-1 by S&P or P-1 by Moody's on the date of acquisition; and (iii) Dollar denominated demand deposits, time deposits or certificates of deposit maturing within one year in domestic commercial banks of recognized standing having capital and surplus in excess of $250,000,000 and whose commercial paper or other short-term unsecured debt obligations are rated A-1 or the equivalent or better by S&P or P-1 or the equivalent or better by Moody's on the date of acquisition. "Person" means any individual, partnership, corporation, trust, joint venture, banking association, unincorporated organization or any other entity or enterprise or government or department or agency thereof. "Plan" means at any time an employee pension benefit plan (not including a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained by the Borrower or any ERISA Affiliate for employees of the Borrower or any ERISA Affiliate or (ii) has at any time within the preceding five years been maintained by any entity which was at such time an ERISA Affiliate for employees of any entity which was an ERISA Affiliate. "Portion" means either the Base Rate Portion, the Euro-Rate Portion, or both of the foregoing, as the case may be. "Potential Default" means an event which, with the passage of time or the giving of notice or both, shall be an Event of Default. "Prime Rate" means the interest rate per annum announced from time to time by the PNC Bank, National Association as its prime rate, which rate may not be the lowest rate of interest then being charged by the PNC Bank, National Association to its commercial borrowers. "Pro Forma Compliance Certificate" means a Pro Forma Compliance Certificate substantially in the form of Exhibit "G". "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Purchasing Lender" has the meaning given it in Subsection 9.6a. "Quarterly Distributions" means the distributions by the Parent of Available Cash. "Ratable Share" means the proportion that a Lender's Revolving Credit Commitment bears to the aggregate Revolving Credit Commitments of the Lenders. "Register" has the meaning given it in Subsection 9.6b. - 13 - "Regulation D" means Regulation D promulgated by the Board of Governors of the Federal Reserve System (12 C.F.R. Part 204 et seq.) as such regulation is now in effect and as may hereafter be amended. "Regulation T" means Regulation T promulgated by the Board of Governors of the Federal Reserve System (12 C.F.R. Part 204 et seq.) as such regulation is now in effect and as may hereafter be amended. "Regulation U" means Regulation U promulgated by the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221 et seq.) as such regulation is now in effect and as may hereafter be amended. "Regulation X" means Regulation X promulgated by the Board of Governors of the Federal Reserve System (12 C.F.R. Part 224 et seq.) as such regulation is now in effect and as may hereafter be amended. "Reimbursement Obligation" has the meaning given it in Subsection 2.6d(ii). "Reportable Event" means any one or more event, defined in Section 4043(b) of ERISA and in 29 C.F.R. Part 2615, other than an event for which the requirement for the thirty (30) day notice to the PBGC is waived. "Required Lenders" means as of a particular date, the Lenders then holding at least sixty-six and two-thirds percent (66-2/3%) of the sum of the aggregate Revolving Credit Commitments (whether or not utilized) of all of the Lenders then in effect and, after the termination of the Revolving Credit Commitments, the Lenders then holding at least sixty-six and two-thirds percent (66-2/3%) of the sum of the aggregate principal amount of the Revolving Credit Loans and the Letters of Credit Outstanding, both at the particular time outstanding; provided that in any event if one Lender holds at least the minimum percentages set forth above at the time of any determination of Required Lenders, the term "Required Lenders" shall be adjusted to include both the minimum percentage requirement plus the vote of two Lenders if there is more than one Lender. "Restricted Payment" has the meaning given it in Section 5.1. "Revolving Credit Commitment" means, as to each Lender, the obligation of such Lender to make Revolving Credit Loans available to the Borrower pursuant to Section 2.1 in an aggregate principal amount not to exceed the amount captioned "Revolving Credit Commitment" set opposite such Lender's name on the signature pages hereto and thereafter on Schedule 1 of any relevant Assignment and Assumption Agreement (as the same may be reduced at any time or from time to time pursuant to Section 2.10) and, as to all Lenders, the obligation of the Lenders to make Revolving Credit Loans available to the Borrower in an aggregate amount equal to the Revolving Credit Commitments of all of the Lenders. "Revolving Credit Commitment Percentage" means, as to each Lender, the percentage of the Revolving Credit Commitment set forth opposite such Lender's name on the signature pages hereto as such amount may change from time to time in accordance with the terms hereof. - 14 - "Revolving Credit Loan" means a Disbursement by a Lender to the Borrower pursuant to Section 2.1. "Revolving Credit Loan Request" has the meaning given it in Subsection 2.1d. "Revolving Credit Notes" means any one or all of the several promissory notes of the Borrower evidencing Indebtedness of the Borrower under the Revolving Credit Commitments which notes are substantially in the form of Exhibit "A" to the Agreement, together with all extensions, renewals, amendments, modifications, substitutions and replacements thereto and thereof. "S&P" means Standard & Poor's Rating Group, a division of McGraw-Hill, Inc. and its successors. "Solvent" means, with respect to any Person on a particular date, that on such date (i) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (ii) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (iii) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or proposes to engage. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "SPC" has the meaning given it in Subsection 9.6d. "Subsidiary" of any Person at any time means (i) any corporation or trust of which more than 50% (by number of shares or number of votes) of the outstanding capital stock or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, (ii) any partnership of which such Person is a general partner or of which more than 50% of the partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries, or (iii) any limited liability company of which such Person is a member or of which more than 50% of the limited liability company interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries. Unless otherwise specified, all references herein to a "Subsidiary" or to "Subsidiaries" shall refer to a Subsidiary or Subsidiaries of the Borrower. - 15 - "Termination Date" means the date which is three (3) years after the Closing Date. "Termination Proceedings" means any action taken by the PBGC under ERISA to terminate any plan. "Transaction" means, collectively, (i) the formations, mergers, contributions and other transfers of interests in certain corporations, limited liability companies and/or partnerships, (ii) the conveyances of assets and properties, (iii) the sale to the public of 4,500,000 common units in the Parent by the Parent and Arch Coal, (iv) the disposition of the proceeds of such sale, and (v) those certain other actions to occur on or before the Closing Date as contemplated and described in the Form S-1. "Transfer Effective Date" has the meaning given it in each respective Assignment and Assumption Agreement. "Transferor Lender" has the meaning given it in Subsection 9.6a. "WPP Group" means, collectively, Western Pocahontas Properties Limited Partnership, a Delaware limited partnership, Great Northern Properties Limited Partnership, a Delaware limited partnership, and New Gauley Coal Corporation, a West Virginia corporation. 1.2 ACCOUNTING PRINCIPLES. Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP; provided, however, that all accounting terms used in Section 5.3 (and all defined terms used in the definition of any accounting term used in Section 5.3) shall have the meaning given to such terms (and defined terms) under GAAP as in effect on the date hereof applied on a basis consistent with those used in preparing the financial statements referred to in Subsection 3.7a. In the event of any change after the date hereof in GAAP, and if such change would result in the inability to determine compliance with the financial covenants set forth in Section 5.3 based upon the Parent's regularly prepared financial statements by reason of the preceding sentence, then the parties hereto agree to endeavor, in good faith, to agree upon an amendment to this Agreement that would adjust such financial covenants in a manner that would not affect the substance thereof, but would allow compliance therewith to be determined in accordance with the Parent's financial statements at that time. 1.3 OTHER DEFINITIONAL CONVENTIONS AND RULES OF CONSTRUCTION. (i) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall, unless otherwise expressly specified, refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article, Section and Subsection references are to this Agreement unless otherwise expressly specified. (ii) All terms defined in this Agreement in the singular shall have comparable meanings when used in plural, and vice versa, unless otherwise specified. - 16 - (iii) The word "or" as used herein shall mean and connote nonexclusive alternatives, unless expressly stated or the context clearly requires otherwise. 2. THE REVOLVING CREDIT LOANS 2.1 REVOLVING CREDIT LOANS. 2.1a REVOLVING CREDIT FACILITY . Subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, each Lender severally agrees to make Revolving Credit Loans to the Borrower at any time from time to time on or after the date hereof to, but not including, the Termination Date, provided that the aggregate principal amount of each Lender's Revolving Credit Loans outstanding hereunder to the Borrower shall not exceed at any one time an amount equal to such Lender's Revolving Credit Commitment Percentage of the aggregate Revolving Credit Commitments minus such Lender's Ratable Share of the Letters of Credit Outstanding. Within such limits of time and amount and subject to the other provisions of this Agreement, the Borrower may borrow, repay and reborrow pursuant to this Subsection 2.1a. The aggregate amount of the Revolving Credit Commitments on the Closing Date is $100,000,000. Each Revolving Credit Loan shall be designated at the time of borrowing by the Borrower, based upon its intended use, as either a General Revolving Loan or a Distribution Loan. General Revolving Credit Loans shall be available to the Borrower solely for the purposes set forth in Section 4.1(i) (each such Revolving Credit Loan, a "General Revolving Credit Loan"). Distribution Loans shall be available for the purposes set forth in Section 4.1(ii) and shall not exceed $12,000,000 in the aggregate at any one time outstanding (each such Revolving Credit Loan, a "Distribution Loan"), subject to the requirements of Section 4.12 hereof. 2.1b REVOLVING CREDIT COMMITMENT OF EACH LENDER. The obligations of each Lender to make Revolving Credit Loans hereunder are several. The failure of any Lender to make Revolving Credit Loans hereunder shall not affect the obligations of the Borrower, or any other Lender, to any other party nor shall the Borrower, or any other Lender, be liable for the failure of such Lender to make Revolving Credit Loans hereunder. The Lenders shall have no obligation to make Revolving Credit Loans hereunder on or after the Termination Date. 2.1c REVOLVING CREDIT NOTES. The obligation of the Borrower to repay, on or before the Termination Date, the aggregate unpaid principal amount of all Revolving Credit Loans shall be evidenced by the several Revolving Credit Notes, each substantially in the form of Exhibit "A" hereto, drawn by the Borrower to the order of a Lender in the maximum amount of such Lender's Revolving Credit Commitment. The principal amount actually due and owing to a Lender at any time with respect to its Revolving Credit Commitment shall be the then aggregate unpaid principal amount of all Revolving Credit Loans made by such Lender as shown on the Loan Account established and maintained by the Agent in accordance with Section 2.11. Each Revolving Credit Note shall be dated the date hereof (or such other date as provided in Section 9.6) and shall be delivered to the Lenders on such date. 2.1d REVOLVING CREDIT LOAN REQUEST. Except as otherwise provided herein, the Borrower may from time to time prior to the Termination Date request the Lenders to make Revolving - 17 - Credit Loans to the Borrower by the delivery to the Agent, not later than 11:00 A.M. (eastern time) (i) three (3) Business Days prior to the proposed Borrowing Date with respect to the making of Revolving Credit Loans to which the Euro-Rate Option applies; and (ii) on the Business Day of the proposed Borrowing Date with respect to the making of Revolving Credit Loans to which the Base Rate Option applies of a duly completed request therefor substantially, in the form of Exhibit "B" hereto or a request by telephone immediately confirmed in writing by letter or facsimile in such form (each, a "Revolving Credit Loan Request"), it being understood that the Agent may rely on the authority of any person making such a telephonic request without the necessity of receipt of such written confirmation. Each Revolving Credit Loan Request shall be irrevocable and shall specify (i) the proposed Borrowing Date; (ii) whether the Revolving Credit Loan is a General Revolving Loan or a Distribution Loan; (iii) the aggregate amount of the proposed Revolving Credit Loans to be made on such Borrowing Date, which amount, as to Base Rate Portions of Revolving Credit Loans, shall be in integral multiples of $100,000 and not less than $300,000, and, as to Euro-Rate Portions of Revolving Credit Loans, shall be in integral multiples of $1,000,000 and not less than $3,000,000; (iv) whether the Euro-Rate Option or the Base Rate Option shall apply to the proposed Revolving Credit Loans to be made on such Borrowing Date; and (v) in the case of Revolving Credit Loans to which the Euro-Rate Option applies, an appropriate Interest Period for each Euro-Rate Portion of the Revolving Credit Loans to be made on such Borrowing Date. 2.1e MAKING REVOLVING CREDIT LOANS. The Agent shall, promptly after receipt by it of a Revolving Credit Loan Request pursuant to Subsection 2.1d (but not later than noon (eastern time) on the Borrowing Date for same day funding and 2:00 P.M. (eastern time) on the second Business Day preceding any Borrowing Date for which any Portion of the Revolving Credit Loans to be made on such Borrowing Date bears interest at the Euro-Rate Option), notify the Lenders of its receipt of such Revolving Credit Loan Request specifying: (i) the proposed Borrowing Date and the time and method of disbursement of such Revolving Credit Loan; (ii) the amount and type of such Revolving Credit Loan and the applicable Euro-Rate Portions and Interest Periods (if any); and (iii) the apportionment among the Lenders of the Revolving Credit Loans as determined by the Agent in accordance with Subsection 2.1a hereof. Each Lender shall remit the principal amount of each Revolving Credit Loan to the Agent such that the Agent is able to, and the Agent shall, to the extent the Lenders have made funds available to it for such purpose, fund such Revolving Credit Loan to the Borrower in Dollars and immediately available funds at the principal office of the Agent in Pittsburgh, Pennsylvania prior to 2:00 P.M. (eastern time) on the Borrowing Date, provided that if any Lender fails to remit such funds to the Agent in a timely manner, or any Lender fails to advise the Agent of its intention not to fund, then the Agent may elect in its sole discretion to fund with its own funds the Revolving Credit Loan of such Lender on the Borrowing Date, subject to the provisions of Section 8.3 below. 2.2 INTEREST RATES, INTEREST PAYMENT AND CERTAIN PROVISIONS RELATING TO INTEREST AND FEES. 2.2a PAYMENTS OF INTEREST. The Borrower shall pay interest on the principal amount of the Revolving Credit Loans from time to time outstanding hereunder, from the date thereof until paid in full, at the rates of interest determined pursuant to this Section 2.2. The Borrower shall pay accrued interest on the unpaid principal balance of the Revolving Credit Loans in arrears: - 18 - (i) with respect to each Base Rate Portion, at the Base Rate on the last day of each Fiscal Quarter during the term thereof; (ii) with respect to each Euro-Rate Portion, at the Adjusted Euro-Rate on the last day of each Interest Period as provided for in Subsection 2.3c (provided, however, if the Interest Period chosen for a Euro-Rate Portion exceeds three (3) months, interest on that Euro-Rate Portion shall be due and payable on the day which is (A) three months after the first day of such Interest Period and (B) the last day of such Interest Period); and (iii) with respect to all such Portions, at the applicable interest rate (A) when due, at maturity, whether by acceleration or otherwise, and (B) after maturity, on demand until paid in full. 2.2b INTEREST RATE OPTIONS. The unpaid principal amount of the Revolving Credit Loans shall bear interest, for each day until due, at one or more rates of interest selected by the Borrower from among the Options set forth below; it being understood that, subject to the provisions of this Agreement, the Borrower may select different Options to apply simultaneously to different Portions of the Revolving Credit Loans and may select different Interest Periods to apply simultaneously to different Portions of the Euro-Rate Portions of the Revolving Credit Loans. (i) Base Rate Option: A rate of interest per annum (computed upon the basis of a year of 365 or 366 days, as the case may be, and the actual number of days elapsed) equal to the Base Rate. The rate of interest per annum under the Base Rate Option shall be adjusted automatically, from time to time, upon each change in the Base Rate. (ii) Euro-Rate Option: A rate of interest per annum (computed on the basis of a year of 360 days and the actual number of days elapsed) equal to the sum of (A) the Euro-Rate plus (B) the Applicable Euro-Rate Margin from time to time in effect (the "Adjusted Euro-Rate"). The Adjusted Euro-Rate for each Euro-Rate Portion then outstanding shall be adjusted automatically, from time to time, effective upon each change in the Applicable Euro-Rate Margin resulting from an increase or decrease in the Parent's ratio of Consolidated Total Indebtedness to Consolidated EBITDDA. 2.2c INTEREST PERIODS; LIMITATIONS ON ELECTIONS. At any time when the Borrower shall select, convert to or renew at the Euro-Rate Option with respect to all or any Portion of the outstanding Revolving Credit Loans, it shall fix one or more Interest Periods during which such Option(s) shall apply. All of the foregoing, however, is subject to the following: (i) any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next Business Day unless such Business Day falls in the succeeding calendar month in which case such Interest Period shall end on the next preceding Business Day; and (ii) any Interest Period which begins on the last day of a calendar month or on a day for which there is no numerically corresponding day in the subsequent calendar month during which such Interest Period is to end shall end on the last Business Day of such subsequent month. - 19 - In addition, elections by the Borrower of the Euro-Rate Option shall be subject to the following further limitations: (A) The Euro-Rate Portions for each Interest Period shall be in integral multiples of $1,000,000 and not less than $3,000,000; (B) If an Interest Period is elected and such Interest Period would end after the Termination Date, such Interest Period shall end on the Termination Date; and (C) At no time may there be more than six (6) Interest Periods in effect relating to Revolving Credit Loans; provided, however if a Base Rate Portion is outstanding there shall be not more than five (5) Interest Periods in effect relating to Revolving Credit Loans. 2.2d ELECTION, CONVERSION OR RENEWAL OF INTEREST RATE OPTIONS. Elections of or conversions to the Base Rate Option shall continue in effect until converted to the Euro-Rate Option as hereinafter provided. Elections of, conversions to or renewals of the Euro-Rate Option shall expire as to each Euro-Rate Portion at the expiration of the applicable Interest Period. At any time, with respect to any Base Rate Portion, or at the expiration of the applicable Interest Period, with respect to any Euro-Rate Portion, the Borrower (subject to Subsection 2.2c) may cause all or any part of the principal amount of such Portion to be converted to and/or (in the case of a Euro-Rate Portion) to be renewed under the Euro-Rate Option by notice to each of the Lenders as hereinafter provided. Such notice (i) shall be irrevocable; (ii) shall be given not later than 11:00 A.M. (eastern time) in the case of a conversion to or renewal of, either in whole or in part, the Euro-Rate Option on the third Business Day prior to the proposed effective date for the conversion or renewal; and (iii) shall set forth: (A) the effective date of such conversion or renewal, which shall be a Business Day; (B) the new Interest Period(s) selected; and (C) with respect to each such Interest Period, the aggregate principal amount of the corresponding Euro-Rate Portion. At the expiration of each Interest Period, any part (including the whole) of the principal amount of the corresponding Euro-Rate Portion as to which no notice of conversion or renewal has been received as provided above, shall automatically be converted to the Base Rate Option. 2.2e NOTIFICATION OF ELECTION OF AN INTEREST RATE OPTION. Any communication under Subsection 2.1d, 2.2b or 2.2d may be oral or written and if oral, it shall be followed immediately by written confirmation of such Option election executed by an Authorized Officer. 2.2f INTEREST AFTER DEFAULT. (A) Any amount not paid when due (including interest), whether by acceleration or otherwise and whether or not judgment has been entered against the Borrower - 20 - thereon, shall bear interest at a rate per annum which shall be two hundred (200) basis points (2%) per annum above the rate otherwise in effect with respect to such amount. (B) Upon the occurrence of an Event of Default, and during the continuance of such Event of Default, upon notice from the Agent (acting upon the instructions of the Required Lenders) to the Borrower: (i) all Base Rate Portions shall bear interest at a rate per annum which shall be two hundred (200) basis points (2%) per annum above the rate otherwise in effect under the Base Rate Option, such interest rate to change automatically from time to time, effective as of the effective date of each change in the Base Rate; and (ii) all Euro-Rate Portions shall bear interest (i) until the end of the then current Interest Period, at a rate per annum which shall be two hundred (200) basis points (2%) per annum above the rate otherwise in effect under the Euro-Rate Option, and (ii) at the end of the then current Interest Period, and thereafter at the sum of (A) the Base Rate plus (B) two hundred (200) basis points (2%) per annum. 2.3 YIELD-PROTECTION, CAPITAL ADEQUACY AND MISCELLANEOUS PROVISIONS RELATING TO EURO-RATE. 2.3a YIELD PROTECTION. Notwithstanding other provisions of this Section 2.3: (a) With respect to any Lender, if, after the date hereof, any adoption of or any change in or in the interpretation of any Governmental Rule, shall: (i) subject such Lender to any tax, levy, impost charge, fee, duty, deduction or withholding of any kind with respect to payments of principal or interest or other amounts due hereunder (other than any tax imposed or based upon the income, gross receipts or capital or franchise taxes of such Lender and payable to any Governmental Authority in the United States of America or any state thereof and other than taxes due by a failure of such Lender to comply with Section 9.4); or (ii) change the basis of taxation of such Lender with respect to payments of principal or interest or other amounts due hereunder (other than any change which affects, and only to the extent that it affects, the taxation by the United States or any state thereof of the total net income of such Lender); or (iii) impose, modify or deem applicable any reserve, special deposit or similar requirements against assets held by such Lender applicable to its Revolving Credit Commitment or Revolving Credit Loans made hereunder (other than such requirements which are included in the determination of the applicable rate of interest hereunder); or (iv) impose upon such Lender any other obligation or condition with respect to this Agreement. and the result of any of the foregoing is to increase the cost to the affected Lender, reduce the income receivable by the affected Lender, reduce the rate of return on the affected Lender's capital, or impose any expenses upon the affected Lender, all with respect to any of the - 21 - Revolving Credit Loans (or any portion thereof) by an amount which the affected Lender reasonably deems material, and if the affected Lender is then demanding similar compensation for such occurrences from other borrowers who are similarly situated and who have a similar relationship with the affected Lender and from which the affected Lender has the right to demand such compensation, then and in any such case: (A) the affected Lender shall promptly notify the Borrower of the happening of such event; (B) the Borrower shall pay to the affected Lender, within two (2) Business Days of demand, such amount as will compensate the affected Lender for such reduction in its rate of return; and (C) the Borrower may pay the affected portion of the affected Lender's Revolving Credit Loans in full without the payment of any additional amount, including prepayment penalties, other than amounts payable on account of the affected Lender's out-of-pocket losses (including funding loss, if any, as provided in Section 2.9) which are not otherwise provided for in subparagraph (B) immediately above. Notwithstanding the foregoing, if any Lender demands compensation from the Borrower under this Section 2.3a more than 180 days after such Lender had knowledge of the occurrence of the event giving rise to such claim for compensation, the Borrower shall not be obligated to reimburse such Lender for amounts incurred as a result of the occurrence of such event more than 180 days prior to the date on which the Lender made such demand (provided that if the event giving rise to claim for compensation or indemnification is retroactive, then such 180 day period shall be extended to include the period of retroactive effect). (b) A certificate as to the increased cost or reduced amount as a result of any event mentioned in this Subsection 2.3a shall be promptly submitted by the affected Lender to the Borrower in accordance with the provisions hereof. Such certificate shall be prima facie evidence as to the amount of such increased cost or reduced amount. 2.3b CAPITAL ADEQUACY. If, after the date hereof, (i) any adoption of or any change in or in the interpretation of any Governmental Rule, or (ii) compliance with any Governmental Rule of any Governmental Authority exercising control over banks or financial institutions generally or any court of competent jurisdiction, requires that the Revolving Credit Commitment (including, without limitation, obligations in respect of any Revolving Credit Loans) hereunder be treated as an asset or otherwise be included for purposes of calculating the appropriate amount of capital to be maintained by any Lender or any corporation controlling any Lender (a "Capital Adequacy Event") the result of which is to reduce the rate of return on a Lender's capital as a consequence of its Revolving Credit Commitment to a level below that which the affected Lender could have - 22 - achieved but for such Capital Adequacy Event, taking into consideration the Lender's policies with respect to capital adequacy, by an amount which the affected Lender reasonably deems to be material, the affected Lender shall promptly deliver to the Borrower a statement of the amount necessary to compensate the affected Lender or the reduction in the rate of return on its capital attributable to its Revolving Credit Commitment (the "Capital Compensation Amount"). The affected Lender shall determine the Capital Compensation Amount in good faith, using reasonable attribution and averaging methods. Each affected Lender shall from time to time notify the Borrower of the amount so determined. Each such notification shall be prima facie evidence of the amount of the Capital Compensation Amount set forth therein, and such Capital Compensation Amount shall be due and payable by the Borrower to the affected Lender thirty (30) days after such notice is given. As soon as practicable after any Capital Adequacy Event, the affected Lender shall submit to the Borrower estimates of the Capital Compensation Amounts that would be payable as a function of the affected Lender's Revolving Credit Commitment hereunder. Notwithstanding the foregoing, if any Lender demands compensation from the Borrower under this Section 2.3b more than 180 days after such Lender had knowledge of the occurrence of the event giving rise to such claim for compensation, the Borrower shall not be obligated to reimburse such Lender for amounts incurred as a result of the occurrence of such event more than 180 days prior to the date on which the Lender made such demand (provided that if the event giving rise to claim for compensation or indemnification is retroactive, then such 180 day period shall be extended to include the period of retroactive effect). 2.3c EURO-RATE UNASCERTAINABLE. If, on any date on which the Adjusted Euro-Rate would otherwise be set, the Agent reasonably shall have determined (which determination shall be final and conclusive) that by reason of circumstances affecting the interbank Eurodollar market, adequate and reasonable means do not exist for ascertaining the Euro-Rate, the Agent shall give prompt notice of such determination to the Borrower and the Lenders and, until the Agent notifies the Borrower and the Lenders that the circumstances giving rise to such determination no longer exist, the right of the Borrower to borrow under, convert to or renew the Euro-Rate Option shall be suspended with respect to any period for which the Euro-Rate is not ascertainable, and with respect to any such period, any notice of borrowing under, conversion to or renewal of the Euro-Rate Option which was to become effective during the period of such suspension shall be treated as a request to borrow under, convert to or renew at the Base Rate Option with respect to the principal amount therein specified. 2.3d ILLEGALITY. If a Lender shall determine in good faith (which determination shall be final and conclusive) that compliance by such Lender with any applicable law, treaty or other Governmental Rule (whether or not having the force of law), or the interpretation or application thereof by any Governmental Authority, has made it unlawful for such Lender to make or maintain the Revolving Credit Loans under the Euro-Rate Option (including but not limited to acquiring Eurodollar liabilities to fund such Revolving Credit Loans), such Lender shall give notice of such determination to the Borrower and the other Lenders. Notwithstanding any provision of this Agreement to the contrary, unless and until the affected Lender shall have given notice to the Borrower and the other Lenders that the circumstances giving rise to such determination no longer apply: - 23 - (i) with respect to any Interest Periods thereafter commencing, interest on the Revolving Credit Loans bearing interest at the Adjusted Euro-Rate (whichever one or more have been determined by the affected Lender to be unlawful) shall, unless the Borrower shall have selected a different Option which is then available, be computed and payable under the Base Rate Option; and (ii) on such date, if any, as shall be required by law, any Revolving Credit Loans bearing interest at the Adjusted Euro-Rate then outstanding shall be automatically converted to the Base Rate Option, and the Borrower shall pay to the affected Lender the accrued and unpaid interest on such Revolving Credit Loans to (but not including) the date of such conversion at the applicable interest rate or rates in effect for such Revolving Credit Loans prior to such conversion. 2.4 FEES. 2.4a COMMITMENT FEE. The Borrower agrees to pay to the Agent on behalf of the Lenders, on a pro rata basis, beginning on December 31, 2002, and continuing quarterly in arrears thereafter on the last day of each March, June, September and December during the term hereof to and including the Termination Date, a Commitment Fee calculated at a rate per annum equal to the Commitment Fee Rate on the average daily unused portion of the Revolving Credit Commitment for the quarter then ending; provided, however, the first payment under this Subsection 2.4a shall be only for the actual number of days elapsed between the Closing Date and December 31, 2002, and the last payment under this Subsection 2.4a shall be only for the actual number of days elapsed between the last quarterly payment date and the Termination Date. 2.4b AGENT'S FEE. The Borrower agrees to pay to the Agent for its own account the non-refundable Agent's Fees for the Agent's services hereunder under the terms of that certain letter (the "Agent's Letter") between the Borrower and the Agent dated as of the Closing Date. 2.4c LETTER OF CREDIT FEE AND FRONTING FEE. The Borrower shall pay to the Agent, from time to time, for the benefit of the Lenders, the Letter of Credit Fee as set forth in Subsection 2.6b. The Borrower shall pay to the Agent, from time to time, for its sole account, the Fronting Fee as set forth in Subsection 2.6b. 2.5 CALCULATION OF INTEREST AND CERTAIN FEES. The calculation of the amount of interest due and owing to each Lender shall be made by the Agent and shall be evidenced by the Agent posting the amount of interest due under such Lender's Revolving Credit Loans to the Loan Account established pursuant to Section 2.11. The Commitment Fee shall be calculated on the basis of a 360 day year and actual number of days elapsed. The calculation of the amount of the Commitment Fee due and owing to each Lender shall be made by the Agent and shall be evidenced by posting such amount due under the Loan Account established pursuant to Section 2.11. 2.6 LETTER OF CREDIT SUB-FACILITY. - 24 - 2.6a ISSUANCE OF LETTERS OF CREDIT. The Borrower may request the issuance of a letter of credit (each a "Letter of Credit") by delivering to the Agent a completed application and agreement for letters of credit in such form as the Agent may specify from time to time by no later than 10:00 A.M., Pittsburgh, Pennsylvania time, at least five (5) business Days, or such shorter period as may be agreed to by the Agent, in advance of the proposed date of issuance. Each Letter of Credit shall be denominated in Dollars. Subject to the terms and conditions hereof and in reliance on the agreements of the other Lenders set forth in this Section 2.6, the Agent will issue a Letter of Credit provided that each Letter of Credit shall (A) have a maximum maturity of one year from the date of issuance, and (B) in no event expire later than ten (10) Business Days prior to the Termination Date and provided that in no event shall the aggregate amount of Letters of Credit Outstanding exceed, at any one time, $2,000,000. The amount of Letters of Credit Outstanding at any time shall reduce the maximum amount otherwise available for Revolving Credit Loans under the Revolving Credit Commitments. No Letters of Credit may be issued hereunder to the extent that such issuance would cause the sum of (i) the Letters of Credit Outstanding plus (ii) the aggregate amount of Revolving Credit Loans outstanding to exceed the aggregate amount of Revolving Credit Commitments then in effect. 2.6b LETTER OF CREDIT FEES. The Borrower shall pay to the Agent for the ratable account of the Lenders a fee (the "Letter of Credit Fee") equal to the Applicable Euro-Rate Margin for Revolving Credit Loans (computed on the basis of a year of 360 days and actual days elapsed), which fees shall be computed on the daily average amount of the Letters of Credit Outstanding and shall be payable quarterly in arrears commencing with the last day of each September, December, March and June following issuance of each Letter of Credit. The Borrower shall also pay to the Agent for the Agent's sole account (i) one-eighth of one percent (.125%) per annum of the amount of any Letters of Credit Outstanding (the "Fronting Fee") quarterly in arrears, and (ii) as incurred, the Agent's then current customary fees and administrative expenses payable with respect to the Letters of Credit as the Agent may generally charge or incur from time to time in connection with the issuance, maintenance, modification (if any), assignment or transfer (if any), negotiation, and administration of Letters of Credit. 2.6c LETTER OF CREDIT FEES UPON DEFAULT. (A) Upon the occurrence of an Event of Default, and during the continuance of such Event of Default, upon notice from the Agent (acting upon the instructions of the Required Lenders) to the Borrower, or (B) upon the acceleration of the Bank Indebtedness for any reason hereunder, the Letter of Credit Fee shall be automatically increased by two percent (2%) in excess of the applicable Letter of Credit Fee then in effect. 2.6d DISBURSEMENTS, REIMBURSEMENT. (i) Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Agent a participation in such Letter of Credit and each drawing thereunder in an amount equal to such Lender's Ratable Share of the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. (ii) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Agent will promptly notify the Borrower of the - 25 - amount of such drawing and the date such payment shall be made. The Borrower shall reimburse (such obligation to reimburse the Agent shall sometimes be referred to as a "Reimbursement Obligation") the Agent for any amount paid by the Agent under any Letter of Credit (each such date of a payment by the Agent under a Letter of Credit, a "Drawing Date") in an amount equal to the amount so paid by the Agent. Such Reimbursement Obligation shall be paid prior to 12:00 noon, Pittsburgh, Pennsylvania time, on the Drawing Date. In the event the Borrower fails to reimburse the Agent for the full amount of any drawing under any Letter of Credit by 12:00 noon, Pittsburgh, Pennsylvania time, on the Drawing Date, the Agent will promptly notify each Lender thereof, and the Borrower shall be deemed to have requested that Revolving Credit Loans be made by the Lenders under the Base Rate Option to be disbursed on the Drawing Date under such Letter of Credit, subject to the amount of the unutilized portion of the Revolving Credit Commitments and subject to the conditions set forth in Section 6.1 other than any notice requirements. Any notice given by the Agent pursuant to this Subsection 2.6d(ii) may be oral if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (iii) Each Lender shall upon any notice pursuant to Subsection 2.6d(ii) make available to the Agent an amount in immediately available funds equal to its Ratable Share of the amount of the drawing, whereupon the participating Lenders shall (subject to Subsection 2.6d(iv)) each be deemed to have made a Revolving Credit Loan under the Base Rate Option to the Borrower in that amount. If any Lender so notified fails to make available to the Agent for the account of the Agent the amount of such Lender's Ratable Share of such amount by no later than 2:00 P.M., Pittsburgh, Pennsylvania time on the Drawing Date, then interest shall accrue on such Lender's obligation to make such payment, from the Drawing Date to the date on which such Lender makes such payment (i) at a rate per annum equal to the Federal Funds Effective Rate during the first three days following the Drawing Date and (ii) at a rate per annum equal to the rate applicable to Revolving Credit Loans under the Base Rate Option on and after the fourth day following the Drawing Date. The Agent will promptly give notice of the occurrence of the Drawing Date to each Lender, but failure of the Agent to give any such notice on the Drawing Date or in sufficient time to enable any Lender to effect such payment on such date shall not relieve such Lender from its obligation to make available its Ratable Share of the amount of the drawing under this Subsection 2.6d(iii). (iv) With respect to any unreimbursed drawing that is not converted into Revolving Credit Loans under the Base Rate Option to the Borrower in whole or in part as contemplated by Subsection 2.6d(ii), because of the Borrower's failure to satisfy the conditions set forth in Section 6.1 other than any notice requirements or for any other reason, the Borrower shall be deemed to have incurred from the Agent a Letter of Credit Borrowing in the amount of such drawing. Such Letter of Credit Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the rate per annum applicable to the Revolving Credit Loans under the Base Rate Option as adjusted to reflect the default rate provisions set forth in Subsection 2.2f. Each Lender's payment to the Agent pursuant to Subsection 2.6d(iii) shall be deemed to be a payment in respect of its participation in such Letter of Credit Borrowing and shall constitute a Participation Advance from such Lender in satisfaction of its participation obligation under this Subsection 2.6d. The provisions of this Subsection (iv) are solely for the benefit of the Agent as issuer of the Letters of Credit, and shall not be deemed to excuse, waive - 26 - or consent to an Event of Default under Section 7.1 arising from an unreimbursed drawing giving rise to a Participation Advance. 2.6e REPAYMENT OF PARTICIPATION ADVANCES. (A) Upon (and only upon) receipt by the Agent for its account of immediately available funds from the Borrower (i) in reimbursement of any payment made by the Agent under the Letter of Credit with respect to which any Lender has made a Participation Advance to the Agent, or (ii) in payment of interest on such a payment made by the Agent under such a Letter of Credit, the Agent will pay to each Lender in the same funds as those received by the Agent, the amount of such Lender's Ratable Share of such funds, except the Agent shall retain the amount of the Ratable Share of such funds of any Lender that did not make a Participation Advance in respect of such payment by Agent. (B) If the Agent is required at any time to return to the Borrower, or to a trustee, receiver, liquidator, custodian, or any official in any proceeding described in Section 7.3. any portion of the payments made by the Borrower to the Agent pursuant to Subsection 2.6d(ii) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Lender shall, on demand of the Agent, forthwith return to the Agent the amount of its Ratable Share of any amounts so returned by the Agent plus interest thereon from the date such demand is made to the date such amounts are returned by such Lender to the Agent, at a rate per annum equal to the Federal Funds Effective Rate in effect from time to time. 2.6f DOCUMENTATION. The Borrower agrees to be bound by the terms of the Agent's application and agreement for letters of credit and the Agent's written regulations and customary practices and interpretations relating to letters of credit, though such practices and interpretation may be different from the Borrower's own. In the event of a conflict between such application or agreement and this Agreement, this Agreement shall govern. It is understood and agreed that, except in the case of gross negligence or willful misconduct, the Agent shall not be liable for any error and/or mistakes, whether of omission or commission, in following the Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments or supplements thereto. 2.6g DETERMINATIONS TO HONOR DRAWING REQUESTS. In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, the Agent shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit. 2.6h NATURE OF PARTICIPATION AND REIMBURSEMENT OBLIGATIONS. Each Lender's obligation in accordance with this Agreement to make the Revolving Credit Loans or Participation Advances, as contemplated by Subsection 2.6d, as a result of a drawing under a Letter of Credit, and the obligation of the Borrower to reimburse the Agent upon a draw under a Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Section 2.6 under all circumstances, including the following circumstances: - 27 - (i) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Agent, the Borrower or any other Person for any reason whatsoever; (ii) the failure of the Borrower or any other Person to comply, in connection with a Letter of Credit Borrowing, with the conditions set forth in Sections 2.1, 2.2 or 6.1 or as otherwise set forth in this Agreement for the making of a Revolving Credit Loan, it being acknowledged that such conditions are not required for the making of a Letter of Credit Borrowing and the obligation of the Lenders to make Participation Advances under Subsection 2.6d; provided, however the aggregate amount thereof shall in no event exceed the unutilized Revolving Credit Commitments; (iii) any lack of validity or enforceability of any Letter of Credit; (iv) the existence of any claim, set-off, defense or other right which the Borrower or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Agent or any Lender or any other Person, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any, underlying transaction between the Borrower and the beneficiary for which any Letter of Credit was procured); (v) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the Agent has been notified thereof; (vi) payment by the Agent under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (vii) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Borrower; (viii) any breach of this Agreement or any other Loan Document by any party thereto; (ix) the occurrence or continuance of any proceeding described in Section 7.3 with respect to the Borrower; (x) the fact that an Event of Default shall have occurred and be continuing; (xi) the fact that the Termination Date shall have passed or this Agreement or the Revolving Credit Commitments hereunder shall have been terminated; and (xii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. - 28 - 2.6i INDEMNITY. In addition to amounts payable as provided in Section 9.16, the Borrower hereby, agrees to protect, indemnify, pay and save harmless the Agent from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which the Agent may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit, other than as a result of (A) gross negligence or willful misconduct of the Agent as determined by a final judgment of a court of competent jurisdiction or (B) subject to the following clause (ii), the wrongful dishonor by the Agent of a proper demand for payment made under any Letter of Credit, or (ii) the failure of the Agent to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Authority (all such acts or omissions herein called "Governmental Acts"). 2.6j LIABILITY FOR ACTS AND OMISSIONS. As between the Borrower and the Agent, the Borrower assumes all risks of the acts and omission of, or misuse of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any such Letter of Credit, or any other party, to which such Letter of Credit may be transferred, to comply fully with any conditions required in order to draw upon such Letter of Credit so long as the documents presented in connection with such draw appear on their face to substantially comply with the terms and conditions of the relevant Letter of Credit; (iv) any claim of the Borrower against any beneficiary of any such Letter of Credit, or any transferee of such Letter of Credit, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any such transferee; (v) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (vi) errors in interpretation of technical terms; (vii) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (viii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (ix) any consequences arising from causes beyond the control of the Agent, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of the Agent's rights or powers hereunder. Nothing in the preceding sentence shall relieve the Agent from liability for the Agent's gross negligence or willful misconduct in connection with actions or omissions described in such clauses (i) through (ix) of such sentence. 2.6k UNIFORM CUSTOMS. Except and to the extent inconsistent with the specific provisions hereof, this Agreement, each Letter of Credit hereunder and all transactions in connection therewith shall be interpreted, construed and enforced according to: (i) the "Uniform Customs and Practice for Documentary Credits" (1993 Revision), International Chamber of Commerce Publication No. 500 or the "International Standby Practices 1998," International Chamber of - 29 - Commerce Publication No. 590, as applicable, and in each case subsequent revisions thereof, which shall supersede inconsistent provisions of applicable law to the extent not prohibited by applicable law and (ii) the laws of the jurisdiction in which the office of the Agent is located for purposes of issuing Letters of Credit hereunder including, without limitation, the Uniform Commercial Code, excluding conflict of laws rules. 2.7 SUBSTITUTION OR REPLACEMENT OF A LENDER. The Borrower shall have the right (provided that at such time, no Event of Default and no Potential Default has occurred and is continuing), in its sole discretion, to either: (i) repay, (A) at any time if either no Revolving Credit Loans are outstanding or if Revolving Credit Loans bearing interest under the Base Rate Option are the only Revolving Credit Loans outstanding, (B) subject to Section 2.9, upon three (3) days prior notice if the Revolving Credit Loans outstanding include Revolving Credit Loans bearing interest under the Euro-Rate Option, the outstanding Revolving Credit Loans of any Lender in whole, together with interest thereon and any other fees, expenses or other sums payable to such Lender pursuant to the terms of this Agreement, all whether then due and payable or accrued and unpaid, and to terminate the Revolving Credit Commitment of such Lender; or (ii) seek a substitute lending institution or institutions (which may be one or more of the other Lenders) to purchase the Revolving Credit Note and assume the Revolving Credit Loans, the Revolving Credit Commitment and the other obligations of such Lender under this Agreement, if any of the following conditions occur with respect to such Lender: (i) such Lender shall have delivered a notice or certificate pursuant to Subsection 2.3a or 2.3b; (ii) the obligation of such Lender to make or renew Revolving Credit Loans which bear or are to bear interest under the Euro-Rate Option has been suspended pursuant to Subsection 2.3d; or (iii) such Lender shall have defaulted under Section 9.4 or failed to fund a Disbursement; provided, any proposed substitute lending institution, which is not a Lender prior to the Borrower's selection thereof, must be acceptable to the Agent, whose consent shall not be unreasonably withheld or delayed, and provided, further that all of the provisions of Section 9.6 (with respect to any Lender) and Section 8.11 (if the affected Lender is the Agent) must be complied with. 2.8 LOAN REPAYMENT AND PREPAYMENT. 2.8a VOLUNTARY PREPAYMENTS. Each repayment of the Revolving Credit Loans shall be in the minimum amount of $1,000,000, in the aggregate, or, in excess thereof, in an integral multiple of - 30 - $100,000 thereof, or such lesser amount as is actually outstanding thereunder. The Borrower, upon (i) oral or written notice to Agent by 11:00 A.M. (eastern time) on the day of the proposed repayment, in the case of Revolving Credit Loans bearing interest at the Base Rate or (ii) three (3) Business Days' prior oral or written notice to the Agent, in the case of Revolving Credit Loans bearing interest at the Adjusted Euro-Rate, followed immediately thereafter by the Borrower's written confirmation to the Agent of any oral notice, may repay the outstanding amount of the Revolving Credit Loans in whole or in part with accrued interest, fees and other amounts then due and payable on the amount repaid to the date of such repayment, subject to the payment of any additional amounts under Section 2.9 below. The Borrower may prepay any Portion of the Revolving Credit Loans without premium or penalty subject to Section 2.9. The Borrower shall notify the Agent whether any such repayment applies to General Revolving Loans or Distribution Loans. If no such notice is given, such repayment shall be deemed to be first a repayment of Distribution Loans and second a repayment of General Revolving Loans. Subject to Section 5.7, any repayment of the Revolving Credit Loans shall increase, by the amount of that repayment, the unborrowed balance of the Revolving Credit Commitments; it being contemplated that the Borrower may repay and reborrow from time-to-time under the Revolving Credit Commitments until the Termination Date. 2.8b SCHEDULED REPAYMENT. All Revolving Credit Loans outstanding on the Termination Date shall become due and payable in full on such date. 2.9 ADDITIONAL PAYMENTS BY THE BORROWER. If (i) the Borrower shall fail to make any payment due hereunder on the due date thereof, (ii) the Borrower shall make a payment, prepayment or conversion of any Euro-Rate Portion of the Revolving Credit Loans on a day other than the last day of the applicable Interest Period, or (iii) the Borrower shall fail on the date specified therefor to consummate any borrowing, conversion or renewal after giving a request for a Disbursement or notice of conversion or renewal, and, as a result of any such action or inaction, a Lender reasonably incurs any losses and expenses which it would not have incurred but for such action or inaction, the Borrower shall pay such additional amounts as will compensate the affected Lender for such losses and expenses, including the cost of reemployment of any funds prepaid at rates lower than the cost to the affected Lender of such funds. Such losses and expenses, which the affected Lender shall exercise reasonable efforts to minimize, shall be specified in writing (setting forth, in reasonable detail, the basis of calculation) to the Borrower by the affected Lender, which writing shall be prima facie evidence of the amounts set forth therein, and such amounts shall be payable within thirty (30) days of demand therefor. 2.10 CHANGES OF COMMITMENTS; VOLUNTARY REDUCTION OF AVAILABILITY . At any time and from time to time upon no less than five (5) Business Day's prior written notice to the Agent, the Borrower may terminate, in whole or in part, without penalty, the then unused portion of the Revolving Credit Commitments, thereby causing a corresponding abatement of the Commitment Fee; provided, however, that the Borrower may not terminate an unused portion of the Revolving Credit Commitments such that the aggregate Revolving Credit Commitments are reduced below the Letters of Credit Outstanding. Each such reduction shall be in a minimum principal amount of $1,000,000 or in integral multiples thereof. Notice of termination once given shall be - 31 - irrevocable and the portion of the Revolving Credit Commitments so terminated shall not be available for borrowing once such notice has been given under the terms hereof. The Agent shall promptly notify each Lender of its pro rata share of such terminated unused portion and the date of each such termination. 2.11 LOAN ACCOUNT. The Agent shall open and maintain on its books a Loan Account in the name of the Borrower, with respect to (i) the amounts and types of Disbursements made, repayments and prepayments of the principal thereof, and the computation and payment of interest thereon, (ii) Letters of Credit issued, or participated in, as the case may be, and draws and reimbursements thereon or thereof, (iii) the computation and payment of the Fees due hereunder to the Lenders and the Agent, and (iv) the computation of other amounts due and sums paid and payable to the Lenders and the Agent hereunder. The Loan Account shall be prima facie evidence as to the amount at any time due to the Lenders and the Agent from the Borrower hereunder; provided, however, that the failure to make notations, or to make accurate notations, on such Loan Account including without limitation notations with respect to interest and Fees pursuant to Section 2.5 or otherwise shall not limit, expand or otherwise affect any obligations of the Borrower hereunder. 2.12 PAYMENT FROM ACCOUNTS MAINTAINED BY BORROWER. In the event that any payment of principal, interest, Fees or any other amount due to the Lenders or the Agent under the Agreement, the Revolving Credit Notes or the other Loan Documents is not paid when due, the Agent is hereby authorized to effect such payment by debiting any demand deposit account of the Borrower maintained with the Agent (excluding however any special purpose fiduciary accounts, which are designated as such at the time of their creation, or mandated by applicable statutes, regulations or rules) and distributing such payment to the party to whom such amounts are due. The Agent shall provide prompt notice to the Borrower subsequent to any exercise of its right to debit accounts of the Borrower to effect such payments. This right of debiting accounts of the Borrower is in addition to any right of set-off accorded the Lenders or the Agent hereunder or by operation of law. 2.13 TIME, PLACE AND MANNER OF PAYMENTS. All payments and prepayments to be made by the Borrower in respect of principal, interest or other costs relating to the Revolving Credit Loans, Reimbursement Obligations and all Fees and any other amounts due hereunder (excepting those amounts due under Sections 2.3 and 2.9 hereof) shall be made at the principal office of the Agent for the ratable account of the Lenders or the Agent, as the case may be. The Agent will promptly pay each such payment received to each Lender or its order in accordance with Section 8.9 hereof. All payments due a Lender by reason of Sections 2.3 or 2.9 hereof shall be paid at the principal office of the Lender which invoices the Borrower for such payment. All payments to be made by the Borrower under this Agreement shall be paid in Dollars and in immediately available funds no later than 12:00 noon (eastern time) on the date such payment is due, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower, and without setoff, counterclaim or other deduction of any nature. Notwithstanding anything herein to the contrary, (i) the Agent's Fee, (ii) the Fronting Fee, and (iii) any interest paid with respect to any Revolving Credit Loan or any unreimbursed draw on the Letter of Credit to the extent a Lender has not been required to honor or has not honored its funding obligation with respect thereto shall be solely for the account of the Agent. - 32 - 2.14 GUARANTY. To secure the repayment of the Bank Indebtedness, each of the Guarantors shall execute and deliver to the Agent for the benefit of the Lenders a Guaranty Agreement substantially in the form of Exhibit "D-1 or "D-2" attached hereto, as applicable, (i) on the Closing Date in the case of each Guarantor in existence on such date, and (ii) within ten (10) days after the formation or acquisition of any entity which meets the definition of a Guarantor. 3. REPRESENTATIONS AND WARRANTIES. To induce the Agent and the Lenders to enter into this Agreement and to make the Revolving Credit Loans, and to issue, renew or extend the Letters of Credit, as herein provided for, the Borrower represents and warrants to the Agent and the Lenders that: 3.1 EXISTENCE. Each Loan Party, and each general partner or managing member of each Loan Party, is a corporation, limited partnership or limited liability company, as the case may be, duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization or formation, and it is duly qualified and in good standing as a foreign corporation, limited partnership or limited liability company, as the case may be, authorized to do business in each jurisdiction where, because of the nature of its respective properties or businesses, such qualification is required or, if not so qualified or in good standing in any state, the lack of such qualification or good standing could not reasonably be expected to result in a Material Adverse Change. 3.2 CAPITALIZATION: OWNERSHIP. The Parent is the sole member of the Borrower. The issued and outstanding securities of the Parent as of the Closing Date consist of approximately 12,005,000 common units of limited partnership interest and approximately 12,005,000 subordinated units of limited partnership interest, all of which have been validly issued and are fully, paid and nonassessable, and the general partnership interests held by the General Partner. The General Partner is the sole general partner of the Parent and owned as described on Schedule 3.2. 3.3 SUBSIDIARIES AND OTHER INVESTMENTS. On the Closing Date, neither the Parent nor the Borrower has any Subsidiaries or any direct or indirect ownership interests in any other Person, except as set forth on Schedule 3.3. The Parent, the Borrower, and each Subsidiary of the Borrower, has good and marketable title to all the securities of the Subsidiaries issued to it, free and clear of all liens and encumbrances and all such securities have been duly and validly issued and are fully paid and nonassessable. The authorized securities of such Subsidiaries and the ownership thereof, in each case on the Closing Date, are as shown on Schedule 3.3 attached hereto. 3.4 CORPORATE AUTHORITY. Each Loan Party is duly authorized to execute and deliver this Agreement, the Revolving Credit Notes and the other Loan Documents to which it is or will become a party; all necessary corporate, partnership or limited liability company action necessary to authorize the execution and delivery of this Agreement, the Revolving Credit Notes and the other Loan Documents to which it is or will become a party has been properly taken; the Borrower is and will continue to be duly authorized to borrow hereunder; and each Loan Party is and will continue to be duly authorized to perform all of the other terms and provisions of this - 33 - Agreement, the Revolving Credit Notes and the other Loan Documents to which it is or will become a party. 3.5 ENFORCEABILITY. This Agreement, the Revolving Credit Notes, and each other Loan Document has been, and will be, duly and validly executed and delivered by each Loan Party which is or will become a party thereto, and each constitutes or will constitute a valid and legally binding agreement of such Loan Party enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, or other laws affecting creditor's rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. 3.6 NO RESTRICTIONS, NO DEFAULT. Neither the execution and delivery of this Agreement, the Revolving Credit Notes and the other Loan Documents to which it is or will become a party, the consummation of the transactions herein contemplated nor compliance with the terms and provisions hereof or of the Revolving Credit Notes or any other Loan Document, will conflict with or result in a breach of any of the terms, conditions or provisions of the certificate of incorporation, by-laws, partnership agreement, operating agreement or other organizational, formation or governing document of any Loan Party or of any law or of any regulation, order, writ, injunction or decree of any court or governmental agency or of any agreement, indenture or other instrument to which any Loan Party is a party or by which any of them is bound or to which any of them is subject, or constitute a default thereunder or result in the creation or imposition of any Encumbrance of any nature whatsoever upon any of the property or assets of any Loan Party pursuant to the terms of any agreement, indenture or other instrument, except those items described above that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. No event has occurred and is continuing and no condition exists or will exist after giving effect to the borrowings hereunder to be made on the Closing Date which constitutes an Event of Default or Potential Default. 3.7 FINANCIAL MATTERS. 3.7a FINANCIAL STATEMENTS. The Borrower has furnished, or caused to be furnished, to the Lenders and the Agent (i) the audited balance sheets as of December 31, 2000 and 2001 and the related statements of income, changes in partners' capital or stockholders' equity, as the case may be, and cash flows for the three (3) Fiscal Years ending December 31, 2001 for each of Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, and New Gauley Coal Corporation, (ii) the audited balance sheets as of December 31, 2000 and 2001 and the related statements of revenues and direct costs and expenses for each of the three (3) Fiscal Years ending December 31, 2001 for Arch Coal, Inc., Contributed Properties (as defined in such financial statements) (each of the entities described in clause (i) and (ii) above are referred to as a "Contributor" and collectively as the "Contributors") and (iii) the unaudited balance sheet and other financial information of the Contributors through June 30, 2002 as set forth in the Form S-1. All such financial statements, including the related notes, have been prepared in accordance with GAAP, except as expressly noted therein, and fairly present the financial position of the respective Contributors as of the dates thereof and the results of the respective Contributor's operations and the changes in financial position for the periods ended on such dates. There were no material liabilities of the respective Contributors, contingent or - 34 - otherwise, not reflected in such financial statements. Except as has been fully disclosed in writing to the Lenders and the Agent prior to the date hereof (including the formation of the Parent and the completion of the Transaction), there has been no Material Adverse Change in the assets, leases, properties, business, condition or operations (financial or otherwise) of the respective Contributors since December 31, 2001. 3.7b PRO FORMA FINANCIALS. The Borrower has delivered, or caused to be delivered, to the Lenders and the Agent (i) an unaudited pro forma balance sheet for the Parent as of June 30, 2002 which is set forth in the Form S-1 (as in effect on the Closing Date) and giving effect to the Transaction and (ii) its projections through December 31, 2006. Such pro forma balance sheet is complete and correct in all material respects and fairly presents the financial condition of the Parent and its Subsidiaries, on a Consolidated basis, in all material respects, and has been prepared in accordance with GAAP (except that such financial statements do not contain all of the footnote disclosures required by GAAP). The Parent and its Subsidiaries have no material liabilities, whether direct or indirect, fixed or contingent, and no liability for taxes, long-term leases or unusual forward or long-term commitments as of the date of such financial statements which are not reflected in such financial statements or in any notes thereto or in such projections. 3.8 ABSENCE OF LITIGATION. Except as described in the Form S-1, there are no actions, suits, investigations, litigation or governmental proceedings pending or, to the Borrower's knowledge, threatened against the Parent or any Subsidiary of the Parent or any of their respective properties, which could reasonably be expected to result in a Material Adverse Change, or which purport to affect the legality, validity or enforceability of this Agreement, the Revolving Credit Notes or any other Loan Document. 3.9 TAX RETURNS AND PAYMENTS. As of the date hereof, the Parent and its Subsidiaries have filed all Federal and other material tax returns required by law to be filed and have paid all material taxes, material assessments and other material governmental charges levied upon the Parent and its Subsidiaries taken as a whole, or any of the respective properties, assets, income or franchises of the Parent and its Subsidiaries taken as a whole, which are due and payable, other than those currently payable or deferrable without penalty or interest or those which are being contested in good faith and by appropriate proceedings diligently conducted for which reserves in accordance with GAAP have been provided. As of the date hereof, the charges, accruals and reserves on the books of the Parent and its Subsidiaries in respect of Federal, state and local income taxes for all fiscal periods are adequate, and the Borrower knows of no unpaid assessments for additional Federal, state or local income taxes for any such fiscal period or any basis therefor. 3.10 PENSION PLANS. (i) Each Plan has been and will be maintained and funded, in all material respects, in accordance with its terms and with all provisions of ERISA and the Code applicable, thereto; (ii) no Reportable Event has occurred and is continuing with respect to any Plan; (iii) no liability to PBGC has been incurred with respect to any Plan, other than for premiums due and payable; (iv) no Plan has been terminated, no proceedings have been instituted to terminate any Plan, and there exists no intent to terminate or institute proceedings to terminate any Plan, which has caused or would cause the Borrower or any ERISA Affiliate to incur any liability to the PBGC under Title IV of ERISA which could reasonably be expected to result in a Material - 35 - Adverse Change; (v) no withdrawal, either complete or partial, has occurred or commenced with respect to any Multiemployer Plan, and there exists no intent to withdraw either completely or partially from any Multiemployer Plan where such withdrawal could reasonably be expected to result in a Material Adverse Change and (vi) the Borrower is not subject to any liability for unpaid penalties or taxes imposed under Section 502(i) of ERISA or Section 4975 of the Code and has not engaged in a prohibited transaction as defined in Section 406 of ERISA and Section 4975 of the Code. 3.11 FISCAL YEAR. The Fiscal Year of the Parent and the Borrower ends on December 31 of each year. 3.12 CONDITION OF AND TITLE TO ASSETS. The Borrower and each of its Subsidiaries has good title to its properties and assets except for Permitted Encumbrances and defects in title which, taken as a whole, are not material. None of the assets of the Borrower or any Subsidiary of the Borrower is subject to any Encumbrances except for Permitted Encumbrances. All material assets and properties of the Borrower and its Subsidiaries that are necessary for the operation of their respective businesses are in good working condition in accordance with industry standards, ordinary wear and tear excepted, and are able to serve the functions for which they are currently being used. 3.13 INSURANCE. The Borrower and its Subsidiaries currently maintain insurance of such types and at least in such amounts as are customarily carried by, and insures against such risks as are customarily insured against by similar businesses similarly situated and owning, leasing and operating similar properties to those owned, leased and operated by the Borrower and its Subsidiaries. All of such insurance policies are valid and in full force and effect. No notice has been given or claim made and no grounds exist to cancel or avoid any, of such policies or to reduce the coverage provided thereby. 3.14 LABOR AND EMPLOYMENT MATTERS. Neither the Borrower nor any Subsidiary of the Borrower is a party to any collective bargaining agreement. 3.15 COMPLIANCE WITH APPLICABLE LAWS. The Borrower and each Subsidiary (i) is not in default with respect to any order, writ, injunction or decree of any court or of any Federal, state, municipal or other Governmental Authority and (ii) is substantially complying with all applicable statutes and regulations of each Governmental Authority having jurisdiction over its activities; except for those orders, writs, injunctions, decrees, statutes and regulations, default under or non-compliance with which, individually or collectively, could not reasonably be expected to result in a Material Adverse Change. 3.16 ENVIRONMENTAL MATTERS. Except as described in the Form S-1, the Borrower and its Subsidiaries are in material compliance with all applicable Environmental Laws. Except for any of the following that could not reasonably be expected to result in a Material Adverse Change, there are no past, pending or, to the best of the Borrower's knowledge, threatened Environmental Claims of any material respect against the Borrower or its Subsidiaries or any of the property of the Borrower or any of its Subsidiaries, and there is no condition or occurrence on any property owned or leased by the Borrower or any of its Subsidiaries, to the knowledge of the Borrower, - 36 - that could reasonably be anticipated (i) to form the basis of a material Environmental Claim against the Borrower, such Subsidiary or its properties or (ii) to cause any property owned or leased by the Borrower or any such Subsidiary to be subject to any material restrictions on its ownership, occupancy or transferability under any applicable Environmental Law. 3.17 CONSENTS AND APPROVALS. No order, authorization, consent, license, validation or approval of, or notice to, filing, recording, or registration with, any Governmental Authority or any other Person, or exemption by any Governmental Authority, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of this Agreement, the Revolving Credit Notes or any other Loan Document, (ii) the legality, binding effect or enforceability of this Agreement, the Revolving Credit Notes or any other Loan Document or (iii) the consummation of the Transaction, which has not been duly obtained and which is not in full force and effect (unless the failure to obtain any of the same could not reasonably be expected, individually or collectively, to result in a Material Adverse Change). 3.18 REGULATIONS T, U AND X. The Borrower is not engaged in the business of purchasing or selling Margin Stock or extending credit to others for the purpose of purchasing or carrying Margin Stock and no part of the proceeds of the Revolving Credit Loans will be used to purchase or carry any Margin Stock or for any other purpose which would violate or be inconsistent with Regulations T, U or X. 3.19 INVESTMENT COMPANY ACT. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 3.20 PUBLIC UTILITY HOLDING COMPANY ACT. The Borrower is not a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.21 SENIOR DEBT STATUS. On the Closing Date and on the date of each Disbursement and the issuance of each Letter of Credit, all Bank Indebtedness outstanding under the Loan Documents will constitute senior Indebtedness of the Borrower and will rank at least pari passu in priority of payment with all other Indebtedness owed by the Borrower from time to time, except Indebtedness of the Borrower which may be secured by Encumbrances permitted pursuant to Section 5.2. 3.22 INTELLECTUAL PROPERTY. The Borrower and each Subsidiary of the Borrower owns, is licensed or otherwise possesses the right to use all patents, patent rights, trademarks, trade names, service marks, copyrights, intellectual property, technology, know-how and processes necessary for the conduct of its business as currently conducted that are material to the condition (financial or otherwise), business or operations of the Borrower and its Subsidiaries. 3.23 LEASES. All Leases in effect on the Closing Date are listed on Schedule 3.23 attached hereto. Each such Lease is in full force and effect and there is no default thereunder and no event has occurred or is occurring which after notice or lapse of time or both will result in such - 37 - default, except for defaults which could not reasonably be expected to result in a Material Adverse Change. Prior to the Closing Date, the Borrower has made available to the Agent a true, correct and complete copy of each of the Leases. Each lessee under the Coal Leases is paying royalties currently due under its respective Coal Lease directly to Borrower and, with the exception of payment of the minimum royalties required thereunder, lessee has not prepaid any sums payable by any lessee under any of the Coal Leases. To the Borrower's knowledge, no material amount of royalties are currently past due under any of the Leases. There is no consent or approval required under any Lease with respect to this Agreement or the consummation of the Transaction which has not been obtained. 3.24 SOLVENCY. On the Closing Date, and as of the date of each advance of a Revolving Credit Loan or the issuance, renewal or extension of any Letter of Credit, as the case may be, and after giving effect to such advance or the issuance, renewal or extension of a Letter of Credit, and after giving effect to the consummation of the transactions contemplated by this Agreement (including the Transaction), the Borrower is, and will be (individually and together with its Subsidiaries), Solvent. 3.25 TAX TREATMENT. The Parent will be treated as a partnership for federal income tax purposes. 3.26 DISCLOSURE. Neither this Agreement nor any other document, certificate or statement furnished to the Lenders or the Agent by or on behalf of any Loan Party pursuant to this Agreement contains any untrue statement of a material fact. There is no fact known to any Loan Party which could reasonably be expected to result in a Material Adverse Change that has not been set forth in this Agreement or in the other documents, certificates and statements (financial or otherwise) furnished to the Lenders or the Agent or otherwise disclosed in writing to the Lenders or the Agent by or on behalf of any Loan Party prior to or on the date hereof. 3.27 TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule 3.27 or as permitted in Section 5.16 herein, there are no loans, leases, royalty agreements or other agreements, arrangements or other transactions between any Loan Party and any Affiliate, including between Loan Parties. 4. AFFIRMATIVE COVENANTS. From the date hereof and thereafter until the termination of the Revolving Credit Commitments and until all of the Bank Indebtedness is paid in full, the Borrower agrees that: 4.1 USE OF PROCEEDS. (i) The proceeds of the General Revolving Loans will be used by the Borrower solely for general corporate, limited liability company or partnership purposes of the Borrower and its Subsidiaries, including for working capital, capital expenditures and for Permitted Acquisitions, but will not be used to fund any Restricted Payment. (ii) The proceeds of the Distribution Loans will be used by the Borrower solely for funding Quarterly Distributions by the Parent to the extent permitted by Section 5.1. (iii) The Letters of Credit will be used for general business purposes in the ordinary course of business or for such other purposes as may be approved by the Required Lenders. - 38 - 4.2 FURNISHING INFORMATION. The Borrower shall: (i) deliver (or cause to be delivered) to the Agent in electronic format or hard copy (with copies for each Lender which Agent shall promptly distribute to each Lender) within sixty (60) days after the end of each of the first three (3) Fiscal Quarters in each Fiscal Year of the Parent, the Parent's Form 10-Q filed with the Securities and Exchange Commission, together with (A) consolidated balance sheet as at the end of such period for the Parent and its Subsidiaries, (B) consolidated statements of income for such period for the Parent and its Subsidiaries and, in the case of the second and third quarterly periods, for the period from the beginning of the current Fiscal Year to the end of such quarterly period, and (C) consolidated statements of cash flow for such period for the Parent and its Subsidiaries and, in the case of the second and third quarterly periods, for the period from the beginning of the current Fiscal Year to the end of such quarterly period; and each such statement shall set forth, in comparative form, corresponding figures for the corresponding period in the immediately preceding Fiscal Year; and all such statements shall be prepared in reasonable detail in accordance with GAAP and certified, subject to changes resulting from year-end adjustments and the absence of footnotes, by the chief financial officer or treasurer of the Parent; (ii) deliver (or cause to be delivered) to the Agent in electronic format or hard copy (with copies for each Lender which Agent shall promptly distribute to each Lender) within one hundred twenty (120) days after the end of each Fiscal Year of the Parent, the Parent's Form 10-K filed with the Securities and Exchange Commission, together with (A) consolidated balance sheets as at the end of such year for the Parent and its Subsidiaries, (B) consolidated statements of income for such year for the Parent and its Subsidiaries, (C) consolidated statements of cash flow for such year for the Parent and its Subsidiaries, and (D) consolidated statements of owners' equity for such year for the Parent and its Subsidiaries; and each such statement shall set forth, in comparative form, corresponding figures for the immediately preceding Fiscal Year; and all such financial statements shall present fairly in all material respects the financial position of the Parent and its consolidated Subsidiaries, as at the dates indicated and the results of its operations and its cash flow for the periods indicated, in conformity with GAAP; and the Borrower shall cause each of the consolidated financial statements described in the foregoing clauses (A) through (D) to be certified without limitation as to scope or material qualification by nationally-recognized independent certified public accountants; (iii) deliver to the Agent in electronic format or hard copy (with copies for each Lender which Agent shall promptly distribute to each Lender), together with each delivery of financial statements pursuant to items (i) and (ii) above, a Compliance Certificate of the Parent and the Borrower substantially in the form of Exhibit "C" hereto, properly completed and signed by an Authorized Officer of the Borrower and the Parent, (A) stating (1) that such officer has reviewed the terms of the Loan Documents and has made, or caused to be made under his supervision, a review of the transactions and condition of the Parent and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during such accounting period, (2) that neither the Parent nor the Borrower has knowledge of the - 39 - existence, as at the date of such Compliance Certificate, of any condition or event which constitutes an Event of Default or a Potential Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken or is taking or proposes to take with respect thereto and (3) that the insurance required to be maintained by the Borrower and its Subsidiaries by Section 4.7 hereof is in force and is adequate in nature and amount, and (B) demonstrating in reasonable detail compliance as at the end of such accounting period with the covenants contained in Section 5.3 hereof; (iv) promptly give electronic or written notice to the Agent (a copy of which Agent shall promptly distribute to each Lender) of any pending or, to the knowledge of the Borrower, overtly threatened claim in writing, litigation or threat of litigation which arises between the Parent, the General Partner, the Borrower, or any of its Subsidiaries, and any other party or parties (including, without limitation, any Governmental Authority) which claim, litigation or threat of litigation, individually or in the aggregate, is reasonably likely to result in a Material Adverse Change, any such notice to be given not later than five (5) Business Days after the Borrower becomes aware of the occurrence of any such claim, litigation or threat of litigation and has ascertained it is reasonably likely to result in Material Adverse Change; (v) deliver (or cause to be delivered) to the Agent in electronic format or hard copy (with copies for each Lender which Agent shall promptly distribute to each Lender) promptly upon their becoming available, copies of all financial statements, reports, notices and information statements sent or made available generally by the Parent to its security holders (including, without limitation, proxy materials) and copies of all other regular and periodic reports (including, without limitation, Form 8-K) filed by the Parent with the Securities and Exchange Commission or any Governmental Authority succeeding to any of its functions, and of all press releases and other statements made available generally by the Parent to the public concerning material developments in the business of the Parent and any of its Subsidiaries taken as a whole; (vi) promptly after receipt thereof by the Borrower or the administrator of any Plan, deliver to the Agent a copy of any notice (a copy of which Agent shall promptly distribute to each Lender) from the PBGC that the PBGC is instituting Termination Proceedings if such Termination Proceedings could reasonably be expected to result in a Material Adverse Change; (vii) promptly after the underlying material information is made available to the public, but in no event later than sixty (60) days following the end of each Fiscal Quarter of the Parent, deliver (or cause to be delivered) to the Agent in electronic format or hard copy (with copies for each Lender which Agent shall promptly distribute to each Lender), a report of Available Cash, cash reserves and other related items of the Parent and its Subsidiaries as of the end of the immediately preceding Fiscal Quarter in form and substance satisfactory to the Agent; - 40 - (viii) promptly and in any event within thirty (30) days after the Borrower or the administrator of any Plan knows or has reason to know that any Reportable Event has occurred which would cause the PBGC to institute Termination Proceedings, give notice thereof (a copy of which Agent shall promptly distribute to each Lender) to the Agent if such Termination Proceedings could reasonably be expected to result in a Material Adverse Change; (ix) promptly, but not later than five (5) Business Days after any officer obtains knowledge of the happening of any event which constitutes an Event of Default or a Potential Default, give written notice, either in electronic format or hard copy, thereof to the Agent (a copy of which Agent shall promptly distribute to each Lender); (x) deliver to the Agent in electronic format or hard copy (with copies for each Lender which Agent shall promptly distribute to each Lender) within one hundred twenty (120) days following the end of each Fiscal Year of the Borrower, an operational report in form and substance satisfactory to the Agent, showing (A) five-year projections, (B) tons of coal mined and sold by lessee, including actual tons mined and sold compared to the previous Fiscal Year and to budget, (C) royalty income by lessee, and, upon the reasonable request of the Agent, (D) a coal reserve summary and (E) a lease summary, including individual lease profiles and lease property maps; (xi) in the event the Borrower or any of its Subsidiaries gives to or receives notice from any Governmental Authority of any Contamination or receives any Environmental Claim from any Person, including any state agency responsible in whole or in part for environmental matters in the state in which its properties are located or the United States Environmental Protection Agency which in either case could reasonably be expected to result in a Material Adverse Change, then Borrower shall, within five (5) Business Days, give written notice, either in electronic format or hard copy, of same to the Agent (a copy of which Agent shall promptly distribute to each Lender) detailing non-privileged and non-confidential facts and circumstances giving rise to the Contamination or Environmental Claim. Such information is to be provided to allow the Agent and the Lenders to protect their interests hereunder and is not intended to create any obligation upon the Agent or any Lender with respect thereto; (xii) promptly after receipt thereof, deliver to the Agent copies, either in electronic format or hard copy for each Lender which Agent shall promptly distribute to each Lender, of any statement or report regarding the rating of the Parent's or the Borrower's debt furnished by any rating agency to any Loan Party; (xiii) promptly, but not later than five (5) Business Days after any sale, transfer or disposition of assets permitted by Section 5.7(iv), deliver to the Agent written notice, either in electronic format or hard copy, of such transaction, including the amount of proceeds (a copy of which Agent shall promptly distribute to each Lender); and (xiv) promptly, deliver to the Lenders such other publicly available information and data with respect to the Parent, the Borrower or any of its Subsidiaries as from time - 41 - to time may be reasonably requested by any Lender. Each document or certificate provided by the Borrower under this Section in electronic format shall for all intents and purposes be treated as an original version of the same document, all as if delivered in hard copy with an original signature appended thereto. 4.3 VISITATION. The Borrower will permit, and will cause each of its Subsidiaries to permit, the Lenders and the Lenders' designated employees and agents to have access, from time to time, and, prior to the occurrence of an Event of Default, upon reasonable notice and during normal business hours at reasonable intervals, to visit any of the properties of the Borrower or any such Subsidiary, to examine and make copies of any of its books of record and account and such reports and returns as the Borrower or any such Subsidiary may file with any Governmental Authority and discuss the Borrower's or any such Subsidiary's affairs and accounts with, and be advised about them, by any Authorized Officer. 4.4 PRESERVATION OF EXISTENCE; QUALIFICATION. At its own cost and expense, the Borrower will do all things necessary to preserve and keep in full force and effect its and each of its Subsidiaries' corporate, partnership or limited liability company existence and qualification under the laws of their respective states of organization and each state where, due to the nature of their respective activities or the ownership of their respective properties, qualification to do business is required except where (i) the lack of corporate, partnership or limited liability company existence of a Subsidiary, or (ii) the failure to be so qualified, could not reasonably be expected to result in a Material Adverse Change or except as permitted by Sections 5.8 and 7.4. 4.5 COMPLIANCE WITH LAWS AND CONTRACTS. The Borrower shall and shall cause each Subsidiary to comply with all applicable Governmental Rules including, but not limited to, Environmental Laws, except where failure to comply, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. 4.6 PAYMENT OF TAXES AND OTHER LIABILITIES. The Borrower shall and shall cause each Subsidiary to promptly pay and discharge all obligations, accounts and liabilities to which it is subject or which are asserted against it and which obligations, accounts and liabilities are, to the Borrower and the Subsidiaries taken as a whole, material, including but not limited to all taxes, assessments and governmental charges and levies upon it or upon any of its income, profits, or property prior to the date on which penalties attach thereto; provided, however, that for purposes of this Agreement, neither the Borrower nor the relevant Subsidiary shall be required to pay any tax, assessment, charge or levy (i) the payment of which is being contested in good faith by appropriate proceedings diligently conducted and (ii) as to which the Borrower shall have set aside on its books reserves for such claims as are determined to be adequate pursuant to the accounting procedures employed by the Borrower, but only to the extent that failure to discharge any such liabilities upon the conclusion of such proceedings or at any other applicable time would not result in any additional liability which could reasonably be expected to result in a Material Adverse Change. 4.7 INSURANCE. The Borrower will keep and maintain, and cause each Subsidiary to keep and maintain, insurance with responsible insurance companies, in such amounts and against such risks as is customarily maintained by similar businesses similarly situated and owning, leasing or - 42 - operating similar properties. The Borrower may satisfy the requirements of the preceding sentence with self insurance and deductibles consistent with customary and prudent industry standards, all as reasonably satisfactory to the Agent. The Borrower will furnish to the Agent at the Closing and together with the annual reports delivered pursuant to Subsection 4.2(ii) hereof, a certificate of an Authorized Officer of the Borrower certifying that such insurance is in force, is adequate in nature and amount and complies with the Borrower's and each Subsidiary's obligations under this Section 4.7. 4.8 MAINTENANCE OF PROPERTIES. The Borrower shall and shall cause its Subsidiaries to maintain, preserve, protect and keep their respective properties in good repair, working order and condition (ordinary, wear and tear excepted), and make all necessary and proper repairs, renewals and replacements so that their business carried on in connection therewith may be properly and advantageously conducted at all times, except where the failure to maintain, preserve, protect or keep such properties could not reasonably be expected to result in a Material Adverse Change. 4.9 PLANS AND BENEFIT ARRANGEMENT. The Borrower shall, and shall cause each ERISA Affiliate to, comply with ERISA, the Code and all other applicable laws which are applicable to Plans, except where the failure to do so, alone or in conjunction with any other failure to do so, could not reasonably be expected to result in a Material Adverse Change. 4.10 SENIOR DEBT STATUS. The Bank Indebtedness will rank at least pari passu in priority of payment with all other Indebtedness of the Borrower, except Indebtedness of the Borrower which may be secured by Encumbrances permitted pursuant to Section 5.2. 4.11 LEASES; MATERIAL CONTRACTS. (i) The Borrower will perform and observe, or cause to be performed and observed, all of the covenants and conditions required to be performed by it or any of its Subsidiaries under each Lease, except where such failure could not reasonably be expected to result in a Material Adverse Change. (ii) The Borrower will promptly notify the Agent in writing of the receipt by the Borrower or any Subsidiary of any notice from any third party to the Borrower or any Subsidiary of any material default under, or the termination of, any Material Contract pursuant to the provisions of such Material Contract, and will promptly cause a copy of each such notice received by the Borrower or any Subsidiary from any third party to be delivered to the Agent. (iii) The Borrower will not, nor will it permit any Subsidiary to, without the prior written consent of the Required Lenders, terminate or surrender, or suffer or permit any termination or surrender, of any Material Contract during the initial term thereof or any valid extension thereto, other than the termination of such Material Contract as the result of the exhaustion of the coal reserves subject thereto as shown on the reports delivered to the Agent pursuant to Section 4.2(x) or otherwise in accordance with the terms of such Material Contract. 4.12 CLEAN-DOWN PERIOD. The Borrower will cause the aggregate outstanding principal balance of Distribution Loans to be zero for a period of at least fifteen (15) consecutive days during each twelve month period. - 43 - 4.13 ENVIRONMENTAL INDEMNIFICATION. The Borrower shall defend and indemnify the Agent and each Lender and hold them harmless from and against all loss, liability, damage, expense, claims, costs, fines, penalties, assessments (including interest on any of the foregoing) and reasonable attorneys' fees, suffered or incurred by the Agent or any Lender which arise, result from or in any way relate to a breach or violation by the Borrower or any Guarantor of any applicable Environmental Law, either prior to or subsequent to the date hereof, including the assertion or imposition of any Encumbrance on the Borrower's or any Guarantor's assets, or which relate to or arise out of an Environmental Claim. The Borrower's obligations hereunder shall survive the termination of this Agreement and the repayment of the Bank Indebtedness. 5. NEGATIVE COVENANTS. From the date hereof and thereafter until the Revolving Credit Commitments are terminated and until the Bank Indebtedness is paid in full, the Borrower agrees that: 5.1 DIVIDENDS, ETC.. The Borrower will not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any member interests or other equity of the Borrower, or purchase, redeem or otherwise acquire for value (or permit any of its Subsidiaries to do so) any member interests or other equity of the Borrower or any warrants, rights or options to acquire any such interests, now or hereafter outstanding (each of the foregoing being a "Restricted Payment"), except that, so long as no Event of Default or Potential Default shall have occurred and be continuing at such time or could reasonably be expected to result therefrom, (a) the Borrower may declare, make or incur a liability to make distributions to the Parent to fund Quarterly Distributions provided that (i) such Quarterly Distributions are made in accordance with the provisions of the MLP Agreement (as in effect on the Closing Date), and (ii) the aggregate amount of Quarterly Distributions made by the Parent with respect to any Fiscal Quarter shall not exceed Available Cash for such Fiscal Quarter; and (b) the Borrower may make payments to the Parent in such amounts as required to pay the general and administrative costs and expenses of the Parent incurred in connection with the operation of its business as permitted pursuant to the terms of its Guaranty Agreement. 5.2 ENCUMBRANCES. The Borrower will not create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Encumbrance or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, in each case to secure or provide for the payment of any Indebtedness of any Person, other than (a) Encumbrances created under the Loan Documents, (b) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower or any Subsidiary in the ordinary course of business to secure the purchase price of such property or to secure indebtedness incurred solely for the purpose of financing the acquisition of such property, so long as such indebtedness does not exceed 100% of the purchase price of such property, (c) Encumbrances existing on such property at the time of the acquisition of such property or the acquisition of such Subsidiary (other than any such Encumbrance created as a result of such acquisition), (d) Permitted Encumbrances, or (e) extensions or renewals of any Encumbrance described in clauses (b) through (d) above, provided, that (i) any such extension or renewal shall be limited to the property theretofore subject to such Encumbrance, (ii) the principal amount of - 44 - the Indebtedness secured by such Encumbrance shall not be increased and (iii) the aggregate principal amount of Indebtedness secured by Encumbrances referred to in clauses (b) through (d) above shall not exceed $1,000,000 at any time outstanding (it being expressly agreed that any refinanced Indebtedness shall not be considered new Indebtedness hereunder). 5.3 FINANCIAL COVENANTS. 5.3a LEVERAGE RATIO. At no time shall the ratio of the Parent's Consolidated Total Indebtedness to its Consolidated EBITDDA for the four (4) most recently completed Fiscal Quarters, taken as a single accounting period, exceed 2.50 to 1.00. 5.3b INTEREST COVERAGE RATIO. At no time shall the ratio of the Parent's Consolidated EBITDDA for the four (4) most recently completed Fiscal Quarters, taken as a single accounting period, to its Consolidated Interest Expense for the four (4) most recently completed Fiscal Quarters, taken as a single accounting period, be less than 4.00 to 1.00. 5.3c CALCULATION OF CONSOLIDATED EBITDDA. For purposes of calculating Consolidated EBITDDA of the Parent and its Consolidated Subsidiaries for any period for the purposes of this Section 5.3 only, the earnings before interest, taxes, depletion, depreciation and amortization calculated as set forth in the definition of "Consolidated EBITDDA" above of any Person or assets acquired by the Borrower or its Subsidiaries during such period shall be included on a pro forma basis for such period as if such acquisition and the incurrence or assumption of any Indebtedness in connection therewith had occurred on the first day of such period and based upon the financial statements and other information delivered to the Agent pursuant to Section 5.4. 5.4 ACQUISITIONS. The Borrower shall not, except as otherwise permitted or required in this Agreement, purchase or otherwise acquire, or permit any Subsidiary to purchase or acquire, any obligations or stock of, or any other interest in, or all or substantially all of the assets of, any Person whatsoever, other than (i) pursuant to a merger permitted under Section 5.8 below or (ii) other non-hostile acquisitions of the equity securities or assets of any domestic Person, provided that (a) immediately prior to and after giving effect to any such acquisition, no Event of Default or Potential Default shall have occurred or be continuing or will result therefrom, (b) such acquisition is consummated in accordance with applicable law, except where any non-compliance with applicable law could not reasonably be expected to result in a Material Adverse Change, (c) if such acquisition is of equity securities of a Person, such Person complies with Section 2.14 above, and substantially all of the assets held by such Person are Permitted Assets, (d) if such acquisition is of assets, substantially all such assets are Permitted Assets, (e) the Borrower shall be in pro forma compliance with this Agreement and shall deliver to the Agent no less than three (3) Business Days prior to the date of the proposed acquisition (A) a certificate which indicates pro forma compliance with the financial covenants set forth in Section 5.3, in each case after giving effect to such acquisition and (B) if available, financial statements with respect to such Person or assets supporting the calculations set forth in such certificate and, in the case of the foregoing clauses (A) and (B), in form and substance satisfactory to the Agent, and (f) such acquired Person or assets shall not be subject to any material liabilities or Encumbrances - 45 - except as permitted by this Agreement. A transaction meeting the requirements of clause (ii) above shall be referred to herein as a "Permitted Acquisition." 5.5 INDEBTEDNESS. The Borrower shall not and shall not permit its Subsidiaries to create, incur, assume or permit to exist or remain outstanding any Indebtedness, except for: (i) the Indebtedness owed by the Loan Parties under the Loan Documents; (ii) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary; (iii) Indebtedness of the Borrower and its Subsidiaries secured by Encumbrances permitted under Section 5.2; (iv) performance Guarantees entered into in the ordinary course of business with respect to the performance of any obligation of any Subsidiary of the Borrower; (v) Indebtedness of the Borrower incurred pursuant to a Hedging Obligation with a Lender or an affiliate of a Lender entered into in the ordinary course of the business of the Borrower and not for speculative purposes; and (vi) other unsecured Indebtedness owed by the Borrower and its Subsidiaries pursuant to a sale of notes in a public offering or a private placement in an aggregate principal amount not to exceed $100,000,000 at any one time outstanding, provided (a) the terms and provisions of such Indebtedness are no more restrictive than the terms and provisions of this Agreement as determined by the Agent in its sole discretion and such terms and provisions are otherwise satisfactory to the Agent in its sole discretion, (b) the final maturity date of such Indebtedness is after the Termination Date and (c) after giving effect to the issuance of such Indebtedness, the Borrower shall be in pro forma compliance with the covenants set forth in Section 5.3 as demonstrated by the delivery of a Pro Forma Compliance Certificate to the Agent not less than ten (10) Business Days prior to the closing of such Indebtedness. 5.6 LOANS, ACQUISITIONS AND INVESTMENTS. The Borrower and its Subsidiaries shall not at any time make any loan or advance to, or purchase or otherwise acquire any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) or other equity interest in, or assets of, or any other investment or interest in or make any capital contribution to, any other Person, or agree to or become liable to do any of the foregoing, except for: (a) trade credit extended on usual and customary terms in the ordinary course of business; (b) fixed assets, equipment or inventory acquired in the ordinary course of business; (c) loans and advances to employees to meet expenses incurred by such employees in the ordinary course of business, including without limitation relocation expenses; - 46 - (d) Permitted Investments; (e) loans, advances and capital contributions by a Subsidiary of the Borrower to the Borrower or any of the Borrower's other Subsidiaries or loans, advances and capital contributions by the Borrower to any of its Subsidiaries; (f) Permitted Acquisitions; and (g) loans and/or investments listed on Schedule 5.6. 5.7 SALES OF ASSETS. Neither the Borrower nor any Subsidiary shall enter into any arrangement, direct or indirect, pursuant to which the Borrower or any Subsidiary shall sell or otherwise transfer or dispose of any property, real, personal or mixed, whether now owned or hereafter acquired, except (i) sales, transfers or dispositions in the ordinary course of business, (ii) sales, transfers or dispositions not in the ordinary course of business provided that the aggregate proceeds of all such sales, transfers and dispositions permitted by this item (ii) shal1 not exceed, (A) from the date hereof during any period of twelve (12) consecutive months more than $10,000,000 and (B) during the term hereof more than $25,000,000, (iii) sales of wetlands credits, and (iv) sales, transfers or dispositions not in the ordinary course of business and in excess of the amounts permitted under Section 5.7(ii), provided that the proceeds of the sale, transfer or disposition (a) represent the fair market value of the assets and (b) within 180 days after the date of such transaction, and at the Borrower's election, are applied to either (1) the purchase or acquisition of Permitted Assets or (2) the repayment of the Revolving Credit Loans and permanent reduction of the Revolving Credit Commitments in the amount of such proceeds, provided further until the Borrower makes its election under Section 5.8(iv)(b), the Revolving Credit Commitment shall be temporarily reduced by the amount of the proceeds received by the Borrower. 5.8 MERGER. The Borrower shall not merge or consolidate with any other Person or permit any of its Subsidiaries to do so, except, so long as no Event of Default or Potential Default then exists or would result therefrom, (A) a merger or consolidation of any Subsidiary with or into any other Subsidiary or the Borrower or (B) a merger or consolidation constituting a Permitted Acquisition, provided that in any merger or consolidation involving the Borrower, the Borrower is the surviving entity. 5.9 REGULATION T, U AND X COMPLIANCE. The Borrower shall not and shall not permit any Subsidiary to use the proceeds of a Revolving Credit Loan to purchase or carry Margin Stock or otherwise act so as to cause any Lender, in extending credit hereunder, to be in contravention of Regulations T, U or X. 5.10 ERISA. The Borrower shall not and shall not permit any ERISA Affiliate to permit any Plan to: (i) engage in any "prohibited transaction", as such term is defined in Section 406 of ERISA and Section 4975 of the Code; - 47 - (ii) incur any "accumulated funding deficiency", as such term is defined in Section 302 of ERISA, whether or not waived; (iii) be terminated in a manner which could result in liability to the PBGC under Title IV of ERISA or the imposition of a lien on the property of the Borrower or any ERISA Affiliate pursuant to Section 4068 of ERISA; or (iv) partially or completely withdraw from any Multiemployer Plan, which withdrawal shall subject the Borrower or any ERISA Affiliate to multiemployer withdrawal liability pursuant to Section 4201 of ERISA, if any such event could reasonably be expected to result in a Material Adverse Change. 5.11 NO LIMITATION ON DIVIDENDS AND DISTRIBUTIONS. The Borrower shall not permit its Subsidiaries to enter into or otherwise be bound by any agreement, or any provision of any certificate of incorporation, by-laws, partnership agreement, operating agreement or other organizational, formation or governing document, not to pay dividends or make distributions to the Borrower, except as imposed by any Governmental Rule or Governmental Authority. 5.12 NEGATIVE PLEDGES. The Borrower shall not directly or indirectly enter into or assume, or permit any Subsidiary to enter into or assume, any agreement (other than this Agreement and the other Loan Documents), or any provision of any certificate of incorporation, by-laws, partnership agreement, operating agreement or other organizational, formation or governing document, prohibiting the creation or assumption of any lien or Encumbrance upon any of the Borrower's or its Subsidiaries' properties, whether now owned or hereafter created or acquired, or otherwise prohibiting or restricting any transaction contemplated hereby; provided that the foregoing shall not apply to (i) restrictions and conditions imposed by any Governmental Rule or by any Loan Document, (ii) restrictions or conditions imposed by any agreement relating to secured Indebtedness or other obligations permitted by this Agreement but only to the extent such restriction or condition is limited to the specific assets subject to a Permitted Encumbrance, or (iii) customary provisions in leases or other agreements restricting the assignment thereof. 5.13 CHANGES IN ORGANIZATIONAL DOCUMENTS. The Borrower shall not permit or suffer to exist any amendment or modification in any respect of the Borrower's or any of its Subsidiaries' organizational documents or the MLP Agreement without providing at least fifteen (15) days prior written notice to the Agent and the Lenders and, in the event such change could reasonably be expected to materially adversely affect the interests of the Lenders as determined by the Agent in its sole discretion, obtaining the prior written consent of the Required Lenders. 5.14 CHANGE IN NATURE OF BUSINESS. The Borrower shall not make, or permit any of its Subsidiaries to make, any material change in the nature of their businesses, taken as a whole, as carried on at the Closing Date. 5.15 CHANGES IN OMNIBUS AGREEMENT. Without the prior written consent of the Agent, which consent shall not be unreasonably withheld or delayed, neither the Parent, the Borrower nor any of its Subsidiaries shall (i) make any material change to the terms of Omnibus Agreement, (ii) release any party from its obligations under the Omnibus Agreement or (iii) fail - 48 - to diligently enforce the Omnibus Agreement and avail itself of the rights and indemnities available thereunder. 5.16 TRANSACTIONS WITH AFFILIATES. Neither the Borrower nor any Loan Party shall enter into or carry out any transaction with an Affiliate (including purchasing property or services from or selling property or services to any Affiliate of Borrower or other Person) unless such transaction is not otherwise prohibited by this Agreement, is entered into in the ordinary course of business upon fair and reasonable arm's-length terms and conditions. 6. CONDITIONS PRECEDENT TO DISBURSEMENTS AND ISSUANCE OF LETTERS OF CREDIT 6.1 ALL DISBURSEMENTS. The obligation of the Lenders to make any Disbursements hereunder, or of the Agent to issue, renew or extend any Letters of Credit hereunder, is subject to the performance by the Borrower of its obligations to be performed hereunder at or prior to the making of any such Disbursement or the issuance, renewal or extension of any such Letter of Credit, as the case may be, and to the satisfaction of each of the following conditions precedent: 6.1a NO DEFAULT. The Borrower shall have performed and complied, in all material respects, with all agreements and conditions herein required to be performed or complied with by it prior to any Disbursements or to the issuance, renewal or extension of any Letter of Credit, and, at the time of such Disbursements or such issuance, renewal or extension, no Potential Default or Event of Default shall exist. 6.1b REPRESENTATIONS CORRECT. The representations and warranties contained in Article III hereof and in the other Loan Documents shall be correct in all material respects (i) when made and (ii) at the time of each Disbursement or issuance, renewal or extension of a Letter of Credit except for such representations and warranties which relate solely to an earlier date (in which case such representations and warranties shall have been true and correct in all material respects as of such date). 6.1c NO MATERIAL ADVERSE CHANGE. At the time of the making of any Disbursement or the issuance, renewal or extension of any Letter of Credit, no Material Adverse Change shall have occurred and be continuing. 6.1d LOAN REQUEST/APPLICATION. The Borrower shall have complied (i) with the requirements of Section 2.1 or Section 2.2, as appropriate, with respect to a requested Disbursement, and (ii) with the requirements of Section 2.6 with respect to the issuance of a Letter of Credit. Each request for Disbursement and each request for the issuance, renewal or extension of a Letter of Credit shall constitute, as at the time made, a representation and warranty by the Borrower that the matters set forth in Subsections 6.la, 6.1b and 6.1c above are true and correct. 6.2 CONDITIONS PRECEDENT TO INITIAL BORROWINGS. The obligation of the Lenders to make the initial Disbursements is subject to the satisfaction of each of the following conditions precedent in addition to the applicable conditions precedent set forth in Section 6.1 above: - 49 - (i) Receipt by the Agent on behalf of each Lender of a counterpart original of this Agreement executed by the other Lenders and the Borrower. (ii) Receipt by the Agent on behalf of each Lender of a Revolving Credit Note, substantially in the form of Exhibit "A" attached hereto, made payable to such Lender in the amount of such Lender's Revolving Credit Commitment and otherwise properly completed and executed by the Borrower. (iii) Receipt by the Agent of all schedules to this Agreement, in form and substance satisfactory to the Lenders. (iv) Receipt by the Agent of a Guaranty Agreement duly executed by each of the Guarantors. (v) Receipt by the Agent of the following formation, governance or other documents for each Loan Party and the General Partner: (a) a copy of its partnership agreement, operating agreement, articles and/or certificate of incorporation, and other formation or governmental documents, certified as true and correct by the secretary of the respective Loan Party or the General Partner, as the case may be; (b) good standing or subsistence certificates relating to each Loan Party and the General Partner executed by the Secretary of State of each state in which such Loan Party or the General Partner, as the case may be, conducts its business; (c) resolutions or other evidence of approval of the partners, board of directors or other governing body authorizing the execution of the Loan Documents and the performance by the Loan Parties pursuant thereto, certified by the secretary or other officer of the respective Loan Party (or, if applicable, of the respective Loan Party's general partner or managing member) as being true, correct, complete and in effect and in form and substance satisfactory to the Agent: (d) a copy of the by-laws (or equivalent documents), if any, and all amendments thereto, certified by the secretary or other officer of each Loan Party and the General Partner as being true, correct, complete and in effect; and (e) an incumbency certificate for each Loan Party and the General Partner, showing the names of the Authorized Officers of each Loan Party and the General Partner, their titles and containing their true signatures. (vi) Receipt by the Agent of a certificate of an Authorized Officer of the Borrower certifying that the insurance required to be maintained by the Borrower and its Subsidiaries by Section 4.7 hereof is in force and is adequate in nature and amount. (vii) Receipt by the Agent of written instructions addressed to the Agent and executed by an Authorized Officer of the Borrower relating to the initial Disbursements. - 50 - (viii) Receipt by the Agent on behalf of each Lender of a signed favorable opinion of Vinson & Elkins L.L.P, special counsel to the Borrower, dated as of the Closing Date and in form and substance satisfactory to Agent and its counsel as to the matters set forth on Exhibit "E" attached hereto. (ix) Receipt by the Agent, for the benefit of each Lender and the Agent, of a certificate of the Borrower, dated the Closing Date and signed by an Authorized Officer of the Borrower, regarding the satisfaction of the conditions set forth in Subsections 6.1a, 6.1b and 6.1c. (x) Receipt by the Agent on its own behalf and on behalf of the Lenders of all Fees due and payable on or prior to the Closing Date and all reimbursable expenses incurred on or prior to the Closing Date for which invoices (in reasonable detail) have been furnished to the Borrower. (xi) The Lenders shall have received satisfactory evidence that (a) the Transaction has been completed, including without limitation the sale of 4,500,000 common units of the Parent by the Parent and Arch Coal pursuant to the Transaction and receipt by the Parent and Arch Coal of gross cash proceeds in a minimum amount of $80,000,000 and (b) the Parent shall have received (1) cash from the proceeds of such offering in an amount at least equal to $50,100,000 (after deducting underwriting discounts but before paying estimated offering expenses) and (2) cash from Arch Coal in an amount at least equal to $800,000, and such cash proceeds have been applied up to the amount needed to repay the Indebtedness assumed by the Parent from the WPP Group in the approximate amount of $46,500,000. (xii) Receipt by the Agent of true and correct copies of the Leases listed on Schedule 3.23 and satisfactory review thereof by the Agent and its counsel. (xiii) The Agent and the Lenders (a) shall have completed and be satisfied with all requested due diligence with respect to the Borrower and the other Loan Parties, including without limitation, (1) a review of Lease files, title files, record searches and Encumbrances affecting Leases, (2) an independent reserve report, (3) an analysis of environmental liabilities with respect to properties owned or to be acquired at Closing, and (4) the financial statements and pro forma financial statements delivered pursuant to Section 3.7; (b) shall be satisfied as to the amount and nature of all environmental, tax, ERISA, employee retirement benefit and other contingent liabilities to which the Borrower and the other Loan Parties may be subject; and (c) shall be satisfied that, as of the Closing, neither the Borrower nor any other Loan Party has any outstanding Indebtedness except for the Bank Indebtedness or as otherwise expressly permitted under Section 5.5. (xiv) The Agent and the Lenders shall have received a true, correct and complete copy of the Omnibus Agreement and all other documents transferring the Leases and any other material agreements from the Contributors to the Loan Parties, all of which shall be satisfactory to the Agent and the Lenders. - 51 - 7. DEFAULTS Each of the events or occurrences described in Sections 7.1 to and including 7.10 below shall constitute an "Event of Default" hereunder. 7.1 PAYMENT DEFAULT. Default in the payment of (i) interest on any Revolving Credit Loan, any Fee, or any other amount due hereunder or under any other Loan Document, and continuance of any such nonpayment of such interest, Fee or other amount for three (3) Business Days, or (ii) principal of any Revolving Credit Loan when due. 7.2 NONPAYMENT OF OTHER INDEBTEDNESS. Any Loan Party shall fail to pay any Indebtedness of such Loan Party, other than the Bank Indebtedness, in an aggregate amount as to the Loan Parties collectively of $1,000,000 or more, as and when the same shall become due, or the occurrence of any default under any agreement or instrument under or pursuant to which such Indebtedness is incurred or issued and continuance of such default beyond the period of grace, if any, allowed with respect thereto, if such default permits or causes the acceleration of such Indebtedness or the termination of any commitment to lend with respect thereto. 7.3 INSOLVENCY. 7.3a INVOLUNTARY PROCEEDINGS. A proceeding shall have been instituted in a court having jurisdiction seeking a decree or order for relief in respect of the Parent, the General Partner, the Borrower or any Subsidiary of the Borrower in an involuntary case under the Federal bankruptcy laws, or any other similar applicable Federal or state law, now or hereafter in effect, or for the appointment of a receiver, liquidator, trustee, sequestrator or similar official for the Parent, the General Partner, the Borrower or any of its Subsidiaries or for a substantial part of its or their property, or for the winding up or liquidation of its or their affairs, and the same shall remain undismissed or unstayed and in effect for a period of sixty (60) days. 7.3b VOLUNTARY PROCEEDINGS. The Parent, the General Partner, the Borrower or any Subsidiary of the Borrower shall institute proceedings to be adjudicated a voluntary bankrupt, or any of them shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Federal bankruptcy laws, or any other similar applicable Federal or state law now or hereinafter in effect, or shall consent to the filing of any such petition or shall consent to the appointment of a receiver, liquidator, trustee, sequestrator or similar official for the Parent, the General Partner, the Borrower or any of its Subsidiaries or for a substantial part of its or their property, or shall make an assignment for the benefit of creditors, or shall admit in writing its or their inability to pay its or their debts generally as they become due, or corporate action shall be taken by the Parent, the General Partner, the Borrower or any of its Subsidiaries in furtherance of any of the aforesaid purposes. 7.4 TERMINATION OF EXISTENCE. The Borrower, the Parent, the General Partner or any Subsidiary of the Borrower shall terminate its existence or cease to exist (i) except by reason of a permitted merger or liquidation of a Subsidiary into or a consolidation of a Subsidiary with the Borrower or another Subsidiary of the Borrower, or (ii) except where a Subsidiary's termination - 52 - or cessation of its existence could not reasonably be expected to result in a Material Adverse Change. 7.5 FAILURE TO COMPLY WITH LOAN DOCUMENTS. 7.5a FAILURE TO COMPLY WITH ARTICLE V COVENANTS AND CERTAIN ARTICLE IV COVENANTS. The Borrower shall default in the observance or performance of Section 4.3, Section 4.4, Section 4.10, Section 4.11 or of any covenant contained in Article V. 7.5b FAILURE TO COMPLY WITH OTHER COVENANTS AND LOAN DOCUMENTS. Any Loan Party shall default in the due performance or observance of any other covenant, condition or provision set forth herein or in any of the other Loan Documents to which it is a party and such default shall not be remedied (i) with respect to any default under Section 4.2(ix) hereunder for a period of ten (10) days, and (ii) with respect to any other such default for a period of thirty (30) days after such default is known to any Authorized Officer of the Borrower or notice thereof has been given to the Borrower by the Agent. 7.6 MISREPRESENTATION. Any representation or warranty made by any Loan Party herein or in any other Loan Document proves to have been untrue in any material respect as of the date when made, or any certificate or other document furnished by the Borrower or any other Loan Party to the Agent or any Lender pursuant to the provisions hereof proves to have been untrue in any material respect on the date as of which the facts set forth therein are stated or certified. 7.7 ADVERSE JUDGMENTS, ETC.. Entry or filing of any one or more judgments, writs or warrants of attachment or of any similar process in an aggregate amount, as to the Parent, the Borrower and its Subsidiaries or any one or more of them, of $1,000,000 or more in excess of any third-party insurance protecting against such liability against the Parent, the Borrower and its Subsidiaries or against any of their respective properties and failure of the Borrower or its Subsidiaries to vacate, pay, bond, stay or contest in good faith such judgments, writs, warrants of attachment or other process within a period of thirty (30) days. 7.8 INVALIDITY OR UNENFORCEABILITY. This Agreement, the Revolving Credit Notes or any other Loan Document ceases to be valid and binding on any Loan Party in any material respect or is declared null and void in any material respect, or the validity or enforceability thereof is contested by any Loan Party or any Loan Party denies it has any or further liability under this Agreement, any Revolving Credit Note or under the other Loan Documents to which it is a party. 7.9 ERISA. (i) A trustee shall be appointed by a court of competent jurisdiction to administer any Plan of the Borrower or any ERISA Affiliate; (ii) the PBGC shall terminate any Plan of the Borrower or any ERISA Affiliate or appoint a trustee to administer any such Plan; or (iii) the Borrower or any ERISA Affiliate shall incur any liability to the PBGC in connection with any Plan, which, in any such case of clauses (i), (ii) or (iii), could reasonably be expected to result in a Material Adverse Change. 7.10 CHANGE IN CONTROL. Any Change in Control shall occur. - 53 - 7.11 CONSEQUENCES OF AN EVENT OF DEFAULT. If one or more of the Events of Default occur then (a) if such Event of Default is set forth in Sections 7.3 or 7.4, the Revolving Credit Commitments shall automatically terminate and the Revolving Credit Notes then outstanding shall become immediately due and payable, without necessity of demand, presentation, protest, notice of dishonor or notice of default, and the Agent shall be under no further obligation to issue, renew, extend or amend Letters of Credit hereunder; or (b) if such Event of Default is set forth in any Sections of this Article VII other than Sections 7.3 or 7.4, then the Agent, upon the direction of the Required Lenders, and without notice to the Borrower, shall declare the Borrower in default hereunder, and upon such declaration, shall, upon the direction of the Required Lenders, terminate the Revolving Credit Commitments and/or terminate the obligation of the Agent to issue, renew, extend or amend Letters of Credit and/or declare the unpaid principal amount of the Revolving Credit Notes then outstanding and all interest accrued thereon, any unpaid Fees and all other Bank Indebtedness immediately due and payable, without necessity of any further demand, presentation, protest, notice of dishonor or further notice of default, whereupon such amounts shall be immediately due and payable. 7.12 REMEDIES UPON DEFAULT. Upon the termination of the Revolving Credit Commitments and the obligation to issue Letters of Credit and the acceleration of the Revolving Credit Notes and the other Bank Indebtedness following the occurrence of an Event of Default, the Lenders shall, unless such termination and acceleration have subsequently been rescinded by the Agent at the direction of the Required Lenders, have the full panoply of rights and remedies granted to them under this Agreement and the other Loan Documents and all those rights and remedies granted by law to creditors, and the Agent, at the direction of the Required Lenders, shall proceed to protect and enforce the Lenders' rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein, in the Revolving Credit Notes or in any of the other Loan Documents, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law. No right, power or remedy conferred by this Agreement, in the Revolving Credit Notes, or by any other Loan Document, upon the Agent or the Lenders shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. No exercise of any one right or remedy shall be deemed a waiver of other rights or remedies. The rights and remedies of the Agent and the Lenders specified herein are for the sole and exclusive benefit, use and protection of the Agent and the Lenders, and the Agent and the Lenders shall be entitled, but shall have no duty or obligation, to exercise or to refrain from exercising any right or remedy reserved to the Agent or the Lenders hereunder. 7.13 CASH COLLATERAL. Upon the occurrence of any Event of Default described in Sections 7.3 or 7.4 or upon the declaration by the Required Lenders of any other Event of Default and the termination of the Revolving Credit Commitments, the obligation of the Agent to issue or amend Letters of Credit shall terminate, and an amount equal to the maximum amount which may at any time be drawn under the Letters of Credit then outstanding (whether or not any beneficiary of such Letters of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents required to draw under such Letters of Credit) shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by the Borrower; provided that the foregoing - 54 - shall not affect in any way the obligations of the Lenders to purchase from the Agent participations in the unreimbursed amount of any drawings under the Letters of Credit issued by it as provided in Subsection 2.6d. So long as the Letters of Credit shall remain outstanding, any amounts declared due pursuant to this Section 7.13 with respect to the outstanding Letters of Credit when received by the Agent shall be deposited and held by the Agent in an interest bearing account denominated in the name of the Agent for the benefit of the Agent and the Lenders over which the Agent shall have sole dominion and control of withdrawals (the "Cash Collateral Account") as cash collateral for the obligation of the Borrower to reimburse the Agent in the event of any drawing under the Letters of Credit and upon any drawing under such Letters of Credit in respect of which the Agent has deposited in the Cash Collateral Account any amounts declared due pursuant to this Section 7.13, the Agent shall apply such amounts held by the Agent to reimburse the Agent for the amount of such drawing. In the event that any Letter of Credit in respect of which the Agent has deposited in the Cash Collateral Account any amounts described above is cancelled or expires or in the event of any reduction in the maximum amount available at any time for drawing under any of the Letters of Credit outstanding, the Agent shall apply the amount then in the Cash Collateral Account designated to reimburse the Agent for any drawings under the Letters of Credit issued by it less the maximum amount available at any time for drawing under the Letters of Credit remaining outstanding immediately after such cancellation, expiration or reduction, if any, to the payment in full of the outstanding Bank Indebtedness, and second, to the payment of any excess, to the Borrower. 8. AGREEMENT AMONG LENDERS. 8.1 APPOINTMENT AND GRANT OF AUTHORITY. Each of the Lenders hereby appoints PNC Bank, National Association, and PNC Bank, National Association hereby agrees to act, as the Agent under this Agreement, the Revolving Credit Notes and the other Loan Documents. As such Agent, PNC Bank, National Association shall have and may exercise such powers under this Agreement and the other Loan Documents as are specifically delegated to the Agent, by the terms hereto or thereof, together with such other powers as are incidental thereto. Without limiting the foregoing, the Agent, on behalf of the Lenders, is authorized to execute all of the Loan Documents, to accept all of the Loan Documents and all other agreements, documents or instruments reasonably required to carry out the intent of the parties to this Agreement and to release any Guarantor from its obligations under its Guaranty Agreement in the event of the disposition of such Guarantor as permitted in this Agreement. 8.2 DELEGATION OF DUTIES. The Agent may perform any of its duties hereunder by or through agents or employees (provided such delegation does not constitute a relinquishment of duties as the Agent hereunder) and, subject to Sections 8.7 and 9.2 hereof, shall be entitled to engage and pay for the advice or services of any attorneys, accountants, or other experts concerning all matters pertaining to duties hereunder and to rely upon any advice so obtained. 8.3 RELIANCE BY AGENT ON LENDERS FOR FUNDING. Unless the Agent shall have received notice from a Lender prior to any Borrowing Date that such Lender will not make available to the Agent such Lender's portion of disbursements of Revolving Credit Loans, the Agent may assume that such Lender has made such portion available to the Agent and the Agent may, in reliance upon such assumption, make Revolving Credit Loans to the Borrower. If and to the - 55 - extent that such Lender has not made such portion available to the Agent on or prior to any Borrowing Date, such Lender and the Borrower severally agree to repay to the Agent immediately upon demand, in immediately available funds, such unpaid amount, together with interest thereon for each day from the applicable Borrowing Date until such amount is repaid to the Agent, (i) in the case of the Borrower, at the rate of interest then in effect for such Revolving Credit Loan and (ii) in the case of such Lender, at the Federal Funds Effective Rate. If such Lender shall repay to the Agent such corresponding amount, such amount shall constitute a Revolving Credit Loan made by such Lender for purposes of this Agreement. The failure by any Lender to pay its portion of a Revolving Credit Loan made by the Agent shall not relieve any other Lender of the obligation to pay its portion of disbursements of Revolving Credit Loans on any Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make its share of Revolving Credit Loans to be made by such other Lender on such Borrowing Date. 8.4 NON-RELIANCE ON AGENT. Each Lender agrees that it has, independently and without reliance on the Agent, based on such documents and information as it has deemed appropriate, made its own credit analysis and evaluation of the Borrower and its operations and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. Except as otherwise provided herein, the Agent shall have no duty to keep the Lenders informed as to the performance or observance by the Borrower of this Agreement or any other Loan Document or to inspect the properties or books of the Borrower. The Agent, in the absence of gross negligence or willful misconduct, shall not be liable to any Lender for its failure to relay or furnish to the Lender any information. 8.5 RESPONSIBILITY OF AGENT AND OTHER MATTERS. 8.5a MINISTERIAL NATURE OF DUTIES. As among the Lenders and the Agent, the Agent shall have no duties or responsibilities except those expressly set forth in this Agreement, the Revolving Credit Notes or in the other Loan Documents, and those duties and responsibilities shall be subject to the limitations and qualifications set forth in this Article VIII. The duties of the Agent shall be ministerial and administrative in nature. 8.5b LIMITATION OF LIABILITY. As among the Lenders and the Agent, neither the Agent nor any of its directors, officers, employees or agents shall be liable for any action taken or omitted (whether or not such action taken or omitted is within or without the Agent's responsibilities and duties expressly set forth in this Agreement) under or in connection with this Agreement or any other instrument or document in connection herewith except (notwithstanding anything else contained in this Agreement) for gross negligence or willful misconduct. Without limiting the foregoing, neither the Agent nor any of its directors, officers or employees shall be responsible for, or have any duty to examine (i) the genuineness, execution, validity, effectiveness, enforceability, value or sufficiency of (A) this Agreement, the Revolving Credit Notes or any of the other Loan Documents or (B) any other document or instrument furnished pursuant to or in connection with this Agreement, (ii) the collectibility of any amounts owed by the Borrower to the Lenders, (iii) the truthfulness of any recitals, statements, representations or warranties made - 56 - to the Agent or the Lenders in connection with this Agreement, (iv) any failure of any party to this Agreement to receive any communication sent, including any telegram, teletype, facsimile transmission or telephone message or any writing, application, notice, report, statement, certificate, resolution, request, order, consent letter or other instrument or paper or communication entrusted to the mails or to a delivery service, or (v) the assets, liabilities, financial condition, results of operations or business, or creditworthiness of the Borrower or any other Loan Party. 8.5c RELIANCE. The Agent shall be entitled to act, and shall be fully protected in acting upon, any telegram, teletype, facsimile transmission or any writing, application, notice, report, statement, certificate, resolution, request, order, consent, letter or other instrument, paper or communication believed by the Agent in good faith to be genuine and correct and to have been signed or sent or made by a proper Person. The Agent may consult counsel and shall be entitled to act, and shall be fully protected in any action taken in good faith, in accordance with advice given by counsel. The Agent may employ agents and attorneys-in-fact and shall not be liable for the default or misconduct of any such agents or attorneys-in-fact selected by the Agent with reasonable care. The Agent shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the other Loan Documents on the part of the Borrower or any other party hereto or thereto. 8.6 ACTIONS IN DISCRETION OF AGENT: INSTRUCTIONS FROM THE LENDERS. The Agent agrees, upon the written request of the Required Lenders, to take or refrain from taking any action of the type specified as being within the Agent's rights, powers or discretion herein or under any Loan Documents, provided that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable law. In the absence of a request by the Required Lenders, the Agent shall have authority, in its sole discretion, to take or not to take any such action, unless this Agreement specifically requires the consent of the Required Lenders or all of the Lenders. Any action taken or failure to act pursuant to such instructions or discretion shall be binding on the Lenders, subject to Subsection 8.5b hereof. Subject to the provisions of Subsection 8.5b, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Lenders. 8.7 INDEMNIFICATION. To the extent the Borrower does not reimburse and save harmless the Agent according to the terms hereof for and from all costs, expenses and disbursements in connection herewith, such costs, expenses and disbursements shall be borne by the Lenders ratably in accordance with their respective Revolving Credit Commitment. Each Lender hereby agrees on such basis (i) to reimburse the Agent for such Lender's pro rata share of all such reasonable costs, expenses and disbursements on request and (ii) to the extent of each such Lender's pro rata share, to indemnify and save harmless the Agent against and from any and all losses, obligations, penalties, actions, judgments and suits and other costs, expenses and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent, other than as a consequence of gross negligence or willful misconduct on the part of the Agent, arising out of or in connection with (a) this Agreement, the Revolving Credit Notes, the other Loan Documents or any other agreement, instrument or document executed or delivered in connection herewith or therewith, or (b) any action taken at - 57 - the request of the Required Lenders or all of the Lenders hereunder, as the case may be, including without limitation the reasonable costs, expenses and disbursements in connection with defending themselves against any claim or liability, or answering any subpoena or other process related to the exercise or performance of any of their powers or duties under this Agreement, the other Loan Documents, or any of the other agreements, instruments or documents executed or delivered in connection herewith or the taking or refraining from any action under or in connection with any of the foregoing. 8.8 AGENT'S RIGHTS AS A LENDER. With respect to the Revolving Credit Commitment of the Agent as a Lender hereunder, and any Revolving Credit Loans of the Agent under this Agreement, the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto and any other amounts due to the Agent under this Agreement, the Agent shall have the same rights and powers, duties and obligations under this Agreement, the Revolving Credit Notes, the other Loan Documents or other agreement, instrument or document as any Lender and may exercise such rights and powers and shall perform such duties and fulfill such obligations as though it were not the Agent. The Agent and its affiliates may accept deposits from, lend money to, issue letters of credit for the account of, and generally engage, and continue to engage, in any kind of business with the Borrower and the other Loan Parties as if it were not the Agent. 8.9 PAYMENT TO LENDERS. Except as otherwise set forth in Section 8.3 hereof, promptly after receipt from the Borrower of any principal repayment of the Revolving Credit Loans, interest due on the Revolving Credit Loans, any Fees or any other amounts owing to the Lenders or other amounts due under any of the Loan Documents (except for such amounts which are payable for the sole account of any Lender or the Agent), the Agent shall distribute to each Lender that Lender's share of the funds so received. 8.10 PRO RATA SHARING. Except as otherwise set forth in Section 8.3 hereof (x) all interest and principal payments on the Revolving Credit Loans are to be divided pro rata among the Lenders in proportion to the Revolving Credit Loans outstanding from each Lender and (y) all payments of the Commitment Fee and the Letter of Credit Fee are to be divided pro rata among the Lenders in accordance with their respective Revolving Credit Commitment Percentages. Any sums obtained from the Borrower by any Lender by reason of the exercise of its rights of set-off, banker's lien or in collection shall be shared (net of costs) pro rata among the Lenders on the basis of the principal amount of Revolving Credit Loans outstanding. Nothing in this Section 8.10 shall be deemed to require the sharing among the Lenders of collections specifically relating to, or of the proceeds of any collateral securing, any other Indebtedness of the Borrower to any Lender. 8.11 SUCCESSOR AGENT. 8.11a RESIGNATION OF AGENT. The Agent may resign as Agent hereunder by giving thirty (30) days' prior written notice to the Lenders and the Borrower. If such notice shall be given, the Lenders shall appoint a successor agent for the Lenders during such thirty (30) day period, which successor agent shall be reasonably satisfactory to the Borrower, to serve as agent hereunder and under the several Loan Documents. If at the end of such thirty (30) day period, the Lenders have - 58 - not appointed such a successor, the Agent shall use reasonable commercial efforts to procure a successor, reasonably satisfactory to the Lenders and the Borrower, to serve as agent for the Lenders hereunder and under the several Loan Documents. Any such successor agent shall succeed to the rights, powers and duties of the Agent. 8.11b RIGHTS OF THE FORMER AGENT. Upon the appointment of such successor agent or upon the expiration of such thirty (30) day period (or any longer period to which the Agent has agreed), the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After any retiring Agent's resignation hereunder as Agent hereunder, the provisions of this Article VIII shall inure to the benefit of such retiring Agent as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 8.12 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of an Event of Default unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement, describing such Event of Default and stating that such notice is a "notice of default." 8.13 NOTICES. The Agent shall send to each Lender a copy of all notices received from any Loan Party pursuant to the provisions of this Agreement or the other Loan Documents promptly upon receipt thereof. The Agent shall promptly notify the Borrower and the other Lenders of each change in the Base Rate and the effective date thereof. 8.14 HOLDERS OF REVOLVING CREDIT NOTES. The Agent may deem and treat any payee of any Revolving Credit Note as the owner thereof for all purposes hereof unless and until written notice of the assignment or transfer thereof shall have been recorded in the Register as contemplated by Section 9.6. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Revolving Credit Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Revolving Credit Note or of any Revolving Credit Note or Revolving Credit Notes issued in exchange therefor. 8.15 CALCULATIONS. In the absence of gross negligence or willful misconduct, the Agent shall not be liable for any error in computing the amount payable to any Lender whether in respect of the Revolving Credit Loans, Fees or any other amounts due to the Lenders under this Agreement or any other Loan Documents. In the event an error in computing any amount payable to any Lender is made, the Agent, the Borrower and each affected Person shall, forthwith upon discovery of such error, make such adjustments as shall be required to correct such error, and any compensation therefor will be calculated at the Federal Funds Effective Rate. 8.16 BENEFICIARIES. Except as expressly provided herein and in Sections 8.1, 8.3, 8.6, 8.1la, 8.14 and 8.15, the provisions of this Article VIII are solely for the benefit of the Agent and the Lenders, and the Borrower shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Borrower. - 59 - 9. GENERAL PROVISIONS 9.1 AMENDMENTS AND WAIVERS. Subject to the remaining provisions of this Section 9.1, the Agent, the Lenders, the Guarantors and the Borrower may, from time to time, enter into amendments, extensions, renewals, modifications, supplements and replacements to and of this Agreement, the Revolving Credit Notes or the other Loan Documents and the Lenders or the Required Lenders, as the case may be, may, from time to time, waive compliance with a provision thereof. No amendment, extension, renewal, modification, supplement, replacement, waiver or consent of any provision of the Agreement, the Revolving Credit Notes or the other Loan Documents or consent to any departure therefrom by the Borrower or any Guarantor shall be effective unless it is in writing and is signed by the Required Lenders (or the Agent with the written consent of the Required Lenders), and then such waiver or consent shall be effective only for the specific instance and for the specific purpose for which it is given; provided, however, that no amendment, extension, renewal, modification, supplement, replacement, waiver or consent, unless in writing and signed by all of the Lenders (or the Agent with the written consent of all of the Lenders), shall do any of the following: (A) increase the Revolving Credit Commitment of any Lender or subject any Lender to any additional obligations hereunder; (B) except for changes permitted by Sections 2.7 or 2.10 hereof or changes made pursuant to an Assignment and Assumption Agreement, change any Lender's Revolving Credit Commitment Percentage or the aggregate or individual unpaid principal amount of any Lender's Revolving Credit Note, or forgive the payment of the principal or interest payable on any Lender's Revolving Credit Note; (C) waive an Event of Default in the payment of principal and/or interest due hereunder and under any of the Revolving Credit Notes; (D) decrease the interest rate relating to the Revolving Credit Loans; (E) postpone any date fixed for any payment of principal of or interest on the Revolving Credit Loans, the Commitment Fee, the Letter of Credit Fee, or any other obligations of the Borrower set forth in Article II; (F) reduce the Commitment Fee or the Letter of Credit Fee; or (G) amend the definition of the term "Required Lenders" or amend or waive the provisions of this Section 9.1. Any such amendment, extension, renewal, modification, supplement, replacement, waiver or consent shall apply equally to the Borrower and each of the Lenders and shall be binding upon the Borrower, the Lenders, the Agent and all future holders of the Revolving Credit Notes. In the case of any waiver, the Borrower, the Lenders and the Agent shall be restored to their former positions and rights, and any Event of Default waived shall be deemed to be cured and not continuing, but no such waiver shall extend to any subsequent or other Event of Default, or impair any right consequent thereon. - 60 - 9.2 EXPENSES. The Borrower shall pay: (i) All reasonable costs and expenses of the Agent (including without limitation the reasonable fees and disbursements of the Agent's special counsel, Buchanan Ingersoll Professional Corporation, incurred in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents and any and all other documents and instruments prepared in connection herewith, including but not limited to all amendments, extensions, modifications, replacements, waivers, consents and other documents and instruments prepared or entered into from time to time; and (ii) All reasonable costs and expenses of the Agent and the Lenders (including without limitation the reasonable fees and disbursements of the Agent's and the Lenders' counsels, which may be in house counsel) in connection with (A) the enforcement of this Agreement and the other Loan Documents arising pursuant to a breach by any Loan Party of any of the terms, conditions, representations, warranties or covenants of any Loan Document to which it is a party (including without limitation the reasonable fees and expenses of any workout counsel for the Agent and the Lenders), and (B) defending or prosecuting any actions, suits or proceedings relating to any of the Loan Documents. All of such costs and expenses shall be payable by the Borrower to the Lenders or the Agent, as the case may be, upon demand or as otherwise agreed upon by the Lenders or the Agent and the Borrower, and shall constitute Bank Indebtedness under this Agreement. The Borrower further agrees to pay and save the Agent and the Lenders harmless from any and all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Revolving Credit Notes or of any Letters of Credit. The Borrower's obligation to pay such costs and expenses shall survive the termination of this Agreement and the repayment of the Bank Indebtedness. 9.3 NOTICES. Any notice, request, demand, direction or other communication (for purposes of this Section 9.3 only, a "Notice") to be given to or made upon any party hereto or any other Loan Document under any provision of this Agreement or any other Loan Document shall be given or made by telephone or in writing (which includes by means of electronic transmission (i.e., "e-mail") or facsimile transmission or by setting forth such Notice on site the World Wide Web (a "Website Posting") if Notice of such Website Posting (including the information necessary to access such site) has previously been delivered to the applicable parties hereto by another means set forth in this Section 9.3) in accordance with this Section 9.3. Any such Notice must be delivered to the applicable parties hereto at the addresses and numbers set forth below or in accordance with any subsequent unrevoked Notice from any such party that is given in accordance with this Section 9.3. Any Notice shall be effective: (i) In the case of hand-delivery, when delivered; - 61 - (ii) If given by mail, four days after such Notice is deposited with the United States Postal Service, certified or registered mail postage prepaid, return receipt requested; (iii) In the case of a telephonic Notice, when a party is contacted by telephone, if delivery of such telephonic Notice is confirmed no later than the next Business Day by hand-delivery, a facsimile or electronic transmission, a Website Posting or an overnight courier delivery of a confirmatory Notice (received before the close of business on such next Business Day); (iv) In the case of a facsimile transmission, when sent to the applicable party's facsimile machine's telephone number, if the party sending such Notice receives confirmation of the delivery thereof from its own facsimile machine; (v) In the case of electronic transmission, when actually received; (vi) In the case of a Website Posting, upon delivery of a Notice of such posting (including the information necessary to access such site) by another means set forth in this Section 9.3; and (vii) If given by any other means (including by overnight courier), when actually received. Any Lender giving a Notice to the Borrower shall concurrently send a copy thereof to the Agent, and the Agent shall promptly notify the other Lenders of its receipt of such Notice. 9.3a NOTICE TO THE BORROWER. NRP (Operating) LLC 601 Jefferson Suite 3600 Houston, TX 77002 Attention: Dwight Dunlap Telecopier: (713) 650-0606 Telephone: (713) 751-7514 with a copy to: 1035 Third Avenue Suite 300 P.O. Box 2827 Huntington, WV 25727 Attention: Nick Carter Telecopier: (304) 522-5757 Telephone: (304) 522-5401 9.3b NOTICE TO THE AGENT. - 62 - PNC Bank, National Association Agency Services One PNC Plaza - 22nd Floor 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: Lisa Pierce Telephone: (412) 762-6442 Telecopier: (412) 762-8672 with a copy to: PNC Bank, National Association Energy, Metals and Mining Group One PNC Plaza, 3rd Floor 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: Christopher Moravec Senior Vice President Telephone: (412) 762-2540 Telecopier: (412) 705-3232 9.3c NOTICE TO THE LENDERS. All notices required to be delivered to the Lenders pursuant to this Agreement shall be sent to the addresses set forth on the signature pages of the Agreement or such Lender's signature page to the Assignment and Assumption Agreement executed by it as a Purchasing Lender. 9.4 TAX WITHHOLDING. Each Lender or assignee or Participant of a Lender that is not incorporated under the laws of the United States of America or a state thereof (and, upon the written request of the Agent, each other Lender or assignee or Participant of a Lender) agrees that it will deliver to each of the Borrower and the Agent two (2) duly completed appropriate valid Withholding Certificates (as defined under Section 1.1441-1 (c)(16) of the Income Tax Regulations (the "Regulations")) certifying its status (i.e., United States or foreign person) and, if appropriate, making a claim of reduced, or exemption from, United States withholding tax on the basis of an income tax treaty or an exemption provided by the Internal Revenue Code (the "Code"). Such delivery may be made by electronic transmission as described in Section 1.1441- 1 (e)(4)(iv) of the Regulations if the Agent establishes an electronic delivery system. The term "Withholding Certificate" means a Form W-9, a Form W-8BEN, a Form W-8ECI, a Form W- 8IMY and the related statements and certifications as required under Section 1.1441-1(e)(3) of the Regulations, a statement described in Section 1.871-14(c)(2)(v) of the Regulations, or any other certificates under the Code or Regulations that certify or establish the status of a payee or beneficial owner as a United States or foreign person. Each Lender, assignee or Participant required to deliver to the Borrower and the Agent a valid Withholding Certificate pursuant to the preceding sentence shall deliver such valid Withholding Certificate as follows; (A) each Lender which is a party hereto on the Closing Date shall deliver such valid Withholding Certificate at least five (5) Business Days prior to the first date on which any interest or Fees are payable by the Borrower hereunder for the account of such Lender; (B) each assignee or Participant shall - 63 - deliver such valid Withholding Certificate at least five (5) Business Days before the effective date of such assignment or Participation (unless the Agent in its sole discretion shall permit such assignee or Participant to deliver such Withholding Certificate less than five (5) Business Days before such date in which case it shall be due on the date specified by the Agent). Each Lender, assignee or Participant which so delivers a valid Withholding Certificate further undertakes to deliver to each of the Borrower and the Agent two (2) additional copies of such Withholding Certificate (or a successor form) on or before the date that such Withholding Certificate expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent Withholding Certificate so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent. Notwithstanding the submission of a Withholding Certificate claiming a reduced rate of, or exemption from United States withholding taxes, the Agent shall be entitled to withhold United States federal income taxes at the full 30% withholding rate if in its reasonable judgment it is required to do so under the due diligence requirements imposed upon a withholding agent under Section 1.1441-7(b) of the Regulations. Further, the Agent is indemnified under Section 1.1461-1(e) of the Regulations against any claims and demands of any Lender or assignee or Participant of a Lender for the amount of any tax it deducts and withholds in accordance with regulations under Section 1441 of the Internal Revenue Code. 9.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Borrower, the Agent and the Lenders and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Agent and the Lender and the successors and assigns of the Agent and the Lender, provided, that the Borrower shall not assign its rights or duties hereunder or under any of the other Loan Documents without the prior written consent of the Lenders. 9.6 ASSIGNMENTS AND PARTICIPATIONS. 9.6a ASSIGNMENTS. Subject to the remaining provisions of this Subsection 9.6a, any Lender (a "Transferor Lender"), at any time, in the ordinary course of its commercial banking business and in accordance with applicable law, may sell to one or more financial institutions (individually a "Purchasing Lender") a portion or all of its rights and obligations under this Agreement and the Revolving Credit Notes then held by it, pursuant to an Assignment and Assumption Agreement substantially in the form of Exhibit "F" executed by the Transferor Lender, such Purchasing Lender, the Borrower and the Agent; subject, however to the following requirements: (i) Each such assignment must be in a minimum amount of $5,000,000, or, in excess thereof, in integral multiples of $1,000,000, unless such Lender's Revolving Credit Commitment is less than $5,000,000, in which case such assignment shall be in the full amount of such Lender's Revolving Credit Commitment;: (ii) During the first ninety (90) days following the Closing Date, each assignment made shall become effective only on a date which coincides with the expiration date of any Interest Period then in effect, unless the Agent agrees to waive this provision; - 64 - (iii) The Agent and the Borrower must each give its prior consent to any such assignment which consent shall not be unreasonably withheld; it being agreed that it shall not be deemed unreasonable for the Borrower to decline to consent to such assignment if (A) such assignment would result in incurrence of additional costs to the Borrower under Article II, or (B) the proposed assignee has not provided to the Borrower any tax forms required under Section 9.4, provided, however, no consent is required for the transfer by a Lender to its Affiliate or to another Lender so long as the conditions in clauses (i) and (ii) immediately above are satisfied; and (iv) The Transferor Lender shall pay to the Agent a $3,500 service fee for each such transfer at the time of each such transfer; provided, however the restrictions set forth in item (i) above shall not apply (x) in the case of an assignment by a Lender to an Affiliate of such Lender or (y) in the case of any assignment by any Transferor Lender upon the occurrence and during the continuation of an Event of Default; and provided further, that upon the occurrence and during the continuance of an Event of Default the consent of the Borrower to any assignment is not required. Upon the execution, delivery, acceptance and recording of any such Assignment and Assumption Agreement, from and after the Transfer Effective Date determined pursuant to such Assignment and Assumption Agreement, all parties hereto agree that (a) the Purchasing Lender thereunder shall be a party hereto as a Lender and, to the extent provided in such Assignment and Assumption Agreement, shall have the rights and obligations of a Lender hereunder with the Revolving Credit Commitments as set forth therein, and (b) the Transferor Lender thereunder shall, to the extent provided in such Assignment and Assumption Agreement, be released from its obligations as a Lender under this Agreement. Such Assignment and Assumption Agreement shall be deemed to amend this Agreement (without further action) to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender as a Lender and the resulting adjustment of Revolving Credit Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such Transferor Lender under this Agreement and its Revolving Credit Notes. On or prior to the Transfer Effective Date, the Borrower shall execute and deliver to the Agent, in exchange for the surrendered Revolving Credit Notes held by the Transferor Lender, new Revolving Credit Notes to the order of such Purchasing Lender in amounts equal to the Revolving Credit Commitment or the Revolving Credit Loans assumed by it and purchased by it pursuant to such Assignment and Assumption Agreement, and new Revolving Credit Notes to the order of the Transferor Lender in amounts equal to the Revolving Credit Commitment or the Revolving Credit Loans retained by it hereunder, in each case dated as of the date of the last payment in full of interest on the surrendered Revolving Credit Notes. In addition to the assignments permitted above, any Lender may assign and pledge all or any portion of its Revolving Credit Loans and Revolving Credit Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations and duties hereunder. - 65 - 9.6b ASSIGNMENT REGISTER. The Agent shall maintain, at its address referred to in Subsection 9.3b, a copy of each Assignment and Assumption Agreement delivered to it and a register (the "Register") for the recordation of the name, address and Revolving Credit Commitment of each Lender and the amount of the Revolving Credit Loans owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Revolving Credit Notes and the Revolving Credit Loans and the holder of the Revolving Credit Commitment recorded therein for all purposes of this Agreement and the other Loan Documents. The Register shall be available at the office of the Agent set forth in Subsection 9.3b for inspection by either Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 9.6c PARTICIPATIONs. Each Lender, in the ordinary course of its commercial banking business and in accordance with applicable law, may sell to one or more Participants a participating interest in any Revolving Credit Loan or Letter of Credit owing to such Lender, the interest of such Lender in any Revolving Credit Note, Letter of Credit or the Revolving Credit Commitment of such Lender. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of its Revolving Credit Notes for all purposes under this Agreement and the Borrower, the other Lenders and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement or its Revolving Credit Notes and the Participants shall have voting rights only with respect to matters described in clauses (B), (D), (E) and (F) of Section 9.1, but only with respect to the Revolving Credit Loans and Revolving Credit Commitments in which such Participant participates. 9.6d PROVISIONS FOR SPECIAL PURPOSE FUNDING VEHICLES. Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Agent and the Borrower, the option to provide to the Borrower all or any part of any Revolving Credit Loan that such Granting Lender would otherwise be obligated to make to the Borrowers; provided that (i) nothing herein shall constitute a commitment to make any Revolving Credit Loan by such SPC and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Revolving Credit Loan, the Granting Lender shall be obligated to make such Revolving Credit Loan pursuant to the terms hereof. The making of a Revolving Credit Loan by an SPC hereunder shall utilize the relevant Revolving Credit Commitment of the Granting Lender to the same extent, and as if, such Revolving Credit Loan were made by the Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any payment under this Agreement for which a Lender would otherwise be liable, for so long as, and to the extent, the related Granting Lender makes such payment. In furtherance of the foregoing, each party hereto hereby agrees that, prior to the date that is one year and one day after the later of (i) the payment in full of all outstanding senior indebtedness of such SPC and (ii) the Termination Date, it will not institute against, or join any other person in instituting against such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States - 66 - or any State thereof. In addition, notwithstanding anything to the contrary contained in this Subsection 9.6d, such SPC may (i) with prior written consent of the Borrower and the Agent (such consent not to be unreasonably withheld) and without paying any processing fee therefor, assign all or a portion of its interests in any Revolving Credit Loans to its Granting Lender or to any financial institutions providing liquidity and or credit facilities to or for the account of such SPC to fund the Revolving Credit Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Revolving Credit Loans and (ii) disclose on a confidential basis consistent with Section 9.19 any non-public information relating to its Revolving Credit Loans to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. In no event shall the Borrower be obligated to pay an SPC that has made a Revolving Credit Loan in a greater amount than the Borrower would have been obligated to pay under this Agreement if the Granting Lender had made such Revolving Credit Loan. Each Granting Lender shall indemnify and hold harmless the Borrower and its directors, officers, employees and agents from and against any and all losses, liabilities, claims, damages and expenses arising from or attributable to the making of a Revolving Credit Loan by an SPC of such Granting Lender. 9.7 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 9.8 SURVIVAL. All representations, warranties, covenants and agreements of the Borrower contained herein, in the Revolving Credit Notes or in the other Loan Documents or made in writing in connection herewith or therewith shall survive the issuance of the Revolving Credit Notes and the Letters of Credit and shall continue in full force and effect so long as the Borrower may borrow hereunder and so long thereafter until payment in full of all the Revolving Credit Notes and the Bank Indebtedness. Notwithstanding the terms of the foregoing sentence, the representations, warranties, covenants, agreements and indemnities set forth in Sections 2.6i, 4.13, 8.7, 9.4, 9.16 and 9.18 shall survive the termination of the Revolving Credit Commitments hereunder and the payment in full of the Revolving Credit Notes and the Bank Indebtedness. 9.9 GOVERNING LAW. This Agreement, each Revolving Credit Note and each other Loan Document shall be a contract made under, governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without reference to the provision thereof regarding conflicts of law except where such law is superseded by applicable Federal law. 9.10 NON-BUSINESS DAYS. Except as otherwise specifically required pursuant to the terms of this Agreement, whenever any payment hereunder or under the Revolving Credit Notes is due and payable on a day which is not a Business Day, such payment may be made on the next succeeding Business Day. 9.11 INTEGRATION. This Agreement constitutes the entire agreement between the parties relating to this financing transaction and it supersedes all prior understandings and agreements, whether written or oral, between the parties hereto concerning the subject matter of this Agreement. - 67 - 9.12 HEADINGS, ETC.. Article, Section and other headings and Section and Subsection references used in this Agreement are intended for convenience only and shall not, and are not intended to, in any way or manner affect the meaning or construction of this Agreement. 9.13 SET-OFF. The Borrower hereby grants to the Lenders a lien and security interest for the amount of any Bank Indebtedness upon and in any property, credits, securities or money of the Borrower which may at any time be delivered to, or be in the possession of, or owed by any Lender in any capacity whatever, including the balance of any deposit account but excluding any trust or fiduciary accounts, in each case maintained by the Borrower with such Lender. The Borrower hereby authorizes each Lender in case of an Event of Default, at such Lender's option, at any time and from time to time, to apply, at the discretion of such Lender, to the payment of Bank Indebtedness, any and all such property, credits, securities or money now or hereafter in the hands of such Lender belonging or owed to the Borrower. Nothing herein shall restrict any Lender's ability to set off any property, credits, securities or money of the Borrower which may at any time be delivered to, or be in possession or owed to any Lender in any capacity whatever to satisfy an independent obligation of the Borrower to the Lender. 9.14 CONSENT TO FORUM. The parties hereto each hereby irrevocably consents to the exclusive jurisdiction of the Court of Common Pleas of Allegheny County, Pennsylvania, or in the District Court of the United States for the Western District of Pennsylvania in any action or proceeding arising out of or relating to this Agreement, the Revolving Credit Notes or the other Loan Documents, and each party, agrees that a summons and complaint commencing an action or proceeding in either of such courts shall be properly served and shall confer personal jurisdiction if served personally or by certified mail to the party, at its respective address set forth in Section 9.3, or as otherwise provided under the laws of the Commonwealth of Pennsylvania. Further, the parties hereby specifically waive and hereby acknowledge that the parties are estopped from raising any claim that any such court lacks personal jurisdiction over such party so as to prohibit either such court from adjudicating any issues raised in a complaint filed with any such court against the Borrower or the Lenders concerning this Agreement, the Revolving Credit Notes or the other Loan Documents. 9.15 WAIVER OF JURY TRIAL. Each of the Agent, the Lenders and the Borrower hereby knowingly, voluntarily and intentionally waive any rights they may have to a trial by jury in respect of any litigation based hereon, or arising out of, under, or in connection with, this Agreement or any other Loan Document, or any course of conduct, course of dealing, statements (whether verbal or written) or actions of the Agent, the Lenders or the Borrower relating hereto or thereto. The Borrower acknowledges and agrees that it has received full and sufficient consideration for this provision (and each other provision of each other Loan Document to which it is a party) and that this provision is a material inducement for the Lenders to enter into this Agreement and each such other Loan Document. 9.16 INDEMNITY. The Borrower hereby agrees to indemnify the Agent, the Lenders and each of their respective directors, officers, employees, attorneys, agents and Affiliates against, and hold each of them harmless from, any loss, liabilities, damages, claims, and reasonable costs and expenses, joint or several (including reasonable attorneys' fees and disbursements reasonably incurred by any such Person in connection with the preparation for or defense of any pending or - 68 - threatened claim, action or proceeding) suffered or incurred by any of them under any applicable federal or state law or otherwise caused by, arising out of, resulting from or in any manner connected with the execution, delivery and performance of each of the Loan Documents, the Revolving Credit Loans and any and all transactions related to or consummated in connection with the Revolving Credit Loans. The indemnity set forth in this Section 9.16 shall be in addition to any other obligations or liabilities of the Borrower to the Agents or the Lenders, or at common law or otherwise. The provisions of this Section 9.16 shall survive the payment of the Bank Indebtedness and the termination of this Agreement. The foregoing provisions of this Section 9.16 to the contrary notwithstanding, the Borrower shall not be obligated to indemnify the Agent or any Lender pursuant to this Section 9.16 for (i) any losses, liabilities, damages, claims or costs suffered or incurred by any of them in connection with the administrative transfer of funds in connection with this Agreement and which arise directly from the Agent's or such Lender's gross negligence or willful misconduct, or (ii) any other losses, liabilities, damages, claims, or costs which arise directly from the Agent's, or such Lender's gross negligence or willful misconduct. All amounts owed pursuant to this Section 9.16 shall be part of the Bank Indebtedness. 9.17 COUNTERPARTS. This Agreement and any amendment, modification, extension or renewal hereto or hereof may be executed in several counterparts and by each party on a separate counterpart, each of which, when so executed and delivered, shall be an original, but all of which together shall constitute but one and the same instrument. In proving this Agreement or any amendment, modification, extension or renewal, it shall not be necessary to produce or account for more than one such counterpart signed by the other party against whom enforcement is sought. 9.18 LIMITATION ON RECOURSE TO GENERAL PARTNER. Except as set forth below, the Agent and the Lenders shall not look to the General Partner for the payment of the Bank Indebtedness and the performance of the Borrower's (or the Parent's) other obligations hereunder and under the other Loan Documents; provided, however, that the Agent and the Lenders shall have the right to look to the General Partner on a joint and several basis for, and the General Partner on a joint and several basis shall indemnify, and hold harmless, the Agent and the Lenders from, any loss, damage, liability, claim, cost or expense (including reasonable attorneys' fees) which the Agent or any Lender may incur as a result of and to the extent caused by (i) any representation or warranty made by the Parent, the Borrower, any Guarantor or the General Partner herein or in any other Loan Document or in any, certificate, schedule, statement, report, notice or other writing furnished or made to the Agent or the Lenders in connection with the transactions contemplated by this Agreement is untrue in any material respect, or (ii) any assets, rights, rents, profits, issues, income or other properties or revenues of the Parent, the Borrower or any of its Subsidiaries are misappropriated by the General Partner and the Agent or any Lender sustains a loss therefrom. 9.19 CONFIDENTIALITY. Each of the Agent and each Lender agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its, its affiliates and its affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed - 69 - to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section by any Person or (ii) becomes available to the Agent or any Lender on a nonconfidential basis from a source other than Borrower or any of its Subsidiaries. For the purposes of this Section, "Information" means all information received from Borrower or its Subsidiaries relating to Borrower and its Subsidiaries or their business, other than any such information that is available to the Agent or any Lender on a nonconfidential basis prior to disclosure by Borrower or any of its Subsidiaries; provided that, in the case of information received from Borrower after the date of this Agreement, such information is clearly identified at the time of delivery as confidential. Any, Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] - 70 - [SIGNATURE PAGE 1 OF 6 TO CREDIT AGREEMENT] IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned have caused this Credit Agreement by and among NRP (OPERATING) LLC, THE LENDERS PARTY HERETO, PNC BANK, NATIONAL ASSOCIATION, as the Administrative Agent, BRANCH BANKING AND TRUST COMPANY, as Syndication Agent and BANK OF MONTREAL and BNP PARIBAS, as Documentation Agents, to be executed by their respective duly authorized officer as of the date first written above. NRP (OPERATING) LLC, a Delaware limited liability company By: Natural Resource Partners L.P., a Delaware limited partnership, its sole member By: NRP (GP) LP, a Delaware limited partnership, its general member By: GP Natural Resource Partners LLC, a Delaware limited liability company, its general member By: /s/ Nick Carter (SEAL) ----------------------------- Name: Nick Carter Title: President and COO [SIGNATURE PAGE 2 OF 6 TO CREDIT AGREEMENT] IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned have caused this Credit Agreement by and among NRP (OPERATING) LLC, THE LENDERS PARTY HERETO, PNC BANK, NATIONAL ASSOCIATION, as the Administrative Agent, BRANCH BANKING AND TRUST COMPANY, as Syndication Agent and BANK OF MONTREAL and BNP PARIBAS, as Documentation Agents, to be executed by their respective duly authorized officer as of the date first written above. PNC BANK, NATIONAL ASSOCIATION, Revolving Credit Commitment: individually and as Administrative Agent $21,250,000 Revolving Credit Commitment By: /s/ Christopher N. Moravec 21.25% ------------------------------------- Name: Christopher N. Moravec Title: Senior Vice President Addresses for notice purposes: PNC Bank, National Association Agency Services One PNC Plaza - 22nd Floor 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: Lisa Pierce Telephone: (412) 762-6442 Telecopier: (412) 762-8672 With a copy to: PNC Bank, National Association Energy Metals and Mining Group One PNC Plaza - 3rd Floor 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: Christopher Moravec, Senior Vice President Telephone: (412) 762-2540 Telecopier: (412) 705-3232 Address for Euro-Rate Loan Funding if different from above: N/A - ------------------------------ - ------------------------------ - ------------------------------ Telephone: ------------------- Telecopier: ------------------- Telex: ------------------------ [SIGNATURE PAGE 3 OF 6 TO CREDIT AGREEMENT] IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned have caused this Credit Agreement by and among NRP (OPERATING) LLC, THE LENDERS PARTY HERETO, PNC BANK, NATIONAL ASSOCIATION, as the Administrative Agent, BRANCH BANKING AND TRUST COMPANY, as Syndication Agent and BANK OF MONTREAL and BNP PARIBAS, as Documentation Agents, to be executed by their respective duly authorized officer as of the date first written above. BRANCH BANKING AND TRUST COMPANY, Revolving Credit Commitment: individually and as Syndication Agent $21,250,000 Revolving Credit Commitment By: /s/ James C. Stallings 21.25% --------------------------------------- Name: James C. Stallings Title: Vice President Addresses for notice purposes: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: -------------------------------- Telephone: -------------------------------- Telecopier: -------------------------------- With a copy to: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: -------------------------------- Telephone: -------------------------------- Telecopier: -------------------------------- Address for Euro-Rate Loan Funding if different from above: N/A - ------------------------------ - ------------------------------ - ------------------------------ Telephone: -------------------- Telecopier: ------------------- Telex: ------------------------ [SIGNATURE PAGE 4 OF 6 TO CREDIT AGREEMENT] IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned have caused this Credit Agreement by and among NRP (OPERATING) LLC, THE LENDERS PARTY HERETO, PNC BANK, NATIONAL ASSOCIATION, as the Administrative Agent, BRANCH BANKING AND TRUST COMPANY, as Syndication Agent and BANK OF MONTREAL and BNP PARIBAS, as Documentation Agents, to be executed by their respective duly authorized officer as of the date first written above. BANK OF MONTREAL, individually and as Revolving Credit Commitment: Documentation Agent $21,250,000 Revolving Credit Commitment By: /s/ Bruce A. Pietka 21.25% ------------------------------------- Name: Bruce A. Pietka Title: Vice President Addresses for notice purposes: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: -------------------------------- Telephone: -------------------------------- Telecopier: ------------------------------- With a copy to: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: -------------------------------- Telephone: -------------------------------- Telecopier: ------------------------------- Address for Euro-Rate Loan Funding if different from above: N/A - ------------------------------ - ------------------------------ - ------------------------------ Telephone: -------------------- Telecopier: ------------------- Telex: ------------------------ [SIGNATURE PAGE 5 OF 6 TO CREDIT AGREEMENT] IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned have caused this Credit Agreement by and among NRP (OPERATING) LLC, THE LENDERS PARTY HERETO, PNC BANK, NATIONAL ASSOCIATION, as the Administrative Agent, BRANCH BANKING AND TRUST COMPANY, as Syndication Agent and BANK OF MONTREAL and BNP PARIBAS, as Documentation Agents, to be executed by their respective duly authorized officer as of the date first written above. BNP PARIBAS, individually and as Revolving Credit Commitment: Documentation Agent $21,250,000 Revolving Credit Commitment By: /s/ Evans R. Swann 21.25% ------------------------------------- Name: Evans R. Swann Title: Director By: /s/ Greg Smothers ------------------------------------- Name: Greg Smothers Title: Vice President Addresses for notice purposes: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: -------------------------------- Telephone: -------------------------------- Telecopier: -------------------------------- With a copy to: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: -------------------------------- Telephone: -------------------------------- Telecopier: -------------------------------- Address for Euro-Rate Loan Funding if different from above: N/A - ------------------------------ - ------------------------------ - ------------------------------ Telephone: -------------------- Telecopier: -------------------- Telex: ------------------------ [SIGNATURE PAGE 6 OF 6 TO CREDIT AGREEMENT] IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned have caused this Credit Agreement by and among NRP (OPERATING) LLC, THE LENDERS PARTY HERETO, PNC BANK, NATIONAL ASSOCIATION, as the Administrative Agent, BRANCH BANKING AND TRUST COMPANY, as Syndication Agent and BANK OF MONTREAL and BNP PARIBAS, as Documentation Agents, to be executed by their respective duly authorized officer as of the date first written above. Revolving Credit Commitment: THE HUNTINGTON NATIONAL BANK $15,000,000 Revolving Credit Commitment By: /s/ Mark A. Scurci 15% ------------------------------------- Name: Mark A. Scurci Title: Vice President Addresses for notice purposes: Huntington National Bank Huntington Center 41 S. High Street HC0810 Columbus, Ohio 43215 Attention: Mark A. Scurci Telephone: 614-480-4196 Telecopier: 614-480-5791 With a copy to: L. Blair DeVan Vice President Huntington National Bank One Huntington Square WE3007 Huntington, WV Attention: -------------------------------- Telephone: 304-348-5008 Telecopier: 304-348-5055 Address for Euro-Rate Loan Funding if different from above: N/A - ------------------------------ - ------------------------------ - ------------------------------ Telephone: -------------------- Telecopier: ------------------- Telex: ------------------------ EX-10.2 8 h04228exv10w2.txt CONTRIBUTION, CONVEYANCE & ASSUMPTION AGREEMENT EXHIBIT 10.2 EXECUTION COPY CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT INDEX ARTICLE I DEFINITIONS; SCHEDULES.................................................................... 4 1.1 Definitions............................................................................. 4 1.2 Schedules and Exhibits.................................................................. 7 ARTICLE II TRANSACTIONS............................................................................. 7 2.1 Contribution by New Gauley to NNG LLC of Assets......................................... 7 2.2 Contribution by WPP to WPP LLC of Assets................................................ 8 2.3 Contribution by Great Northern to GNP LLC of Assets..................................... 8 2.4 Contribution by Ark to ACIN LLC of Assets............................................... 8 2.5 Contribution by New Gauley to the MLP of Interest in NNG LLC............................ 9 2.6 Contribution by WPP to the MLP of Interest in WPP LLC................................... 9 2.7 Contribution by Great Northern to the MLP of Interest in GNP LLC........................ 9 2.8 Contribution by Ark to the MLP of Interest in ACIN LLC.................................. 10 2.9 Public Cash Contribution................................................................ 10 2.10 Public Cash Contribution to Ark......................................................... 10 2.11 MLP Receipt of Public Cash.............................................................. 10 2.12 Ark Receipt of Public Cash.............................................................. 10 2.13 NNG LLC Receipt of Offering Proceeds.................................................... 10 2.14 WPP LLC Receipt of Offering Proceeds.................................................... 10 2.15 GNP LLC Receipt of Offering Proceeds.................................................... 10 2.16 Contribution by New Gauley to GP LP of its SPLs......................................... 10 2.17 Contribution by WPP to GP LP of its SPLs................................................ 10 2.18 Contribution by Great Northern to GP LP of its SPLs..................................... 10 2.19 Contribution by Ark to GP LP of its SPLs................................................ 11 2.20 Conversion of SPLs...................................................................... 11 2.21 Payment of Transaction Costs, Offering Proceeds and Capital Expenditures................ 11 2.22 Contribution by the MLP to the OLLC of the Membership Interests in the LLCs............. 11 2.23 Exercise of the Shoe.................................................................... 11 2.24 Specific Conveyances.................................................................... 11 ARTICLE III ASSUMPTION OF CERTAIN LIABILITIES....................................................... 12 3.1 Assumption by the NNG LLC of the New Gauley Debt........................................ 12 3.2 Assumption by the WPP LLC of the WPP Debt............................................... 12 3.3 Assumption by the GNP LLC of the Great Northern Debt.................................... 12 ARTICLE IV TITLE MATTERS............................................................................ 12 4.1 Encumbrances............................................................................ 12 4.2 Disclaimer of Warranties; Subrogation; Waiver of Bulk Sales Laws........................ 13 4.3 General Provision Relating to Assumption Liabilities.................................... 14 ARTICLE V FURTHER ASSURANCES........................................................................ 15 5.1 Further Assurances...................................................................... 15 5.2 Power of Attorney....................................................................... 15 ARTICLE VI MISCELLANEOUS............................................................................ 16 6.1 Order of Completion of Transactions..................................................... 16 6.2 Consents; Restriction on Assignment..................................................... 16 6.3 Costs................................................................................... 16 6.4 Ad Valorem Tax Payment.................................................................. 17 6.5 Headings; References; Interpretation.................................................... 19
i 6.6 Successors and Assigns.................................................................. 19 6.7 No Third Party Rights................................................................... 19 6.8 Counterparts............................................................................ 19 6.9 Governing Law........................................................................... 19 6.10 Severability............................................................................ 20 6.11 Deed; Bill of Sale; Assignment.......................................................... 20 6.12 Amendment or Modification............................................................... 20 6.13 Integration............................................................................. 20
ii CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT THIS CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT (this "Agreement") is made, entered into and effective as of the 17th day of October, 2002, by and among New Gauley Coal Corporation, a West Virginia corporation ("New Gauley"); Western Pocahontas Properties Limited Partnership, a Delaware limited partnership ("WPP"); Great Northern Properties Limited Partnership, a Delaware limited partnership ("Great Northern"); Ark Land Company, a Delaware corporation ("Ark"); NNG LLC, a Delaware limited liability company ("NNG LLC"); WPP LLC, a Delaware limited liability company ("WPP LLC"); GNP LLC, a Delaware limited liability company ("GNP LLC"); ACIN LLC, a Delaware limited liability company ("ACIN LLC"); Robertson Coal Management LLC, a Delaware limited liability company ("RCM LLC"); NRP (Operating) LLC, a Delaware limited liability company (the "OLLC"); GP Natural Resource Partners LLC, a Delaware limited liability company ("GP LLC"); NRP (GP) LP, a Delaware limited partnership ("GP LP"); and Natural Resource Partners L.P., a Delaware limited partnership (the "MLP"). RECITALS WHEREAS, GP LLC and GP LP have formed the MLP pursuant to the Delaware Revised Uniform Limited Partnership Act for the purpose of, among other things, acquiring, owning and operating certain assets of New Gauley, WPP, Great Northern and Ark used in the business of owning and managing coal properties; WHEREAS, in furtherance of accomplishing the objectives and purposes set forth in the preceding recital, the following actions have been taken prior to the date hereof: 1. New Gauley has formed NNG LLC to which New Gauley contributed $1,000 in exchange for all the membership interests in NNG LLC. 2. WPP has formed WPP LLC to which WPP contributed $1,000 in exchange for all the membership interests in WPP LLC. 3. Great Northern has formed GNP LLC to which Great Northern contributed $1,000 in exchange for all the membership interests in GNP LLC. 4. Ark has formed ACIN LLC to which Ark contributed $1,000 in exchange for all the membership interest in ACIN LLC. 5. Corbin J. Robertson, Jr. ("CR") and Ark have formed GP LLC to which CR has contributed $577.50 in exchange for a 57.75% member interest and Ark has contributed $422.50 in exchange for a 42.25% member interest. 6. CR has formed RCM LLC to which CR contributed his 57.75% interest in GP LLC in exchange for all the membership interest in RCM LLC. 7. New Gauley, WPP, Great Northern, Ark and GP LLC have formed GP LP to which New Gauley has contributed $18.40 in exchange for a 1.8399816% limited partner interest, WPP has contributed $460.80 in exchange for a 46.0795392% 1 limited partner interest, Great Northern has contributed $98.30 in exchange for a 9.8299017% limited partner interest, Ark has contributed $422.50 in exchange for a 42.2495775% limited partner interest and GP LLC has contributed $0.01 in exchange for a 0.001% general partner interest.(1) 8. GP LP and GP LLC have formed the MLP to which GP LP has contributed $20 in exchange for the 2% general partner interest (including 65% of the incentive distribution rights of the MLP (the "Incentive Distribution Rights")), and GP LLC has contributed $980 in exchange for a 98% limited partner interest.(2) 9. The MLP has formed the OLLC to which it has contributed $1,000 in exchange for all the membership interests in the OLLC. WHEREAS, concurrently with the consummation of the transactions contemplated hereby, each of the following shall occur: 10. New Gauley will contribute certain assets to NNG LLC as a capital contribution and in exchange for membership interests and an assumption of certain debt related to the assets. 11. WPP will contribute certain assets to WPP LLC as a capital contribution and in exchange for membership interests and an assumption of certain debt related to the assets. 12. Great Northern will contribute certain assets to GNP LLC as a capital contribution and in exchange for membership interests and an assumption of certain debt related to the assets. 13. Ark will contribute assets to ACIN LLC as a capital contribution and in exchange for membership interests. 14. New Gauley will contribute its membership interests in NNG LLC to the MLP in exchange for (a) a 0.0368% special limited partner interest ("SPL"), (b) 116,957 common units representing common limited partner interests ("Common Units"), constituting a 0.5% interest in the MLP, (c) 208,907 subordinated units, representing subordinated limited partner interests of the MLP ("Subordinated Units"), constituting a 0.9% interest in the MLP and (d) 0.8% of the Incentive Distribution Rights. 15. WPP will contribute its interest in WPP LLC to the MLP in exchange for (a) a 0.9216% SPL, (b) 3,158,166 Common Units, constituting a 13.7% interest in the MLP, (c) 5,231,766 Subordinated Units, constituting a 22.7% interest in the MLP, (d) 19.94% of the Incentive Distribution Rights and (e) the right to receive $11,520 as reimbursement for certain capital expenditures. - ---------- (1) Ark has an aggregate 42.25% interest in GP LP based on its 42.2495775% limited partner interest and its 0.0004225% general partner interest. (2) At closing, the limited partner interest acquired by GP LLC is redeemed by the MLP for $980. 2 16. Great Northern will contribute its interest in GNP LLC to the MLP in exchange for (a) a 0.1966% SPL, (b) 607,362 Common Units, constituting a 2.6% interest in the MLP, (c) 1,116,065 Subordinated Units, constituting a 4.8% interest in the MLP and (d) 4.26% of the Incentive Distribution Rights. 17. Ark will contribute its interest in ACIN LLC to the MLP in exchange for (a) a 0.8450% SPL, (b) 4,796,920 Common Units, constituting a 20.8% interest in the MLP, (c) 4,796,920 Subordinated Units, constituting a 20.8% interest in the MLP and (d) 10% of the Incentive Distribution Rights. 18. The public, through the Underwriters, will contribute $51,975,000 ($48,401,718.75 net of the Underwriters' 6.5% spread and the Lehman structuring fee) to the MLP in exchange for 2,598,750 Common Units, constituting a 11.2% interest in the MLP. 19. The public, through the Underwriters, will pay $38,025,000 ($35,410.781.25 net of the Underwriters' 6.5% spread and the Lehman structuring fee) to Ark in exchange for 1,901,250 Common Units, constituting a 8.2% interest in the MLP. 20. New Gauley will contribute its SPLs to GP LP as capital contribution to continue its interest in GP LP. 21. WPP will contribute its SPLs to GP LP as capital contribution to continue its interest in GP LP. 22. Great Northern will contribute its SPLs to GP LP as capital contribution to continue its interest in GP LP. 23. Ark will contribute its SPLs to GP LP as capital contribution to continue its interest in GP LP. 24. The SPLs held by GP LP will be converted to an additional general partner capital interest in the MLP. 25. The MLP (a) will pay the transaction expenses,(3) estimated to be $5,000,000, (b) will contribute some of the remaining cash to NNG LLC ($1,609,066), WPP LLC ($36,000,000) and GNP LLC ($7,511,039) which, in turn will use the funds to retire all or a portion of their debt ($1,609,066 $36,000,000 and $7,511,039, respectively), (c) will distribute $11,520 to WPP to reimburse it for certain capital expenditures and (d) will retain $1,000,000 for working capital. 26. The MLP will contribute its interests in NNG LLC, WPP LLC, GNP LLC, and ACIN LLC to the OLLC as a capital contribution. - ---------- (3) The MLP will reimburse the parties for any payments of transaction expenses; ACIN LLC will pay 42.25% or reimburse the MLP for 42.25% of the transaction expenses including retained working capital (which share is estimated to be $2,535,000). 3 27. If the over-allotment option (the "Shoe") is exercised in full, 57.75% of the net proceeds ($7,289,494) will be contributed to the MLP which, in turn, will contribute a portion ($1,411,898) to the OLLC which, in turn, will contribute a portion to GNP LLC ($1,411,898) which will use the funds to retire the debt; the balance of the proceeds ($5,877,597) will be used by the MLP to redeem 311,040 of the Common Units held by WPP and 3,270 of the Common Units held by New Gauley at a price of $18.70 per unit ($20 less the Underwriters' spread) in reimbursement of certain capital expenditures. To the extent the Shoe is not exercised, Great Northern and New Gauley will purchase up to 66,353 and 9,150 of the Common Units, respectively, with the proceeds being used, as described above, to retire debt of GNP LLC.(4) The balance (42.25%) of the net proceeds will be paid to Ark in exchange for its share (42.25%) of the Common Units sold pursuant to the exercise of the Shoe. NOW, THEREFORE, in consideration of their mutual undertakings and agreements hereunder, the parties to this Agreement undertake and agree as follows: ARTICLE I DEFINITIONS; SCHEDULES 1.1 Definitions. The following capitalized terms have the meanings given below. "ACIN LLC" has the meaning assigned to such term in the opening paragraph. "Agreement" has the meaning assigned to such term in the opening paragraph. "Ark" has the meaning assigned to such term in the opening paragraph. "Ark Assets" has the meaning assigned to such term in Section 2.4. "Ark Operators" has the meaning assigned to such term in Section 6.4(a). "Ark Reservations" has the meaning assigned to such term in Section 2.4. "Ark Reservations Taxes" has the meaning assigned to such term in Section 6.4(a). "Ark Taxes" has the meaning assigned to such term in Section 6.4(a). "Attorney-in-Fact" has the meaning assigned to such term in Section 5.2. "Beneficial Owner" has the meaning assigned to such term in Section 6.2. "Common Units" has the meaning assigned to such term in Recital 14. - ---------- (4) If the Shoe is not exercised, there will be $98,154 additional working capital equal in the MLP to the spread on the units bought by Great Northern (66,353) and New Gauley (9,150) as they will pay the same price as the public and no spread will be paid on them. 4 "Contributing Parties" has the meaning assigned to such term in Section 5.2. "Conveyed Assets" has the meaning assigned to such term in Section 5.2. "Conveying Documents" has the meaning assigned to such term in Section 4.1(b). "CR" has the meaning assigned to such term in Recital 5. "Effective Date" means October 17, 2002. "Effective Time" means 12:01 a.m. Eastern Standard Time on the Effective Date. "GNP LLC" has the meaning assigned to such term in the opening paragraph. "GP LLC" has the meaning assigned to such term in the opening paragraph. "GP LP" has the meaning assigned to such term in the opening paragraph. "Great Northern" has the meaning assigned to such term in the opening paragraph. "Great Northern Assets" has the meaning assigned to such term in Section 2.3. "Great Northern Debt" has the meaning assigned to such term in Section 2.3. "Great Northern Operators" has the meaning assigned to such term in Section 6.4(d). "Great Northern Reservations" has the meaning assigned to such term in Section 2.3. "Great Northern Reservations Taxes" has the meaning assigned to such term in Section 6.4(d). "Great Northern Taxes" has the meaning assigned to such term in Section 6.4(d). "Incentive Distribution Rights" has the meaning assigned to such term in Recital 8. "Initial Offering" has the meaning assigned to such term in the Partnership Agreement. "Laws" means any and all laws, statutes, ordinances, rules or regulations promulgated by a governmental authority, orders of a governmental authority, judicial decisions, decisions of arbitrators or determinations of any governmental authority or court. "MLP" has the meaning assigned to such term in the opening paragraph. 5 "New Gauley" has the meaning assigned to such term in the opening paragraph. "New Gauley Assets" has the meaning assigned to such term in Section 2.1. "New Gauley Debt" has the meaning assigned to such term in Section 2.1. "New Gauley Operators" has the meaning assigned to such term in Section 6.4(c). "New Gauley Reservations" has the meaning assigned to such term in Section 2.1. "New Gauley Reservations Taxes" has the meaning assigned to such term in Section 6.4(c). "New Gauley Taxes" has the meaning assigned to such term in Section 6.4(c). "NNG" has the meaning assigned to such term in the opening paragraph. "Offering Costs" has the meaning assigned to such term in Section 2.21. "Offering Proceeds" has the meaning assigned to such term in Section 2.11. "OLLC" has the meaning assigned to such term in the opening paragraph. "Omnibus Agreement" has the meaning assigned to such term in the Partnership Agreement. "Partnership Agreement" means the Agreement of Limited Partnership of the MLP, as it may be amended and restated from time to time. "RCM LLC" has the meaning assigned to such term in the opening paragraph. "Restriction" has the meaning assigned to such term in Section 6.2. "Restriction Asset" has the meaning assigned to such term in Section 6.2. "Shoe" has the meaning assigned to such term in Recital 27. "Specific Conveyances" has the meaning assigned to such term in Section 2.24. "SPL" has the meaning assigned to such term in Recital 14. "Subordinated Units" has the meaning assigned to such term in Recital 14. "Underwriters" has the meaning assigned to such term in the Partnership Agreement. "WPP" has the meaning assigned to such term in the opening paragraph. "WPP Assets" has the meaning assigned to such term in Section 2.2. 6 "WPP Debt" has the meaning assigned to such term in Section 2.2. "WPP LLC" has the meaning assigned to such term in the opening paragraph. "WPP Operators" has the meaning assigned to such term in Section 6.4(b). "WPP Reservations" has the meaning assigned to such term in Section 2.2. "WPP Reservations Taxes" has the meaning assigned to such term in Section 6.4(b). "WPP Taxes" has the meaning assigned to such term in Section 6.4(b). 1.2 Schedules and Exhibits. The following schedules and exhibits are attached hereto: Schedule 2.1 - New Gauley Assets Schedule 2.2 - WPP Assets Schedule 2.3 - Great Northern Assets Schedule 2.4 - Ark Assets ARTICLE II TRANSACTIONS 2.1 Contribution by New Gauley to NNG LLC of Assets. New Gauley hereby contributes, transfers and assigns to NNG LLC, its successors and assigns, for its and their own use forever, all right, title and interest of New Gauley in and to all the assets described on Schedule 2.1 (the "New Gauley Assets") and NNG LLC hereby accepts the New Gauley Assets, as a capital contribution and in exchange for an assumption of $1,609,066 in debt related to the New Gauley Assets (the "New Gauley Debt"); provided, however, that subject to the rights of NNG LLC, its successors and assigns, to use or consume the same in connection with its coal mining operations, New Gauley reserves, for itself and its successors and assigns, all of its interest in timber and the surface estate of the assets described on Schedule 2.1 and such reserved interests are not included in the New Gauley Assets. New Gauley is not contributing, transferring and assigning to NNG LLC, its successors and assigns, oil and gas (except that New Gauley is contributing, transferring and assigning to NNG LLC, its successors and assigns, any and all right, title and interest of New Gauley in and to the oil and gas estate located in Nicholas and Greenbrier County, West Virginia with respect to the New Gauley Assets due to these interests being the subject of outleases to third parties) such interests are not included in the New Gauley Assets. The interests and estates being retained by New Gauley as set forth in this paragraph are herein called the "New Gauley Reservations". TO HAVE AND TO HOLD the New Gauley Assets unto NNG LLC, its successors and assigns, together with all and singular the rights and appurtenances thereto in 7 anywise belonging, subject, however, to the terms and conditions stated in this Agreement, and in such instruments of conveyance forever. 2.2 Contribution by WPP to WPP LLC of Assets. WPP hereby contributes, transfers and assigns to WPP LLC, its successor and assigns, for its and their use forever, all right, title and interest of WPP in and to all the assets described on Schedule 2.2 ("WPP Assets") and WPP LLC hereby accepts the WPP Assets as a capital contribution and in exchange for an assumption of $36,000,000 in debt related to the WPP Assets (the "WPP Debt"); provided, however, that subject to the rights of WPP LLC, its successors and assigns to use or consume the same in connection with its coal mining operations, WPP reserves, for itself and its successors and assigns, all of its interest in timber and the surface estate, less and excepting one surface estate located in Raleigh County, West Virginia, of the assets described on Schedule 2.2 and such reserved interests are not included in the WPP Assets. WPP is not contributing, transferring and assigning to WPP LLC, its successors and assigns, oil and gas due to these interests being previously severed and such interests are not included in the WPP Assets. The interests and estates being retained by WPP as set forth in this paragraph are herein called the "WPP Reservations". TO HAVE AND TO HOLD the WPP Assets unto WPP LLC, its successors and assigns, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement, and in such instruments of conveyance forever. 2.3 Contribution by Great Northern to GNP LLC of Assets. Great Northern hereby contributes, transfers and assigns to GNP LLC, its successor and assigns, for its and their use forever, all right, title and interest of Great Northern in and to all the assets described on Schedule 2.3 (the "Great Northern Assets") and GNP LLC hereby accepts the Great Northern Assets as a capital contribution and in exchange for an assumption of $8,922,937 in debt related to the Great Northern Assets (the "Great Northern Debt"); provided, however, that subject to the rights of GNP LLC, its successors and assigns, to use or consume the same in connection with its coal mining operations, Great Northern is not contributing, transferring and assigning to GNP LLC, its successors and assigns, any coal bed methane and oil and gas due to these interests being previously severed and such interests are not included in the assets described on Schedule 2.3 and such interests are not included in the Great Northern Assets. The interests and estates being retained by Great Northern as set forth in this paragraph are herein called the "Great Northern Reservations". TO HAVE AND TO HOLD the Great Northern Assets unto GNP LLC, its successors and assigns, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement, and in such instruments of conveyance forever. 2.4 Contribution by Ark to ACIN LLC of Assets. Ark hereby contributes, transfers and assigns to ACIN LLC, its successor and assigns, for its and their use forever, all right, title and interest of Ark in and to all the assets described on Schedule 2.4 ("Ark Assets") and ACIN LLC hereby accepts the Ark Assets as a capital contribution; provided, however, that subject to the rights of ACIN LLC, its successors and assigns, to use or consume the same in connection 8 with its coal mining operations, Ark reserves, for itself and its successors and assigns, (a) the oil and gas estate, and the coal bed methane estate to the extent, if any, it is not otherwise included in the oil and gas estate, contained within those properties(5) described on Schedule 2.4 that are located in Harlan and Letcher Counties, Kentucky, and Wise County, Virginia and that are subject to oil and gas leases to Columbia Natural Resources, Inc., (b) a royalty interest with respect to the oil and gas estates of the assets described on Schedule 2.4 other than those assets included in clause (a) above, but only those assets that as of the date hereof are not subject to an oil and gas lease with any third party, such royalty interest being equal to eighty percent of whatever royalties may from time to time be reserved by ACIN LLC, its successors and assigns, with respect to such oil and gas (and, for greater clarity, there is no such reservation under this clause (b) with respect to assets of which the oil and gas estates are currently leased to third parties), and (c) a royalty interest in the coal bed methane estate of the assets described on Schedule 2.4 (but excluding those assets covered by clause (a) above and without duplication of the royalty interest reserved in clause (b) above to the extent, if any, coal bed methane is included in the oil and gas estate), such royalty interest being equal to eighty percent of whatever royalties may from time to time be reserved by ACIN LLC, its successors and assigns, with respect to such coal bed methane; and such reserved interests referenced in clauses (a), (b), and (c) above are not included in the Ark Assets. The interests and estates being retained by Ark as set forth in this paragraph are herein called the "Ark Reservations". TO HAVE AND TO HOLD the Ark Assets unto ACIN LLC, its successors and assigns, together with all and singular the rights and appurtenances thereto in anywise belonging, subject, however, to the terms and conditions stated in this Agreement, and in such instruments of conveyance forever. 2.5 Contribution by New Gauley to the MLP of Interest in NNG LLC. New Gauley hereby grants, contributes, transfers, assigns and conveys to the MLP, all of its membership interests in NNG LLC in exchange for (a) a 0.0368% SPL, (b) 116,957 Common Units, constituting a 0.5% interest in the MLP, (c) 208,907 Subordinated Units, constituting a 0.9% interest in the MLP and (d) 0.8% of the Incentive Distribution Rights. 2.6 Contribution by WPP to the MLP of Interest in WPP LLC. WPP hereby grants, contributes, transfers, assigns and conveys to the MLP all of its membership interests in WPP LLC in exchange for (a) a 0.9216% SPL, (b) 3,158,166 Common Units, constituting a 13.7% interest in the MLP, (c) 5,231,766 Subordinated Units, constituting a 22.7% interest in the MLP, (d) 19.94% of the Incentive Distribution Rights and (d) the right to receive $11,520 as reimbursement for certain capital contributions. 2.7 Contribution by Great Northern to the MLP of Interest in GNP LLC. Great Northern hereby grants, contributes, transfers, assigns and conveys to the MLP all of its membership interests in GNP LLC in exchange for (a) a 0.1966% SPL, (b) 607,362 Common Units, constituting a 2.6% interest in the MLP, (c) 1,116,065 Subordinated Units, constituting a 4.8% interest in the MLP and (d) 4.26% of the Incentive Distribution Rights. - ---------- (5) These properties contain an oil and gas lease to Columbia Natural Resources, Inc. This lease does not include the coal bed methane estate, but grants Columbia a right of first option as to any lease of the coal bed methane estate. 9 2.8 Contribution by Ark to the MLP of Interest in ACIN LLC. Ark hereby grants, contributes, transfers, assigns and conveys to the MLP all of its membership interest in ACIN LLC in exchange for (a) a 0.8450% SPL, (b) 4,796,920 Common Units, constituting a 20.8% interest in the MLP, (c) 4,796,920 Subordinated Units, constituting a 20.8% interest in the MLP and (d) 10% of the Incentive Distribution Rights. 2.9 Public Cash Contribution. The parties to this Agreement acknowledge a cash contribution of $48,401,718.75 (being a gross contribution of $51,975,000 reduced by the Underwriters' 6.5% spread and the Lehman structuring fee) from the public to the MLP in exchange for 2,598,750 Common Units, representing a 11.2% limited partner interest in the MLP. 2.10 Public Cash Contribution to Ark. The parties to this Agreement acknowledge a cash contribution of $35,553,375 (being a gross contribution of $38,410,781.25 reduced by the Underwriters' 6.5% spread and the Lehman structuring fee) from the public to Ark in exchange for 1,901,250 Common Units, representing a 8.2% interest in the MLP. 2.11 MLP Receipt of Public Cash. The MLP acknowledges receipt of $48,401,718.75 in cash obtained from the Initial Offering (the "Offering Proceeds") as a capital contribution to the MLP. 2.12 Ark Receipt of Public Cash. Ark acknowledges receipt of $35,410,781.25 in cash obtained from the Initial Offering in exchange for 1,901,250 Common Units, representing a 7.8% limited partner interest in the MLP. 2.13 NNG LLC Receipt of Offering Proceeds. NNG LLC acknowledges receipt of $1,635,000 in cash obtained from the MLP. 2.14 WPP LLC Receipt of Offering Proceeds. WPP LLC acknowledges receipt of $36,000,000 in cash obtained from the MLP. 2.15 GNP LLC Receipt of Offering Proceeds. GNP LLC acknowledges receipt of $7,485,105 in cash obtained from the MLP. 2.16 Contribution by New Gauley to GP LP of its SPLs. New Gauley hereby grants, contributes, transfers, assigns and conveys to GP LP, as a capital contribution, its SPLs to continue its interest in GP LP, and GP LP hereby accepts the same. 2.17 Contribution by WPP to GP LP of its SPLs. WPP hereby contributes, transfers and assigns to GP LP, as a capital contribution, its SPLs to continue its interest in GP LP, and GP LP hereby accepts the same. 2.18 Contribution by Great Northern to GP LP of its SPLs. Great Northern herby contributes, transfers and assigns to GP LP, as a capital contribution, its SPLs to continue its interest in GP LP, and GP LP hereby accepts the same. 10 2.19 Contribution by Ark to GP LP of its SPLs. Ark hereby contributes, transfers and assigns to GP LP, as a capital contribution, its SPLs to continue its interest in GP LP, and GP LP hereby accepts the same. 2.20 Conversion of SPLs. The parties acknowledge that the SPLs held by GP LP will be converted to an additional general partner interest in the MLP. 2.21 Payment of Transaction Costs, Offering Proceeds and Capital Expenditures. The parties to this Agreement acknowledge that the MLP has used all of such capital contribution (a) to pay transaction costs accrued in connection with the Initial Offering, including without limitation the Underwriters' 6.5% spread and the Lehman structuring fee, that are due and payable or that have previously been paid (collectively, the "Offering Costs") and (b) to pay the balance of the Offering Proceeds to the NNG LLC ($1,609,066), WPP LLC ($36,000,000) and GNP LLC ($7,511,039) as a capital contribution in each of NNG LLC, WPP LLC and GNP LLC which, in turn will use the funds to retire a portion of their debt ($1,609,066, $36,000,000 and $7,511,039, respectively) and (c) to distribute $11,520 to WPP as reimbursement for certain capital expenditures. 2.22 Contribution by the MLP to the OLLC of the Membership Interests in the LLCs. The MLP hereby contributes, transfers and assigns to the OLLC, as a capital contribution, the MLP's interests in NNG LLC, WPP LLC, GNP LLC and ACIN LLC, respectively. 2.23 Exercise of the Shoe. The parties to this Agreement hereby acknowledge that (x) in the event the Underwriters exercise their over allotment option pursuant to Section 2 of the Underwriting Agreement, the MLP shall contribute a portion ($1,411,898) of the net proceeds from the exercise of the Shoe to the OLLC as a capital contribution which shall, in turn, contribute that portion to GNP LLC ($1,411,898), which shall be used to retire the debt; the balance of the net proceeds from the exercise of the Shoe ($5,877,597) shall be used by the MLP to redeem 311,040 of the Common Units held by WPP and 3,270 of the Common Units held by New Gauley at a price of $18.70 per unit for reimbursement of capital expenditures and (y) to the extent the Shoe is not exercised, Great Northern and New Gauley will purchase up to 66,353 and 9,150 Common Units, respectively, and the net proceeds will be used as described above, to retire debt of Great Northern LLC. The balance (42.25%) of the net proceeds will be paid to Ark in exchange for its share (42.25%) of the Common Units sold to Ark pursuant to the exercise of the Shoe. 2.24 Specific Conveyances. To further evidence the asset contributions set forth in Sections 2.1, 2.2, 2.3 and 2.4 above, each party making such contribution may have executed and delivered to the party receiving such contribution certain conveyance, assignment and bill of sale instruments (the "Specific Conveyances"). The Specific Conveyances shall evidence and perfect such sale and contribution made by this Agreement and shall not constitute a second conveyance of any assets or interests therein and shall control over any contrary terms of this Agreement. 11 ARTICLE III ASSUMPTION OF CERTAIN LIABILITIES 3.1 Assumption by the NNG LLC of the New Gauley Debt. In connection with the capital contribution by New Gauley to NNG LLC, as set forth in Section 2.1 above, NNG LLC hereby assumes and agrees to duly and timely pay, perform and discharge the New Gauley Debt, to the full extent that New Gauley has been heretofore or would have been in the future obligated to pay, perform and discharge the New Gauley Debt were it not for such execution and delivery of this Agreement; provided however that said assumption and agreement to duly and timely pay, perform and discharge the New Gauley Debt shall not (i) increase the obligation of NNG LLC with respect to the New Gauley Debt beyond that of New Gauley, (ii) waive any valid defense that was available to New Gauley with respect to the New Gauley Debt or (iii) enlarge any rights or remedies of any third party with respect to the New Gauley Debt. 3.2 Assumption by the WPP LLC of the WPP Debt. In connection with the capital contribution by WPP to WPP LLC, as set forth in Section 2.2 above, WPP LLC hereby assumes and agrees to duly and timely pay, perform and discharge the WPP Debt, to the full extent that WPP has been heretofore or would have been in the future obligated to pay, perform and discharge the WPP Debt were it not for such contribution and the execution and delivery of this Agreement; provided however that said assumption and agreement to duly and timely pay, perform and discharge the WPP Debt shall not (i) increase the obligation of the WPP LLC with respect to the WPP Debt beyond that of WPP, (ii) waive any valid defense that was available to WPP with respect to the WPP Debt or (iii) enlarge any rights or remedies of any third party with respect to the WPP Debt. 3.3 Assumption by the GNP LLC of the Great Northern Debt. In connection with the capital contribution by Great Northern to GNP LLC, as set forth in Section 2.3 above, GNP LLC hereby assumes and agrees to duly and timely pay, perform and discharge the Great Northern Debt, to the full extent that Great Northern has been heretofore or would have been in the future obligated to pay, perform and discharge the Great Northern Debt were it not for such contribution and the execution and delivery of this Agreement; provided however that said assumption and agreement to duly and timely pay, perform and discharge the Great Northern Debt shall not (i) increase the obligation of the MLP with respect to the Great Northern Debt beyond that of Great Northern, (ii) waive any valid defense that was available to Great Northern with respect to the Great Northern Debt or (iii) enlarge any rights or remedies of any third party with respect to the Great Northern Debt. ARTICLE IV TITLE MATTERS 4.1 Encumbrances. (a) Except to the extent provided in Article II or any other document executed in connection with this Agreement or the Initial Offering including, without limitation, the Omnibus Agreement, the contribution and conveyance of the various Conveyed Assets (as defined below) as reflected in this Agreement are made expressly subject to (i) all recorded and specifically identified unrecorded liens, encumbrances, agreements, defects, restrictions, adverse 12 claim and all laws, rules, regulations, ordinances, judgments and orders of governmental authorities or tribunals having or asserting jurisdiction over the Conveyed Assets and operations conducted thereon or therewith, in each case to the extent the same are valid and enforceable and affect the Conveyed Assets (provided, however, that each grantor of any of the Conveyed Assets warrants and represents to the respective grantee of the Conveyed Assets that such grantor's Conveyed Assets are not encumbered by (x) any mortgages, deeds of trust, security interests, or other contractual liens, in each case by, through, or under such grantor (including matters knowingly assumed or taken subject to by such grantor), but not otherwise, except for such matters as are specifically identified in the Omnibus Agreement, this Agreement or the Conveying Documents or (y) any liens with respect to which the secured debt is past due, (ii) all matters that a current on the ground survey or visual inspection of the Conveyed Assets would reflect, (iii) the applicable liabilities assumed in Article III, and (iv) all matters contained in the applicable provisions of Article II. (b) To the extent that the parties have executed, or hereafter do execute, deeds, bills of sale, or other conveyance documents ("Conveying Documents"), then the provisions set forth in Section 4.1(a) immediately above shall also be applicable to the conveyances under the Conveying Documents. 4.2 Disclaimer of Warranties; Subrogation; Waiver of Bulk Sales Laws. (A) EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE INITIAL OFFERING INCLUDING, WITHOUT LIMITATION THE OMNIBUS AGREEMENT, THE PARTIES TO THIS AGREEMENT ACKNOWLEDGE AND AGREE THAT NONE OF THE PARTIES TO THIS AGREEMENT HAS MADE, DOES NOT MAKE, AND EACH SUCH PARTY SPECIFICALLY NEGATES AND DISCLAIMS, ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS, OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS, IMPLIED, OR STATUTORY, ORAL OR WRITTEN, PAST OR PRESENT, REGARDING (A) THE VALUE, NATURE, QUALITY, OR CONDITION OF ANY ASSET, INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL, GEOLOGY, OR ENVIRONMENTAL CONDITION OF ANY ASSET GENERALLY, INCLUDING THE PRESENCE OR LACK OF HAZARDOUS SUBSTANCES OR OTHER MATTERS ON THE CONVEYED ASSETS, (B) THE INCOME TO BE DERIVED FROM THE CONVEYED ASSETS, (C) THE SUITABILITY OF THE CONVEYED ASSETS FOR ANY AND ALL ACTIVITIES AND USES THAT MAY BE CONDUCTED THEREON, (D) THE COMPLIANCE OF OR BY THE CONVEYED ASSETS OR THEIR OPERATION WITH ANY LAWS (INCLUDING WITHOUT LIMITATION ANY ZONING, ENVIRONMENTAL PROTECTION, POLLUTION OR LAND USE LAWS, RULES, REGULATIONS, ORDERS OR REQUIREMENTS), OR (E) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY, PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE CONVEYED ASSETS. EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE INITIAL OFFERING INCLUDING, WITHOUT LIMITATION, THE OMNIBUS AGREEMENT, THE PARTIES TO THIS AGREEMENT ACKNOWLEDGE AND AGREE THAT EACH HAS HAD THE OPPORTUNITY TO INSPECT THE RESPECTIVE CONVEYED ASSETS, AND EACH IS RELYING SOLELY ON ITS OWN INVESTIGATION OF THE RESPECTIVE CONVEYED ASSETS AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY ANY OF THE PARTIES TO THIS AGREEMENT. EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE INITIAL OFFERING INCLUDING, WITHOUT 13 LIMITATION, THE OMNIBUS AGREEMENT, NONE OF THE PARTIES TO THIS AGREEMENT IS LIABLE OR BOUND IN ANY MANNER BY ANY VERBAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE CONVEYED ASSETS FURNISHED BY ANY AGENT, EMPLOYEE, SERVANT OR THIRD PARTY. EXCEPT TO THE EXTENT PROVIDED IN ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE INITIAL OFFERING INCLUDING, WITHOUT LIMITATION, THE OMNIBUS AGREEMENT, EACH OF THE PARTIES TO THIS AGREEMENT ACKNOWLEDGE THAT TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE CONTRIBUTION OF THE CONVEYED ASSETS AS PROVIDED FOR HEREIN IS MADE IN AN "AS IS", "WHERE IS" CONDITION WITH ALL FAULTS, AND THE CONVEYED ASSETS ARE CONTRIBUTED AND CONVEYED SUBJECT TO ALL OF THE MATTERS CONTAINED IN THIS SECTION. THIS SECTION SHALL SURVIVE SUCH CONTRIBUTION AND CONVEYANCE OR THE TERMINATION OF THIS AGREEMENT. THE PROVISIONS OF THIS SECTION HAVE BEEN NEGOTIATED BY THE PARTIES TO THIS AGREEMENT AFTER DUE CONSIDERATION AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS, IMPLIED, OR STATUTORY, WITH RESPECT TO THE CONVEYED ASSETS THAT MAY ARISE PURSUANT TO ANY LAW NOW OR HEREAFTER IN EFFECT, OR OTHERWISE, EXCEPT AS SET FORTH IN THIS AGREEMENT OR ANY OTHER DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS AGREEMENT OR THE INITIAL OFFERING, INCLUDING, WITHOUT LIMITATION, THE OMNIBUS AGREEMENT. (b) To the extent that certain jurisdictions in which the Conveyed Assets are located may require that documents be recorded in order to evidence the transfers of title reflected in this Agreement, then the disclaimers set forth in Section 4.2(a) immediately above shall also be applicable to the conveyances under such documents, except as otherwise provided in such document. (c) The contributions of the Conveyed Assets made under this Agreement are made with full rights of substitution and subrogation of the respective parties receiving such contributions, and all persons claiming by, through and under such parties, to the extent assignable, in and to all covenants and warranties by the predecessors-in-title of the parties contributing the Conveyed Assets, and with full subrogation of all rights accruing under applicable statutes of limitation and all rights of action of warranty against all former owners of the Conveyed Assets. (d) Each of the parties to this Agreement agrees that the disclaimers contained in this Section 4.2 are "conspicuous" disclaimers. Any covenants implied by statute or law by the use of the words "grant," "convey," "bargain," "sell," "assign," "transfer," "deliver," or "set over" or any of them or any other words used in this Agreement or any exhibits hereto are hereby expressly disclaimed, waived or negated. (e) Each of the parties to this Agreement hereby waives compliance with any applicable bulk sales law or any similar law in any applicable jurisdiction in respect of the transactions contemplated by this Agreement. 4.3 General Provision Relating to Assumption Liabilities. Notwithstanding the terms and conditions of the Conveying Documents, each grantor of the Conveyed Assets shall remain responsible for all liabilities and obligations related thereto arising prior to the date hereof, and 14 each grantee of the Conveyed Assets shall assume responsibility for liabilities and obligations related thereto first arising on and after the date hereof, under or in connection with any and all covenants, leases, or agreements of record, or any assumed coal leases, affecting the respective Conveyed Assets. ARTICLE V FURTHER ASSURANCES 5.1 Further Assurances. From time to time after the date hereof, and without any further consideration, the parties to this Agreement agree to execute, acknowledge and deliver all such additional deeds, assignments, bills of sale, conveyances, instruments, notices, releases, acquittances and other documents, and will do all such other acts and things, all in accordance with applicable law, as may be necessary or appropriate (i) more fully to assure that the applicable parties to this Agreement own all of the properties, rights, titles, interests, estates, remedies, powers and privileges granted by this Agreement, or which are intended to be so granted, (ii) more fully and effectively to vest in the applicable parties to this Agreement and their respective successors and assigns beneficial and record title to the interests contributed and assigned by this Agreement or intended so to be and (iii) more fully and effectively to carry out the purposes and intent of this Agreement. 5.2 Power of Attorney. Each party (collectively, the "Contributing Parties") that has conveyed assets (collectively, the "Conveyed Assets") as reflected by this Agreement hereby constitutes and appoints GP LP (the "Attorney-in-Fact"), its true and lawful attorney-in-fact with full power of substitution for it and in its name, place and stead or otherwise on behalf of the applicable Contributing Party and its successors and assigns, and for the benefit of the Attorney-in-Fact to demand and receive from time to time the Conveyed Assets contributed and to execute in the name of the applicable Contributing Party and its successors and assigns instruments of conveyance, instruments of further assurance and to give receipts and releases in respect of the same, and from time to time to institute and prosecute in the name of the applicable Contributing Party for the benefit of the Attorney-in-Fact, any and all proceedings at law, in equity or otherwise which the Attorney-in-Fact may deem proper in order to (i) collect, assert or enforce any claims, rights or titles of any kind in and to the Conveyed Assets, (ii) defend and compromise any and all actions, suits or proceedings in respect of any of the Conveyed Assets, and (iii) do any and all such acts and things in furtherance of this Agreement as the Attorney-in-Fact shall deem advisable. Each Contributing Party hereby declares that the appointment hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by any act of any Contributing Party or its successors or assigns or by operation of law. 15 ARTICLE VI MISCELLANEOUS 6.1 Order of Completion of Transactions. The transactions provided for in Articles II (except as otherwise noted) and III of this Agreement shall be completed on the Effective Date in the following order: First, the transactions provided for in Article II shall be completed in the order set forth therein; and Second, the transactions provided for in Article III shall be completed in the order set forth therein. 6.2 Consents; Restriction on Assignment. If there are prohibitions against or conditions to the contribution and conveyance of one or more of the Conveyed Assets without the prior written consent of third parties, including, without limitation, governmental agencies (other than consents of a ministerial nature which are normally granted in the ordinary course of business), which if not satisfied would result in a material breach of such prohibitions or conditions or would give an outside party the right to terminate rights of the party to whom the applicable assets were intended to be conveyed (the "Beneficial Owner") with respect to such portion of the Conveyed Assets (herein called a "Restriction"), then any provision contained in this Agreement to the contrary notwithstanding, the transfer of title to or interest in each such portion of the Conveyed Assets (herein called the "Restriction Asset") pursuant to this Agreement shall not become effective unless and until such Restriction is satisfied, waived or no longer applies. When and if such a Restriction is so satisfied, waived or no longer applies, to the extent permitted by applicable law and any applicable contractual provisions, the assignment of the Restriction Asset subject thereto shall become effective automatically as of the Effective Time, without further action on the part of any party to this Agreement. Each of the applicable parties to this Agreement that were involved with the conveyance of a Restriction Asset agree to use their reasonable best efforts to obtain on a timely basis satisfaction of any Restriction applicable to any Restriction Asset conveyed by or acquired by any of them. The description of any portion of the Conveyed Assets as a "Restriction Asset" shall not be construed as an admission that any Restriction exists with respect to the transfer of such portion of the Conveyed Assets. In the event that any Restriction Asset exists, the applicable party agrees to continue to hold such Restriction Asset in trust for the exclusive benefit of the applicable party to whom such Restriction Asset was intended to be conveyed and to otherwise use its reasonable best efforts to provide such other party with the benefits thereof, and the party holding such Restriction Asset will enter into other agreements, or take such other action as it may deem necessary, in order to ensure that the applicable party to whom such Restriction Asset was intended to be conveyed has the assets and concomitant rights necessary to enable the applicable party to operate such Restriction Asset in all material respects as it was operated prior to the Effective Time. 6.3 Costs. The MLP shall pay, or reimburse the other parties hereto for their payment of, all sales, use and similar taxes arising out of the contributions, conveyances and deliveries to be made hereunder, and shall pay all documentary, filing, recording, transfer, deed, and conveyance taxes and fees required in connection therewith. In addition, the MLP shall be 16 responsible for all costs, liabilities and expenses (including court costs and reasonable attorneys' fees) incurred in connection with the satisfaction or waiver of any Restriction pursuant to Section 6.2. 6.4 Ad Valorem Tax Payment. (a) As between Ark and ACIN LLC, but subject to rights of reimbursement from the Ark Operators, all real estate and personal property taxes relating to the Ark Assets (herein collectively referred to as the "Ark Taxes") for which tax bills are received prior to the Closing Date shall be paid by Ark and all such tax bills received on and after the Closing Date shall be paid by ACIN LLC. Ark shall bear all real estate and personal property taxes relating to the Ark Reservations (the "Ark Reservations Taxes") for all periods of time, both before and after the Closing Date. As soon as practical after the Closing Date, Ark and ACIN LLC shall, to the extent possible, cause the applicable tax assessors to separately assess the Ark Taxes and the Ark Reservations Taxes. After tax bills are received based on the separate assessment of the Ark Taxes and the Ark Reservations Taxes, Ark shall be responsible for the timely payment of the Ark Reservations Taxes and provide to ACIN LLC proof of payment of said taxes. ACIN LLC shall then submit to the lessees of the Ark Assets (the "Ark Operators") such proof of payment of the Ark Reservations Taxes as have been paid by Ark, within a reasonable time of such payment for reimbursement by the Ark Operators under the terms of such leases. To the extent the Ark Operators reimburse ACIN LLC for the Ark Reservations Taxes, ACIN LLC shall forward such amounts to Ark. ACIN LLC shall be responsible for submitting proof of payment by ACIN LLC of the Ark Taxes to the Ark Operators for reimbursement. ACIN LLC shall pay the total amount of taxes shown on tax bills received on or after Closing that are not based on the separate assessment of the Ark Taxes and the Ark Reservations Taxes and shall be responsible for submitting proof of payment by ACIN LLC of both the Ark Taxes and the Ark Reservations Taxes to the Ark Operators for reimbursement; and Ark shall fully reimburse ACIN LLC for the full amount of the Ark Reservations Taxes, if any, which are not reimbursed by the Ark Operators. (b) As between WPP and WPP LLC, but subject to rights of reimbursement from the WPP Operators, all real estate and personal property taxes relating to the WPP Assets (herein collectively referred to as the "WPP Taxes") for which tax bills are received prior to the Closing Date shall be paid by WPP and all such tax bills received on and after the Closing Date shall be paid by WPP LLC. WPP shall bear all real estate and personal property taxes relating to the WPP Reservations (the "WPP Reservations Taxes") for all periods of time, both before and after the Closing Date. As soon as practical after the Closing Date, WPP and WPP LLC shall, to the extent possible, cause the applicable tax assessors to separately assess the WPP Taxes and the WPP Reservations Taxes. After tax bills are received based on the separate assessment of the WPP Taxes and the WPP Reservations Taxes, WPP shall be responsible for the timely payment of the WPP Reservations Taxes and provide to WPP LLC proof of payment of said taxes. WPP LLC shall then submit to the lessees of the WPP Assets (the "WPP Operators") such proof of payment of the WPP Reservations Taxes as have been paid by WPP, within a reasonable time of such payment for reimbursement by the WPP Operators under the terms of such leases. To the extent the WPP Operators reimburse WPP LLC for the WPP Reservations Taxes, WPP LLC shall forward such amounts to WPP. WPP LLC shall be responsible for submitting proof of payment by WPP LLC of the WPP Taxes to the WPP Operators for reimbursement. WPP LLC 17 shall pay the total amount of taxes shown on tax bills received on or after Closing that are not based on the separate assessment of the WPP Taxes and the WPP Reservations Taxes and shall be responsible for submitting proof of payment by WPP LLC of both the WPP Taxes and the WPP Reservations Taxes to the WPP Operators for reimbursement; and WPP shall fully reimburse WPP LLC for the full amount of the WPP Reservations Taxes, if any, which are not reimbursed by the WPP Operators. (c) As between New Gauley and NNG LLC, but subject to rights of reimbursement from the New Gauley Operators, all real estate and personal property taxes relating to the New Gauley Assets (herein collectively referred to as the "New Gauley Taxes") for which tax bills are received prior to the Closing Date shall be paid by New Gauley and all such tax bills received on and after the Closing Date shall be paid by NNG LLC. New Gauley shall bear all real estate and personal property taxes relating to the New Gauley Reservations (the "New Gauley Reservations Taxes") for all periods of time, both before and after the Closing Date. As soon as practical after the Closing Date, New Gauley and NNG LLC shall, to the extent possible, cause the applicable tax assessors to separately assess the New Gauley Taxes and the New Gauley Reservations Taxes. After tax bills are received based on the separate assessment of the New Gauley Taxes and the New Gauley Reservations Taxes, New Gauley shall be responsible for the timely payment of the New Gauley Reservations Taxes and provide to NNG LLC proof of payment of said taxes. NNG LLC shall then submit to the lessees of the New Gauley Assets (the "New Gauley Operators") such proof of payment of the New Gauley Reservations Taxes as have been paid by New Gauley, within a reasonable time of such payment for reimbursement by the New Gauley Operators under the terms of such leases. To the extent the New Gauley Operators reimburse NNG LLC for the New Gauley Reservations Taxes, NNG LLC shall forward such amounts to New Gauley. NNG LLC shall be responsible for submitting proof of payment by NNG LLC of the New Gauley Taxes to the New Gauley Operators for reimbursement. NNG LLC shall pay the total amount of taxes shown on tax bills received on or after Closing that are not based on the separate assessment of the New Gauley Taxes and the New Gauley Reservations Taxes and shall be responsible for submitting proof of payment by NNG LLC of both the New Gauley Taxes and the New Gauley Reservations Taxes to the New Gauley Operators for reimbursement; and New Gauley shall fully reimburse NNG LLC for the full amount of the New Gauley Reservations Taxes, if any, which are not reimbursed by the New Gauley Operators. (d) As between Great Northern and GNP LLC, but subject to rights of reimbursement from the Great Northern Operators, all real estate and personal property taxes relating to the Great Northern Assets (herein collectively referred to as the "Great Northern Taxes") for which tax bills are received prior to the Closing Date shall be paid by Great Northern and all such tax bills received on and after the Closing Date shall be paid by GNP LLC. Great Northern shall bear all real estate and personal property taxes relating to the Great Northern Reservations (the "Great Northern Reservations Taxes") for all periods of time, both before and after the Closing Date. As soon as practical after the Closing Date, Great Northern and GNP LLC shall, to the extent possible, cause the applicable tax assessors to separately assess the Great Northern Taxes and the Great Northern Reservations Taxes. After tax bills are received based on the separate assessment of the Great Northern Taxes and the Great Northern Reservations Taxes, Great Northern shall be responsible for the timely payment of the Great Northern Reservations Taxes and provide to GNP LLC proof of payment of said taxes. GNP LLC shall then submit to 18 the lessees of the Great Northern Assets (the "Great Northern Operators") such proof of payment of the Great Northern Reservations Taxes as have been paid by Great Northern, within a reasonable time of such payment for reimbursement by the Great Northern Operators under the terms of such leases. To the extent the Great Northern Operators reimburse GNP LLC for the Great Northern Reservations Taxes, GNP LLC shall forward such amounts to Great Northern. GNP LLC shall be responsible for submitting proof of payment by GNP LLC of the Great Northern Taxes to the Great Northern Operators for reimbursement. GNP LLC shall pay the total amount of taxes shown on tax bills received on or after Closing that are not based on the separate assessment of the Great Northern Taxes and the Great Northern Reservations Taxes and shall be responsible for submitting proof of payment by GNP LLC of both the Great Northern Taxes and the Great Northern Reservations Taxes to the Great Northern Operators for reimbursement; and Great Northern shall fully reimburse GNP LLC for the full amount of the Great Northern Reservations Taxes, if any, which are not reimbursed by the Great Northern Operators. 6.5 Headings; References; Interpretation. All Article and Section headings in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any of the provisions hereof. The words "hereof," "herein" and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole, including without limitation, all Schedules attached hereto, and not to any particular provision of this Agreement. All references herein to Articles, Sections, and Schedules shall, unless the context requires a different construction, be deemed to be references to the Articles, Sections and Schedules of this Agreement, respectively, and all such Schedules attached hereto are hereby incorporated herein and made a part hereof for all purposes. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders, and the singular shall include the plural and vice versa. The use herein of the word "including" following any general statement, term or matter shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not non-limiting language (such as "without limitation," "but not limited to," or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that could reasonably fall within the broadest possible scope of such general statement, term or matter. 6.6 Successors and Assigns. The Agreement shall be binding upon and inure to the benefit of the parties signatory hereto and their respective successors and assigns. 6.7 No Third Party Rights. The provisions of this Agreement are intended to bind the parties signatory hereto as to each other and are not intended to and do not create rights in any other person or confer upon any other person any benefits, rights or remedies and no person is or is intended to be a third party beneficiary of any of the provisions of this Agreement. 6.8 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute one agreement binding on the parties hereto. 6.9 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas applicable to contracts made and to be performed wholly within such state without giving effect to conflict of law principles thereof, except to the 19 extent that it is mandatory that the law of some other jurisdiction, wherein the Conveyed Assets are located, shall apply. 6.10 Severability. If any of the provisions of this Agreement are held by any court of competent jurisdiction to contravene, or to be invalid under, the laws of any political body having jurisdiction over the subject matter hereof, such contravention or invalidity shall not invalidate the entire Agreement. Instead, this Agreement shall be construed as if it did not contain the particular provision or provisions held to be invalid, and an equitable adjustment shall be made and necessary provision added so as to give effect to the intention of the parties as expressed in this Agreement at the time of execution of this Agreement. 6.11 Deed; Bill of Sale; Assignment. To the extent required and permitted by applicable law, this Agreement shall also constitute a "deed," "bill of sale" or "assignment" of the Conveyed Assets. 6.12 Amendment or Modification. This Agreement may be amended or modified from time to time only by the written agreement of all the parties hereto and affected thereby. 6.13 Integration. This Agreement and the instruments referenced herein supersede all previous understandings or agreements between the parties, whether oral or written, with respect to its subject matter. This Agreement and such instruments contain the entire understanding of the parties with respect to the subject matter hereof and thereof. No understanding, representation, promise or agreement, whether oral or written, is intended to be or shall be included in or form part of this Agreement unless it is contained in a written amendment hereto executed by the parties hereto after the date of this Agreement. [Remainder of page intentionally left blank.] 20 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written. New Gauley Coal Corporation By: /s/ Nick Carter ------------------------------------------------- Name: Nick Carter Title: President Western Pocahontas Properties Limited Partnership By: Western Pocahontas Corporation, its general partner By: /s/ Nick Carter ---------------------------------------------- Name: Nick Carter Title: President Great Northern Properties Limited Partnership By: GNP Management Corporation, its general partner By: /s/ Dwight L. Dunlap ---------------------------------------------- Name: Dwight L. Dunlap Title: Chief Financial Officer Ark Land Company By: /s/ Steven E. McCurdy ------------------------------------------------- Name: Steven E. McCurdy Title: President Signature Page 1 of 3 to the Contribution, Conveyance and Assumption Agreement NNG LLC By: NRP (Operating) LLC, its sole operating manager By: /s/ Nick Carter ----------------------------------- Name: Nick Carter Title: President WPP LLC By: NRP (Operating) LLC, its sole operating manager By: /s/ Nick Carter ----------------------------------- Name: Nick Carter Title: President GNP LLC By: NRP (Operating) LLC, its sole operating manager By: /s/ Nick Carter ----------------------------------- Name: Nick Carter Title: President ACIN LLC By: NRP (Operating) LLC, its sole operating manager By: /s/ Nick Carter ----------------------------------- Name: Nick Carter Title: President Robertson Coal Management LLC By: /s/ Corbin J. Robertson, Jr. ---------------------------------------- Name: Corbin J. Robertson, Jr. Title: Sole Member Signature Page 2 of 3 to the Contribution, Conveyance and Assumption Agreement NRP (Operating) LLC By: /s/ Nick Carter -------------------------------------- Name: Nick Carter Title: President GP Natural Resource Partners LLC By: /s/ Nick Carter -------------------------------------- Name: Nick Carter Title: President NRP (GP) LP By: GP Natural Resource Partners LLC, its general partner By: /s/ Nick Carter -------------------------------------- Name: Nick Carter Title: President Natural Resource Partners L.P. By: NRP (GP) LP, its general partner By: GP Natural Resource Partners LLC, its general partner By: /s/ Nick Carter -------------------------------------- Name: Nick Carter Title: President Signature Page 3 of 3 to the Contribution, Conveyance and Assumption Agreement SCHEDULE 2.1 NEW GAULEY ASSETS The real property and real property interests as are being conveyed by New Gauley Coal Corporation to NNG LLC, pursuant to, and as more fully described in the deeds of conveyance, dated October 14, 2002 by New Gauley Coal Company, as grantor to NNG LLC, as grantee, to be recorded in the real estate recording offices in the following counties: Nicholas County, West Virginia Greenbrier County, West Virginia Cullman County, Alabama Walker County, Alabama SCHEDULE 2.1 CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT SCHEDULE 2.2 WPP ASSETS The real property and real property interests as are being conveyed by Western Pocahontas Properties Limited Partnership to WPPLLC, pursuant to, and as more fully described in the deeds of conveyance, dated October 14, 2002 by Western Pocahontas Properties Limited Partnership, as grantor to WPP LLC, as grantee, to be recorded in the real estate recording offices in the following counties: Boone County, West Virginia Cullman County, Alabama Fayette County, West Virginia Walker County, Alabama Grant County, West Virginia Breathitt County, Kentucky Logan County, West Virginia Floyd County, Kentucky Marion County, West Virginia Knott County, Kentucky Mineral County, West Virginia Magoffin County, Kentucky Mingo County, West Virginia Pike County, Kentucky Nicholas County, West Virginia Pocahontas County, West Virginia Preston County, West Virginia Randolph County, West Virginia Raleigh County, West Virginia Tucker County, West Virginia Webster County, West Virginia Wetzel County, West Virginia Wyoming County, West Virginia Garrett County, Maryland Sullivan County, Indiana Vigo County, Indiana SCHEDULE 2.2 CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT SCHEDULE 2.3 GREAT NORTHERN ASSETS The real property and real property interests as are being conveyed by Great Northern Properties Limited Partnership to GNPLLC, pursuant to, and as more fully described in the deeds of conveyances, dated October 14, 2002 by Great Northern Properties Limited Partnership, as grantor to GNP LLC, as grantee, to be recorded in the real estate recording offices in the following counties: Rosebud County, Montana Treasure County, Montana SCHEDULE 2.3 CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT SCHEDULE 2.4 ARK ASSETS The real property and real property interests as are being conveyed by Ark Land Company to ACIN LLC pursuant to, and as more fully described in the deeds of conveyance, dated October 10, 2002 by Ark Land Company, as grantor to ACIN LLC, as grantee, to be recorded in the real estate recording offices in the following counties: Letcher County, Kentucky Harlan County, Kentucky Johnson County, Kentucky Kanawha County, West Virginia Nicholas County, West Virginia Clay County, West Virginia Boone County, West Virginia Raleigh County, West Virginia Fayette County, West Virginia Lincoln County, West Virginia Wise County, Virginia Perry County, Illinois Jackson County, Illinois SCHEDULE 2.4 CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT EX-10.3 9 h04228exv10w3.txt LONG-TERM INCENTIVE PLAN EXHIBIT 10.3 NATURAL RESOURCE PARTNERS LONG-TERM INCENTIVE PLAN SECTION 1. Purpose of the Plan. The Natural Resource Partners Long-Term Incentive Plan (the "Plan") is intended to promote the interests of Natural Resource Partners L.P., a Delaware limited partnership (the "Partnership"), by providing to employees and directors of GP Natural Resource Partners LLC (the "Company") and its Affiliates who perform services for the Partnership incentive compensation awards for superior performance that are based on Units. The Plan is also contemplated to enhance the ability of the Company and its Affiliates to attract and retain the services of individuals who are essential for the growth and profitability of the Partnership and to encourage them to devote their best efforts to the business of the Partnership, thereby advancing the interests of the Partnership and its partners. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "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. "Award" means an Option or Phantom Unit granted under the Plan. "Board" means the Board of Directors of the Company. "Change in Control" shall be deemed to have occurred upon the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one or a series of related transactions) of all or substantially all of the assets of the Partnership, NRP (GP) LP or the Company to any Person, other than the Partnership, NRP (GP) LP, the Company or any of their Affiliates, or (ii) any merger, reorganization, consolidation or other transaction pursuant to which more than 50% of the combined voting power of the outstanding equity interests in either NRP (GP) LP or the Company ceases to be owned by the Persons who own such interests, respectively, as of the effective date of the initial public offering of Units. "Committee" means the Compensation Committee of the Board or such other committee of the Board appointed by the Board to administer the Plan. "Director" means a member of the Board or the Board of Directors or Board of Managers of an Affiliate who is not an Employee. "Employee" means any employee of the Company or an Affiliate, as determined by the Committee. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the closing sales price of a Unit on the applicable date (or if there is no trading in the Units on such date, on the next preceding date on which there was trading) as reported in The Wall Street Journal (or other reporting service approved by the Committee). In the event (1) there is no sale of Units on the New York Stock Exchange or any other national securities exchange on which the Units are listed for more than 10 days preceding such date or (2) the Units are not publicly traded at the time a determination of fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee. "Option" means an option to purchase Units granted under the Plan. "Participant" means any Employee or Director granted an Award under the Plan. "Partnership Agreement" means the Amended and Restated Agreement of Limited Partnership of Natural Resource Partners L.P. "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. "Phantom Unit" means a phantom (notional) Unit granted under the Plan which upon vesting entitles the Participant to receive a Unit or an amount of cash equal to the Fair Market Value of a Unit, whichever is determined by the Committee. "Restricted Period" means the period established by the Committee with respect to an Award during which the Award remains subject to forfeiture (is not vested) and is not exercisable by or payable to the Participant. "Rule 16b-3" means Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" means the Securities and Exchange Commission, or any successor thereto. "Unit" means a Common Unit of the Partnership. SECTION 3. Administration. The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. Subject to the following and any applicable law, the Committee, in its sole discretion, may delegate any or all of its powers and duties under the Plan (provided the Chief Executive Officer is a member of the Board), including the power to grant Awards under the Plan, to the Chief Executive Officer of the Company, subject to such limitations on such delegated powers and duties as the Committee may impose, if any. Upon any such delegation all references in the Plan to the "Committee", other than in Section 7, shall be deemed to include the Chief Executive Officer; provided, however, that such delegation shall not limit the Chief Executive Officer's right to receive Awards under the Plan. Notwithstanding the -2- foregoing, the Chief Executive Officer may not grant Awards to, or take any action with respect to any Award previously granted to, a person who is an officer subject to Rule 16b-3 or a member of the Board. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to a Participant; (iii) determine the number of Units to be covered by Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled, exercised, canceled, or forfeited; (vi) interpret and administer the Plan and any instrument or agreement relating to an Award made under the Plan; (vii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (viii) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, the Partnership, any Affiliate, any Participant, and any beneficiary of any Award. SECTION 4. Units. (a) Units Available. Subject to adjustment as provided in Section 4(c), the number of Units with respect to which Awards may be granted under the Plan shall be equal to 3% of the number of Units outstanding immediately following the initial public offering of Units. If any Option or Phantom Unit is forfeited or otherwise terminates or is canceled without the delivery of Units, then the Units covered by such Award, to the extent of such forfeiture, termination or cancellation, shall again be Units with respect to which Awards may be granted. (b) Sources of Units Deliverable Under Awards. Any Units delivered pursuant to an Award shall consist, in whole or in part, of Units acquired in the open market, from any Affiliate, the Partnership or any other Person, or any combination of the foregoing, as determined by the Committee in its discretion. (c) Adjustments. In the event that the Committee determines that any distribution (whether in the form of cash, Units, other securities, or other property), recapitalization, split, reverse split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Units or other securities of the Partnership, issuance of warrants or other rights to purchase Units or other securities of the Partnership, or other similar transaction or event affects the Units such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Units (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Units (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, that the number of Units subject to any Award shall always be a whole number. -3- SECTION 5. Eligibility. Any Employee or Director who performs services for the Partnership shall be eligible to be designated a Participant and receive an Award under the Plan. SECTION 6. Awards. (a) Options. The Committee shall have the authority to determine the Employees and Directors to whom Options shall be granted, the number of Units to be covered by each Option, the purchase price therefor and the conditions and limitations applicable to the exercise of the Option, including the following terms and conditions and such additional terms and conditions, as the Committee shall determine, that are not inconsistent with the provisions of the Plan. (i) Exercise Price. The purchase price per Unit purchasable under an Option shall be determined by the Committee at the time the Option is granted and may not be less than its Fair Market Value as of the date of grant. (ii) Time and Method of Exercise. The Committee shall determine (x) the Restricted Period, i.e., the time or times at which an Option may be exercised in whole or in part, which may include, without limitation, accelerated vesting upon the achievement of specified performance goals, and (y) the method or methods by which payment of the exercise price with respect thereto may be made or deemed to have been made, which may include, without limitation, cash, check acceptable to the Company, a "cashless-broker" exercise through procedures approved by the Company, other securities or other property, a recourse note from the Participant in a form acceptable to the Company, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price. (iii) Forfeiture. Except as otherwise provided in the terms of the Option grant, upon termination of a Participant's employment with the Company and its Affiliates or membership on the Board, whichever is applicable, for any reason during the applicable Restricted Period, all Options shall be forfeited by the Participant (or any transferee) unless otherwise provided in a written employment agreement between the Participant and the Company or its Affiliates. The Committee may, in its discretion, waive in whole or in part such forfeiture with respect to a Participant's Options. (b) Phantom Units. The Committee shall have the authority to determine the Employees and Directors to whom Phantom Units shall be granted, the number of Phantom Units to be granted to each such Participant, the Restricted Period, the conditions under which the Phantom Units may become vested or forfeited, which may include, without limitation, the accelerated vesting upon the achievement of specified performance goals, and such other terms and conditions as the Committee may establish with respect to such Awards. (i) Forfeiture. Except as otherwise provided in the terms of the Phantom Units grant, upon termination of a Participant's employment with the Company and its Affiliates or membership on the Board, whichever is applicable, for any reason during the applicable Restricted Period, all Phantom Units shall be forfeited by the Participant (or any transferee) -4- unless otherwise provided in a written employment agreement between the Participant and the Company or its Affiliates. The Committee may, in its discretion, waive in whole or in part such forfeiture with respect to a Participant's Phantom Units. (ii) Lapse of Restrictions. Upon or as soon as reasonably practical following the vesting of each Phantom Unit, the Participant shall be entitled to receive from the Company one Unit or cash equal to the Fair Market Value of a Unit, as determined by the Committee in its discretion. (c) General. (i) Awards May Be Granted Separately or Together. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (ii) Limits on Transfer of Awards. (A) Except as provided in Sections 6(a) and (b) above or (C) below, each Option shall be exercisable only by the Participant during the Participant's lifetime. (B) Except as provided in (C) below, no Award and no right under any such Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate. (C) To the extent specifically provided by the Committee with respect to an Option grant, an Option may be transferred by a Participant without consideration to immediate family members or related family trusts, limited partnerships or similar entities or on such terms and conditions as the Committee may from time to time establish. In addition, to the extent provided in the grant agreement Awards may be transferred by will and the laws of descent and distribution. (iii) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee. (iv) Unit Certificates. All certificates for Units or other securities of the Partnership delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Units or other securities are then listed, and any applicable federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. -5- (v) Consideration for Grants. Awards may be granted for such consideration, including services or such minimal consideration as may be required by law, as the Committee determines. (vi) Delivery of Units or other Securities and Payment by Participant of Consideration. Notwithstanding anything in the Plan or any grant agreement to the contrary, delivery of Units pursuant to the exercise or vesting of an Award may be deferred for any period during which, in the good faith determination of the Committee, the Company is not reasonably able to obtain Units to deliver pursuant to such Award without violating the rules or regulations of any applicable law or securities exchange. No Units or other securities shall be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award grant agreement (including, without limitation, any exercise price or tax withholding) is received by the Company. Such payment may be made by such method or methods and in such form or forms as the Committee shall determine, including, without limitation, cash, other Awards, withholding of Units, cashless-broker exercises with simultaneous sale, or any combination thereof; provided that the combined value, as determined by the Committee, of all cash and cash equivalents and the Fair Market Value of any such Units or other property so tendered to the Company, as of the date of such tender, is at least equal to the full amount required to be paid to the Company pursuant to the Plan or the applicable Award agreement. (vii) Change in Control. Upon a Change in Control or such period prior thereto as may be established by the Committee, all Awards shall automatically vest and become payable or exercisable, as the case may be, in full. In this regard, all Restricted Periods shall terminate and all performance criteria, if any, shall be deemed to have been achieved at the maximum level. To the extent an Option is not exercised upon a Change in Control, the Committee may, in its discretion, cancel such Award without payment or provide for a replacement grant with respect to such property and on such terms as it deems appropriate. SECTION 7. Amendment and Termination. Except to the extent prohibited by applicable law: (a) Amendments to the Plan. Except as required by the rules of the principal securities exchange on which the Units are traded and subject to Section 7(b) below, the Board or the Committee may amend, alter, suspend, discontinue, or terminate the Plan in any manner, including increasing the number of Units available for Awards under the Plan, without the consent of any partner, Participant, other holder or beneficiary of an Award, or other Person. (b) Amendments to Awards. Subject to Section 7(a), the Committee may waive any conditions or rights under, amend any terms of, or alter any Award theretofore granted, provided no change, other than pursuant to Section 7(c), in any Award shall materially reduce the benefit to a Participant without the consent of such Participant. (c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, -6- and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) of the Plan) affecting the Partnership or the financial statements of the Partnership, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. SECTION 8. General Provisions. (a) No Rights to Award. No Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Participants. The terms and conditions of Awards need not be the same with respect to each recipient. (b) Withholding. The Company or any Affiliate is authorized to withhold from any Award, from any payment due or transfer made under any Award or from any compensation or other amount owing to a Participant the amount (in cash, Units, Units that would otherwise be issued pursuant to such Award or other property) of any applicable taxes payable in respect of the grant of an Award, its exercise, the lapse of restrictions thereon, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy its withholding obligations for the payment of such taxes. (c) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate or to remain on the Board, as applicable. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award agreement. (d) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware law without regard to its conflict of laws principles. (e) Severability. If any provision of the Plan or any award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or award and the remainder of the Plan and any such Award shall remain in full force and effect. (f) Other Laws. The Committee may refuse to issue or transfer any Units or other consideration under an Award if, in its sole discretion, it determines that the issuance or transfer or such Units or such other consideration might violate any applicable law or regulation, the rules of the principal securities exchange on which the Units are then traded, or entitle the Partnership or an Affiliate to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. -7- (g) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any participating Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any participating Affiliate pursuant to an award, such right shall be no greater than the right of any general unsecured creditor of the Company or any participating Affiliate. (h) No Fractional Units. No fractional Units shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Units or whether such fractional Units or any rights thereto shall be canceled, terminated, or otherwise eliminated. (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (j) Facility Payment. Any amounts payable hereunder to any person under legal disability or who, in the judgment of the Committee, is unable to properly manage his financial affairs, may be paid to the legal representative of such person, or may be applied for the benefit of such person in any manner which the Committee may select, and the Company shall be relieved of any further liability for payment of such amounts. (k) Gender and Number. Words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural. SECTION 9. Term of the Plan. The Plan shall be effective on the date of its approval by the Board and shall continue until the date terminated by the Board or Units are no longer available for the payment of Awards under the Plan, whichever occurs first. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted prior to such termination, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under such Award, shall extend beyond such termination date. -8- EX-10.4 10 h04228exv10w4.txt ANNUAL INCENTIVE PLAN EXHIBIT 10.4 NATURAL RESOURCE PARTNERS ANNUAL INCENTIVE COMPENSATION PLAN 1. INTENT. The purpose of this Annual Incentive Compensation Plan (the "Plan") is to motivate the key employees of GP Natural Resource Partners LLC (the "Company") and its affiliates who perform services for Natural Resource Partners L.P. (the "Partnership") and its subsidiaries to produce outstanding results, encouraging superior performance, increasing productivity, and to aid in the ability to attract and retain such key employees. 2. PLAN GUIDELINES. The administration of the Plan and any potential financial remuneration to come as a result of its implementation is subject to the determination by the Compensation Committee of the Company's Board of Directors that the performance goals for the applicable period have been achieved. The Plan is an additional compensation program designed to encourage Plan participants (designated by the Company's Compensation Committee) to exceed specified objective performance targets for the designated period. The Compensation Committee will review the performance results for the designated period and thereafter determine the payments due under the Plan, if any. 3. PERFORMANCE TARGETS. 3.1 Designation of Performance Targets. The Compensation Committee shall determine the performance target or targets to be used for each calendar year (a "Plan Year") for determining the bonuses to be paid as a result of this Plan. Performance targets may be based on Partnership, business units and/or individual achievements, criteria and/or goals and/or incentive distribution rights of the Company with respect to the Partnership or any combination or weighting of the same or on such other factors as the Compensation Committee may determine, whether subjective or objective. Different performance targets may be established for different participants or groups of participants for any Plan Year. Except as provided in Section 3.3, satisfactory results as determined by the Compensation Committee, in its sole discretion, must be achieved in order for a performance payment to occur under the Plan. 3.2 Equitable Adjustment to Performance Targets. The performance targets applicable to any participant for a Plan Year shall be subject to equitable adjustment at the sole discretion of the Compensation Committee to reflect the occurrence of any unexpected significant events during the Plan Year. 3.3 Waiver of Performance Targets. The Compensation Committee may waive, in whole or in part, the requirement that performance targets be achieved in order to pay a bonus under this Plan whenever the Compensation Committee determines such a bonus payment will be in the best interests of the Partnership. 4. PARTICIPANTS. Employees of the Company and its affiliates eligible to participate in the Plan shall be designated annually by the Compensation Committee and may be based on the recommendation of the Company's President and Chief Executive Officer. 5. PARTICIPATION LEVELS. A participant's designated level of participation in the Plan will be determined under criteria established or approved by the Compensation Committee for that Plan Year or designated performance period. Levels of participation in the Plan may vary according to a participant's position and the relative impact such participant can have on the Company's and/or affiliates' operations. Care will be used in communicating to any participant his performance targets and potential performance amount for a Plan Year. The amount of bonus a participant may receive for any Plan Year will depend upon the performance level(s) achieved (unless waived) for that Plan Year, as determined by the Compensation Committee. No participant shall have any claim to be granted any award under the Plan, and there is no obligation for uniformity of treatment of participants. The terms and conditions of awards need not be the same respecting each participant. 6. AWARD PAYOUT. Earned awards will be determined after the end of the Plan Year or designated performance period. Awards will be paid in cash as soon as reasonably practical following the Compensation Committee's determination, unless otherwise determined by the Compensation Committee. The Compensation Committee will have the discretion, by participant and by grant, to reduce or increase the amount of any award that otherwise would be payable to an individual by reason of the satisfaction of the applicable performance targets. In making any such determination, the Compensation Committee is authorized to take into account such factors it determines are appropriate. 7. TERMINATION OF EMPLOYMENT. A participant's termination of employment for any reason prior to a performance payment under the Plan will result in the participant's forfeiture of any right, title or interest in receiving a performance payment under the Plan, except to the extent waived by the Compensation Committee, in its sole discretion. 8. AMENDMENT AND TERMINATION. The Company's Compensation Committee, at its sole discretion, may amend the Plan in whole or in part and may terminate the Plan at any time. 9. ADMINISTRATION OF PLAN. 9.1 Administration. The Compensation Committee may delegate all or part of the responsibility for the administration of the Plan to the President and Chief Executive Officer of the Company and other employees. The Compensation Committee (or the person(s) to which -2- such administrative authority has been delegated) shall have the authority to interpret and construe any and all provisions of the Plan, including all performance targets and whether and to what extent achieved. Any determination made by the Compensation Committee (or the person(s) to which administrative authority has been delegated) shall be final and conclusive and binding on all persons. 9.2 Indemnification. Neither the Company, any participating affiliate, the Board of Directors, any member or any committee thereof, nor any employee of the Company or any participating affiliate shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith; and the members of the Company's Board of Directors, the Compensation Committee and the employees of the Company and any participating affiliate shall be entitled to indemnification and reimbursement by the Company to the maximum extent permitted by law in respect of any claim, loss, damage or expense (including counsel's fees) arising from their acts, omission and conduct in their official capacity with respect to the Plan if taken or omitted in good faith. 10. GENERAL PROVISIONS. 10.1 Non-Guarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Company and/or a participating affiliate and a participant, and nothing in this Plan shall confer upon any participant any right to continued employment with the Company or a participating affiliate, or to interfere with the right of the Company or a participating affiliate to discharge a participant, with or without cause. 10.2 Interests Not Transferable. No interest or payment under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or other legal process, or encumbrance of any kind, and any attempt to do so shall be void. 10.3 Facility Payment. Any amounts payable hereunder to any person under legal disability or who, in the judgment of the Compensation Committee or its designee, is unable to properly manage his financial affairs, may be paid to the legal representative of such person, or may be applied for the benefit of such person in any manner which the Compensation Committee or its designee may select, and each participating affiliate shall be relieved of any further liability for payment of such amounts. 10.4 Tax Withholding. The Company and/or any participating affiliate may withhold from any payments otherwise due under this Plan to a participant (or beneficiary) all amounts required by law to be withheld for purposes of federal, state or local taxes. 10.5 Gender and Number. Words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural. 10.6 Controlling Law. The law of the State of Texas, without regard to its conflict of laws principles, shall be controlling in all matters relating to the Plan. 10.7 No Rights to Award. No person shall have any claim to be granted any award under the Plan, and there is no obligation for uniformity of treatment of participants. The terms and conditions of awards need not be the same with respect to each recipient. -3- 10.8 Severability. If any provision of the Plan or any award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any person or award, or would disqualify the Plan or any award under the law deemed applicable by the Compensation Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Compensation Committee, materially altering the intent of the Plan or the award, such provision shall be stricken as to such jurisdiction, person or award and the remainder of the Plan and any such award shall remain in full force and effect. 10.9 No Trust or Fund Created. Neither the Plan nor any award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any participating affiliate and a participant or any other person. To the extent that any person acquires a right to receive payments from the Company or any participating affiliate pursuant to an award, such right shall be no greater than the right of any general unsecured creditor of the Company or any participating affiliate. 10.10 Headings. Headings are given to the Sections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. -4- EX-10.5 11 h04228exv10w5.txt OMNIBUS AGREEMENT EXHIBIT 10.5 EXECUTION VERSION ================================================================================ OMNIBUS AGREEMENT among ARCH COAL, INC. ARK LAND COMPANY WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP NEW GAULEY COAL CORPORATION ROBERTSON COAL MANAGEMENT LLC GP NATURAL RESOURCE PARTNERS LLC NRP (GP) LP NATURAL RESOURCE PARTNERS L.P. and NRP (OPERATING) LLC ================================================================================ OMNIBUS AGREEMENT THIS OMNIBUS AGREEMENT ("Agreement") is entered into on, and effective as of, the Closing Date (as defined herein) among Arch Coal, Inc., a Delaware corporation ("Arch"), Ark Land Company, a Delaware corporation ("Ark"), Western Pocahontas Properties Limited Partnership, a Delaware limited partnership ("WPP"), Great Northern Properties Limited Partnership, a Delaware limited partnership ("GNP"), New Gauley Coal Corporation, a West Virginia corporation ("NGCC" and, together with WPP and GNP, the "WPP Group"), Robertson Coal Management LLC, a Delaware limited liability company ("Robertson Coal Management"), GP Natural Resource Partners LLC ("GP LLC"), NRP (GP) LP, a Delaware limited partnership (including any permitted successors and assigns under the Partnership Agreement (as defined herein), the "General Partner"), Natural Resource Partners L.P., a Delaware limited partnership (the "Partnership"), and NRP (Operating) LLC, a Delaware limited liability company ("OLLC"). The above-named entities are sometimes referred to in this Agreement each as a "Party" and collectively as the "Parties." R E C I T A L S: 1. The Parties desire by their execution of this Agreement to evidence their understanding, as more fully set forth in Article II, with respect to those business opportunities that a Sponsor (as defined herein) will not engage in for so long as such Sponsor participates in the control of the General Partner unless the Partnership has declined to engage in any such business opportunity for its own account. 2. The Parties desire by their execution of this Agreement to evidence their understanding, as more fully set forth in Article III, with respect to certain indemnification obligations of the Sponsors in favor of the Partnership Group (as defined herein). In consideration of the premises and the covenants, conditions and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. (a) As used in this Agreement, the following terms shall have the respective meanings set forth below: "Affiliate" is defined in the Partnership Agreement; notwithstanding the foregoing, "Affiliate" shall also include, with respect to any Sponsor, any other entity in which the Sponsor owns, through one or more intermediaries, 50% or more of the then outstanding voting securities or ownership interests of such entity. "Assets" means all assets conveyed, contributed, or otherwise transferred by the Sponsors to the Partnership Group prior to or on the Closing Date. 1 "Closing Date" means the date of the closing of the Partnership's initial public offering of Common Units. "Common Units" is defined in the Partnership Agreement. "Conflicts Committee" is defined in the Partnership Agreement. "control" means the possession, directly or indirectly, 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. "Covered Environmental Losses" is defined in Section 3.1. "Environmental Laws" means all federal, state, and local laws, statutes, rules, regulations, orders, and ordinances, now or hereafter in effect, relating to protection of human health and the environment including, without limitation, the federal Comprehensive Environmental Response, Compensation, and Liability Act, the Superfund Amendments Reauthorization Act, the Surface Mining Control and Reclamation Act, the Mine Health and Safety Acts of 1969 and 1977, the Resource Conservation and Recovery Act, the Clean Air Act, the Clean Water Act, the Federal Water Pollution Control Act, the Toxic Substances Control Act, the Hazardous Materials Transportation Act, the Safe Drinking Water Act, the Emergency Planning and Community Right-to-Know Act, and other environmental conservation and protection laws, each as amended from time to time. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Group Member" is defined in the Partnership Agreement. "Limited Partner" is defined in the Partnership Agreement. "Mechanics Lien" means the unperfected lien filed on March 21, 2002 against Ark in the amount of $40,504.40 by Ash Block, Inc. "Majority Sponsor" means the WPP Group and any Affiliate of the WPP Group, Robertson Coal Management or Corbin J. Robertson, Jr. "Minority Sponsor" means Arch and Ark. "Partnership Agreement" means the First Amended and Restated Agreement of Limited Partnership of Natural Resource Partners L.P., dated as of the Closing Date, as such agreement is in effect on the Closing Date, to which reference is hereby made for all purposes of this Agreement. No amendment or modification to the Partnership Agreement subsequent to the Closing Date shall be given effect for the purposes of this Agreement unless consented to by each of the Parties to this Agreement. "Partnership Group" is defined in the Partnership Agreement. 2 "Person" is defined in the Partnership Agreement. "Restricted Business" is defined in Section 2.1. "Second Offer" is defined in Section 2.4(c). "Sponsor" means any of the Majority Sponsor or the Minority Sponsor, and "Sponsors" means both the Majority Sponsor and the Minority Sponsor. "Subsidiary" is defined in the Partnership Agreement. "Unit" is defined in the Partnership Agreement. ARTICLE II BUSINESS OPPORTUNITIES 2.1 RESTRICTED ACTIVITIES (a) Restricted Businesses. For so long as a Sponsor participates in the control of the General Partner, and except as permitted by Section 2.2, each Sponsor and its Affiliates shall be prohibited from, directly or indirectly, owning, operating or investing in any business having assets engaged in the following activities (each, a "Restricted Business"): (i) owning or entering into leases with a party other than an Affiliate of a Sponsor of any fee coal reserves within the United States owned by a Sponsor or its Affiliate; or (ii) owning or entering into subleases with a party other than an Affiliate of a Sponsor of any coal reserves within the United States controlled by a paid-up lease owned by a Sponsor or its Affiliate. (b) Restrictions on Controlling Investments in New Entities. For so long as a Sponsor participates in the control of the General Partner, the Sponsors and their Affiliates shall be prohibited from the following actions: (i) The Majority Sponsor and its Affiliates may not, through one or more transactions, form or purchase (1) a general partner interest in any partnership (publicly traded or private) that principally engages in a Restricted Business, (2) a managing member interest in any limited liability company (publicly traded or private) that principally engages in a Restricted Business or (3) a controlling interest in any corporation (publicly traded or private) that principally engages in a Restricted Business; provided, however, that the Majority Sponsor may form or purchase a general partner interest in any private partnership, a managing member interest in any private limited liability company or a controlling interest in any private corporation, each principally engaging in a Restricted Business, subject to Sections 2.3 and 2.4. 3 (ii) The Minority Sponsor and its Affiliates may not, through one or more transactions, form or purchase (1) a general partner interest in any partnership (publicly traded or private) that principally engages in a Restricted Business, (2) a managing member interest in any limited liability company (publicly traded or private) that principally engages in a Restricted Business or (3) a controlling interest in any corporation (publicly traded or private) that principally engages in a Restricted Business; provided, however, that the Minority Sponsor may form or purchase a general partner interest in any partnership (publicly traded or private), a managing member interest in any limited liability company (publicly traded or private) or a controlling interest in any corporation (publicly traded or private), each principally engaging in a Restricted Business, so long as (1) the Minority Sponsor sells such general partner interest, managing member interest or controlling interest to the Partnership or a third party within six months of the date of the acquisition by the Minority Sponsor or (2) the General Partner (with the concurrence of the Conflicts Committee) agrees that the interest in the Restricted Business will be subject to Section 2.4 of this Agreement without further reference to this paragraph. If, at any time after six months from the date of such formation or acquisition by the Minority Sponsor, the Minority Sponsor continues to own the interest in the Restricted Business despite a good faith, reasonable attempt to divest such interest, it may seek an extension from the Conflicts Committee for such time as is reasonably necessary to divest such interest. The Conflicts Committee, in its discretion, may either (1) grant an extension to the Minority Sponsor to complete the divestiture of such interest or (2) subject such interest to Section 2.4(c). If the Conflicts Committee does not grant an extension or if the Minority Sponsor's interest in the Restricted Business is not otherwise subject to Section 2.4, then if at any time after six months from the date of such formation or acquisition by the Minority Sponsor, the Minority Sponsor continues to own such interest despite a good faith, commercially reasonable attempt to divest such interest, it must promptly notify the General Partner in writing of its decision to either (1) immediately cause its directors to resign from the board of directors of GP LLC and it shall thereafter be forever free to continue to own and operate such interest in the Restricted Business; provided, however, that the Minority Sponsor shall thereafter continue to relinquish its rights to designate directors of GP LLC until such time as the Minority Sponsor divests of its interest in the Restricted Business or (2) initiate a sale of its interest in the Restricted Business to the Partnership as described below and engage an independent investment banking firm with a national reputation to determine the fair market value of the Restricted Business. Such investment banking firm will determine the fair market value of the interest in the Restricted Business within 30 days and furnish the Minority Sponsor and the General 4 Partner its opinion of such value. The Minority Sponsor and the General Partner shall have 30 days from the receipt of such opinion to determine:: (A) if the Minority Sponsor and the General Partner (with the concurrence of the Conflicts Committee) agree on the fair market value as determined by the investment banking firm, in which case the Minority Sponsor shall sell the interest in the Restricted Business to any member of the Partnership Group; (B) if the Minority Sponsor desires to sell the interest in the Restricted Business to the Partnership Group at the valuation determined by the investment banking firm but the General Partner (with the concurrence of the Conflicts Committee) does not elect to purchase the interest in the Restricted Business at such valuation, in which case the Minority Sponsor will be forever free to continue to own and operate the interest in the Restricted Business; or (C) if the Minority Sponsor does not elect to sell the interest in the Restricted Business at the valuation determined by the investment banking firm but the General Partner (with the concurrence of the Conflicts Committee) desires the purchase the interest in the Restricted Business at such valuation, in which case the Minority Sponsor will cause its designated directors to resign immediately from the board of directors of GP LLC, and the Minority Sponsor will be forever free to continue to own and operate the interest in the Restricted Business; provided, however, that the Minority Sponsor shall thereafter continue to relinquish its rights to designate directors of GP LLC until such time as the Minority Sponsor divests of its interest in the Restricted Business. All fees of the investment banking firm for its services pursuant to the preceding paragraph shall be (1) split equally between the Minority Sponsor and the Partnership in the case of clause (A) above; (2) the sole obligation of the Partnership in the case of clause (B) above; or (3) the sole obligation of the Minority Sponsor in the case of clause (C) above. 2.2 PERMITTED EXCEPTIONS. Notwithstanding any provision of Section 2.1 to the contrary, and subject to Section 2.3 in the case of assets retained by a Sponsor pursuant to Section 2.2(a) or Section 2.2(b)(i), any Sponsor or its Affiliate may engage, directly or indirectly, in the following activities under the following circumstances: (a) owning, operating or investing in any Restricted Business (whether comprised of one asset or a group of related assets) that is retained by a Sponsor or its Affiliate as of the Closing Date; provided, however that if after the Closing Date the Restricted Business (whether comprised of one asset or a group of 5 related assets) has a fair market value (as determined in good faith by the board of directors, or other governing body, of the Sponsor that owns, operates or invests in the Restricted Business) greater than $10 million, the Sponsor must offer the Restricted Business to the Partnership Group in accordance with Section 2.4; (b) owning, operating or investing in a Restricted Business that is acquired by a Sponsor or its Affiliate after the Closing Date if: (i) the fair market value of the Restricted Business (whether comprised of one asset or a group of related assets) (as determined in good faith by the board of directors, or other governing body, of the Sponsor that will own, operate or invest in the Restricted Business) is equal to or less than $10 million at the time of such acquisition by such Sponsor or its Affiliate; provided, however, that if the fair market value of the Restricted Business (whether comprised of one asset or a group of related assets) subsequently exceeds $10 million, the Sponsor must offer the Restricted Business to the Partnership Group in accordance with Section 2.4. (ii) in the case of an acquisition of a Restricted Business (whether comprised of one asset or a group of related assets) with a fair market value (as determined in good faith by the board of directors, or other governing body, of the Sponsor that will own, operate or invest in the Restricted Business) greater than $10 million at the time of such acquisition by the Sponsor, the Partnership Group has been offered the opportunity to purchase the Restricted Business in accordance with Section 2.4 and the Partnership Group (with the concurrence of the Conflicts Committee) has elected not to purchase the Restricted Business. (iii) the investment in the Restricted Business is held solely by means of an equity interest in the entity that owns the Restricted Business and such equity interest does not constitute control of the Restricted Business. 2.3 LIMITATION ON ACQUISITIONS BY THE MAJORITY SPONSOR. (a) Notwithstanding Section 2.2, the fair market value (as determined in good faith by the board of directors, or other governing body, of the Majority Sponsor) of all Restricted Businesses owned, operated or invested in by the Majority Sponsor (other than those owned or operated by the Majority Sponsor as of the Closing Date) may not exceed $75 million in the aggregate. For purposes of this Section 2.3, the fair market value of any entity owning the Restricted Businesses purchased by the Majority Sponsor shall be determined based on the fair market value of the entity as a whole, without regard for any lesser ownership interest therein to be acquired by the Majority Sponsor. 2.4 PROCEDURES. (a) 6 (i) If the Majority Sponsor desires to acquire a Restricted Business not otherwise permitted by Section 2.2 and such Restricted Business constitutes greater than 50% of the aggregate value of the entire acquisition, then the Majority Sponsor shall (1) notify the General Partner in writing of such acquisition opportunity, (2) deliver to the General Partner all information prepared by or on behalf of the Sponsor relating to such Restricted Business and the proposed acquisition and (3) offer the Partnership Group the opportunity to purchase such Restricted Business in accordance with this Section 2.4. The offer shall set forth the terms relating to the purchase of the Restricted Business. As soon as practicable, but in any event within 60 days after receipt of such written notification, the General Partner shall notify the Sponsor in writing that either (1) the General Partner has elected, with the approval of the Conflicts Committee, not to cause a Group Member to purchase the Restricted Business, in which event the Sponsor may consummate the proposed acquisition opportunity and own, operate or invest in such Restricted Business or (2) the General Partner has elected to cause a Group Member to purchase the Restricted Business, in which event the procedures outlined in this Section 2.4 shall apply. (ii) if (1) the Minority Sponsor desires to acquire a Restricted Business or an entity that engages in a Restricted Business not otherwise permitted by Section 2.2, in each case with a fair market value (as determined in good faith by the board of directors or other governing body of the Minority Sponsor) in excess of $10 million or (2) the Majority Sponsor desires to acquire a Restricted Business or an entity that engages in a Restricted Business (not otherwise permitted by Section 2.2) and such Restricted Business constitutes 50% or less of the aggregate value of the entire acquisition, then not later than six months after the consummation of the acquisition by such Sponsor of the Restricted Business, such Sponsor shall (1) notify the General Partner in writing of such acquisition, (2) deliver to the General Partner all information prepared by or on behalf of the Sponsor relating to such acquisition and (3) offer the Partnership Group the opportunity to purchase the Restricted Business in accordance with this Section 2.4. The offer shall set forth terms relating to the purchase of the Restricted Business. As soon as practicable, but in any event within 60 days after receipt of such written notification, the General Partner shall notify the Sponsor in writing that either (1) the General Partner has elected, with the approval of the Conflicts Committee, not to cause a Group Member to purchase the Restricted Business, in which case the Sponsor may continue to own, operate or invest in such Restricted Business or (2) the General Partner has elected to cause a Group Member to purchase the Restricted Business, in which event the procedures outlined in this Section 2.4 shall apply. 7 (iii) For purposes of this Section 2.4, a "Restricted Business" excludes a general partner interest or a managing member interest, which interests are addressed in Section 2.1. (b) If the Sponsor and the General Partner (with the concurrence of the Conflicts Committee) are able to agree on the fair market value of the Restricted Business that is subject to the offer delivered pursuant to Section 2.4(a)(i) or (ii) above and the other terms of the offer, a Group Member shall purchase the Restricted Business for the agreed upon fair market value as soon as commercially practicable after such agreement has been reached. The purchase agreement for the Restricted Business will provide for the purchase price to be paid, at the option of the Sponsor, in cash, Units, or an interest-bearing promissory note (the interest rate and other terms of which shall be mutually agreed upon by the Sponsor and the General Partner) or any combination thereof. (c) If the Sponsor and the General Partner are unable to agree on the fair market value of the Restricted Business that is subject to the offer delivered pursuant to Section 2.4(a)(i) or (ii) above or the other terms of the offer within 60 days after receipt by the General Partner of the offer, then the Sponsor may not, for a period of two years following the date of the offer, sell the Restricted Business to a third party for less than the price set forth in the offer or on more favorable terms than the terms set forth in the offer; provided, however, that if during such two-year period, a change occurs in the Restricted Business that, in the good faith opinion of the board of directors or other governing body of the relevant Sponsor, affects the fair market value of such Restricted Business by more than 10% and the fair market value of the Restricted Business remains greater than $10 million, the Sponsor shall be obligated to re-offer such Restricted Business to the Partnership Group at the new fair market value (as determined in good faith by the board of directors, or other governing body, of the Sponsor that owns the Restricted Business) and the process with respect to the Second Offer (as defined below) shall commence. If, at the end of the two-year period, the Sponsor has not sold the Restricted Business to a third party and the Restricted Business still has a fair market value (as determined in good faith by the board of directors, or other governing body, of the Sponsor that owns the Restricted Business) greater than $10 million, the Sponsor must again offer to the Partnership Group the opportunity to purchase such Restricted Business in accordance with this Section 2.4(c) (the "Second Offer"). The Second Offer shall set forth the terms relating to the purchase of the Restricted Business. As soon as practicable, but in any event within 60 days after receipt of the Second Offer, the General Partner shall notify the Sponsor in writing that either (1) the General Partner has elected, with the approval of the Conflicts Committee, not to cause a Group Member to purchase the Restricted Business, in which event the Sponsor may continue to own such Restricted Business without further obligation with respect to the Partnership Group, or (2) the General Partner has elected to cause a Group Member to purchase the Restricted Business, in which event a Group Member shall purchase the Restricted Business for the agreed upon fair market value as soon as commercially practicable after such agreement has been reached. 8 The purchase agreement for the Restricted Business will provide for the purchase price to be paid, at the option of the Sponsor, in cash, Units, or an interest-bearing promissory note (the interest rate and other terms of which shall be mutually agreed upon by the Sponsor and the General Partner) or any combination thereof. 2.5 SCOPE OF PROHIBITION. Except as provided in this Article II and the Partnership Agreement, each Sponsor and its Affiliates shall be free to engage in any business activity, including those that may be in direct competition with any Group Member. 2.6 ENFORCEMENT. The Sponsors agree and acknowledge that the Partnership Group does not have an adequate remedy at law for the breach by a Sponsor of the covenants and agreements set forth in this Article II, and that any breach by a Sponsor of the covenants and agreements set forth in this Article II would result in irreparable injury to the Partnership Group. The Sponsors each further agree and acknowledge that any Group Member may, in addition to the other remedies which may be available to the Partnership Group, file a suit in equity to enjoin a Sponsor Entity from such breach, and consent to the issuance of injunctive relief under this Agreement. ARTICLE III INDEMNIFICATION 3.1 INDEMNIFICATION BY THE SPONSORS (a) Subject to Section 3.2, the Sponsors, jointly and severally, shall indemnify, defend and hold harmless the Partnership Group for a period of three years after the Closing Date from and against all Covered Environmental Losses, defined as follows: any event or condition associated with ownership or operation of the Assets including, without limitation, (A) the cost and expense of any investigation, assessment, evaluation, monitoring, containment, cleanup, repair, restoration, remediation, or other corrective action required or necessary under Environmental Laws, (B) the cost or expense of the preparation and implementation of any closure, remedial, corrective action, or other plans required or necessary under Environmental Laws, (C) the cost and expense for any environmental or toxic tort pre-trial, trial, or appellate legal or litigation support work and (D) any violation or correction of violation of Environmental Laws associated with the Assets; but only to the extent that such violation complained of under this section or such events or conditions included under this section occurred before the Closing Date (collectively, "Covered Environmental Losses"). (b) The Sponsors, jointly and severally, shall indemnify, defend and hold harmless the Partnership Group from and against all federal, state and local income tax liabilities attributable to the ownership or operation of the Assets prior to the Closing Date, including any such income tax liabilities of the Sponsors and 9 their Affiliates that may result from the consummation of the formation transactions for the Partnership Group. (c) Ark shall indemnify, defend and hold harmless the Partnership Group from and against any and all claims, demands, costs, liabilities and expenses (including court costs and reasonable attorneys' fees) of every kind, character and description, whether known or unknown, accrued or contingent, and whether or not reflected on the books and records of Ark as of the Closing Date, arising from or relating to the liabilities assumed by the Partnership Group with respect to the Mechanics Lien. Ark hereby agrees that upon the request of the Partnership Group, Ark will escrow up to 150% of the amount of the Mechanics Lien, including accrued interest in an account specified by the Partnership Group. 3.2 LIMITATIONS REGARDING ENVIRONMENTAL INDEMNIFICATION (a) The Sponsors shall have no indemnification obligation under Section 3.1 for (1) claims made after the third anniversary of the Closing Date or (2) claims made as a result of additions to or modifications of the Environmental Laws made after the Closing Date. (b) The aggregate combined liability of the Sponsors in respect of all Covered Environmental Claims under Section 3.1(a) shall not exceed $10.0 million. 3.3 INDEMNIFICATION PROCEDURES (a) The Partnership Group agrees that within a reasonable period of time after it becomes aware of facts giving rise to a claim for indemnification under this Article III, it will provide notice thereof in writing to the Sponsor that contributed the property that is the subject of the claim, specifying the nature of and specific basis for such claim. (b) Each Sponsor shall have the right to control all aspects of the defense of (and any counterclaims with respect to) any claims brought against the Partnership Group that are covered by the indemnification under this Article III, including, without limitation, the selection of counsel, determination of whether to appeal any decision of any court and the settling of any such matter or any issues relating thereto; provided, however, that no such settlement shall be entered into without the consent of the Partnership Group unless it includes a full release of the Partnership Group from such matter or issues, as the case may be. (c) The Partnership Group agrees to cooperate fully with each Sponsor, with respect to all aspects of the defense of any claim covered by the indemnification under this Article III, including, without limitation, the prompt furnishing to each Sponsor of any correspondence or other notice relating thereto that the Partnership Group may receive, permitting the name of the Partnership Group to be utilized in connection with such defense, the making available to each Sponsor of any files, records or other information of the Partnership Group 10 that each Sponsor considers relevant to such defense and the making available to each Sponsor of any employees of the Partnership Group; provided, however, that in connection therewith each Sponsor agrees to use reasonable efforts to minimize the impact thereof on the operations of the Partnership Group and further agree to maintain the confidentiality of all files, records, and other information furnished by the Partnership Group pursuant to this Section 3.3. In no event shall the obligation of the Partnership Group to cooperate with each Sponsor as set forth in the immediately preceding sentence be construed as imposing upon the Partnership Group an obligation to hire and pay for counsel in connection with the defense of any claims covered by the indemnification set forth in this Article III; provided, however, that the Partnership Group may, at its own option, cost and expense, hire and pay for counsel in connection with any such defense. Each Sponsor agrees to keep any such counsel hired by the Partnership Group informed as to the status of any such defense, but each Sponsor shall have the right to retain sole control over such defense. (d) In determining the amount of any loss, cost, damage or expense for which the Partnership Group is entitled to indemnification under this Agreement, the gross amount of the indemnification will be reduced by (1) any insurance proceeds realized by the Partnership Group, and such correlative insurance benefit shall be net of any incremental insurance premium that becomes due and payable by the Partnership Group as a result of such claim and (2) all amounts recovered by the Partnership Group under contractual indemnities from third Persons. (e) The date on which notification of a claim for indemnification is received by the Sponsors shall determine whether such claim is timely made under Section 3.2. ARTICLE IV MISCELLANEOUS 4.1 CHOICE OF LAW; SUBMISSION TO JURISDICTION. This Agreement shall be subject to and governed by the laws of the State of Texas, excluding any conflicts-of-law rule or principle that might refer the construction or interpretation of this Agreement to the laws of another state. Each Party hereby submits to the jurisdiction of the state and federal courts in the State of Texas and to venue in Houston, Texas. 11 4.2 NOTICE. All notices or requests or consents provided for by, or permitted to be given pursuant to, this Agreement must be in writing and must be given by depositing same in the United States mail, addressed to the Person to be notified, postpaid, and registered or certified with return receipt requested or by delivering such notice in person or by telecopier or telegram to such Party. Notice given by personal delivery or mail shall be effective upon actual receipt. Notice given by telegram or telecopier shall be effective upon actual receipt if received during the recipient's normal business hours or at the beginning of the recipient's next business day after receipt if not received during the recipient's normal business hours. All notices to be sent to a Party pursuant to this Agreement shall be sent to or made at the address set forth below such Party's signature to this Agreement or at such other address as such Party may stipulate to the other Parties in the manner provided in this Section 4.2. if to Arch or Ark: Arch Coal, Inc. Attention: General Counsel CityPlace One, Suite 300 St. Louis, MO 63141 Telecopy: (314) 994-2734 if to WPP or NGCC: Western Pocahontas Properties Limited Partnership or New Gauley Coal Corporation Attention: Nick Carter P.O. Box 2827 1035 Third Avenue, Suite 300 Huntington, WV 25727 Telecopy: (304) 522-5401 with a copy to: Dwight Dunlap 601 Jefferson, Suite 3600 Telecopy: (713) 751-7510 if to GNP: Great Northern Properties Limited Partnership Attention: Corbin J. Robertson, Jr. 601 Jefferson, Suite 3600 Telecopy: (713) 751-7510 with a copy to: Dwight Dunlap 601 Jefferson, Suite 3600 12 Telecopy: (713) 751-7510 if to Robertson Coal Management LLC Robertson Coal Management LLC Attention: Corbin J. Robertson, Jr. 601 Jefferson Street, Suite 3600 Houston, TX 77002 Telecopy: (713) 751-7510 with a copy to: Dwight Dunlap 601 Jefferson, Suite 3600 Telecopy: (713) 751-7510 if to any Group Member NRP (GP) LP Attention: Dwight Dunlap 601 Jefferson, Suite 3600 Telecopy: (713) 751-7510 4.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the Parties relating to the matters contained herein, superseding all prior contracts or agreements, whether oral or written, relating to the matters contained herein. 4.4 TERMINATION. Article II of this Agreement will terminate with respect to any Sponsor upon the sale or other disposition of (1) all of such Sponsor's membership interest in GP LLC and limited partnership interest in the General Partner and (2) the termination of its right to nominate and elect the directors of GP LLC. 4.5 AMENDMENT OR MODIFICATION. This Agreement may be amended or modified from time to time after the Closing Date only by the written agreement of all the Parties hereto; provided, however, that the Partnership may not, without the prior approval of the Conflicts Committee, agree to any amendment or modification of this Agreement that, in the reasonable discretion of the General Partner, will adversely affect the holders of Common Units. Each such instrument shall be reduced to writing and shall be designated on its face an "Amendment" or an "Addendum" to this Agreement. 4.6 ASSIGNMENT. No Party shall have the right to assign its rights or obligations under this Agreement without the consent of the other Parties hereto. 4.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts with the same effect as if all signatory parties had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument. 13 4.8 SEVERABILITY. If any provision of this Agreement shall be held invalid or unenforceable by a court or regulatory body of competent jurisdiction, the remainder of this Agreement shall remain in full force and effect. 4.9 FURTHER ASSURANCES. In connection with this Agreement and all transactions contemplated by this Agreement, each signatory party hereto agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement and all such transactions. 4.10 RIGHTS OF LIMITED PARTNERS. The provisions of this Agreement are enforceable solely by the Parties to this Agreement, and no Limited Partner of the Partnership shall have the right, separate and apart from the Partnership, to enforce any provision of this Agreement or to compel any Party to this Agreement to comply with the terms of this Agreement. 14 IN WITNESS WHEREOF, the Parties have executed this Agreement on, and effective as of, the Closing Date. ARCH COAL, INC. By: /s/ Robert J. Messey ---------------------------------------- Name: Robert J. Messey Title: Senior Vice President and Chief Financial Officer ARK LAND COMPANY By: /s/ Steve McCurdy ------------------------------------ Name: Steve McCurdy Title: President WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP By: Western Pocahontas Corporation, Its General Partner By: /s/ Nick Carter ------------------------------------ Name: Nick Carter Title: President GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP By: GNP Management Corporation, Its General Partner By: /s/ Dwight L. Dunlap ------------------------------------ Name: Dwight L. Dunlap Title: Chief Financial Officer NEW GAULEY COAL CORPORATION By: /s/ Nick Carter ------------------------------------ Name: Nick Carter Title: President 15 ROBERTSON COAL MANAGEMENT LLC By: Corbin J. Robertson, Jr. Its sole member By: /s/ Corbin J. Robertson, Jr. ------------------------------------ Name: Corbin J. Robertson, Jr. GP NATURAL RESOURCE PARTNERS LLC By: /s/ Nick Carter ------------------------------------ Name: Nick Carter Title: President NRP (GP) LP By: GP Natural Resource Partners LLC, Its General Partner By: /s/ Nick Carter ------------------------------------ Name: Nick Carter Title: President NATURAL RESOURCE PARTNERS L.P. By: NRP (GP) LP, Its General Partner By: GP Natural Resource Partners LLC, Its General Partner By: /s/ Nick Carter ------------------------------------ Name: Nick Carter Title: President NRP (OPERATING) LLC By: /s/ Nick Carter ------------------------------------ Name: Nick Carter Title: President 16 EX-10.6 12 h04228exv10w6.txt ROYALTY PASS-THROUGH AGREEMENT EXHIBIT 10.6 EXECUTION VERSION ROYALTY PASS-THROUGH AGREEMENT AND GUARANTY DATED AS OF OCTOBER 17, 2002 AMONG ARCH COAL, INC. AND ARK LAND COMPANY AND ACIN LLC EXECUTION VERSION THIS ROYALTY PASS-THROUGH AGREEMENT AND GUARANTY, dated as of October 17, 2002 (this "Agreement"), is entered into by and among Arch Coal, Inc., a Delaware corporation ("Arch"), Ark Land Company, a Delaware corporation ("Ark"), and ACIN LLC, a Delaware limited liability company ("ACIN"). Arch, Ark and ACIN are sometimes referred to together herein as the "Parties" and individually as a "Party". RECITALS WHEREAS, pursuant to two agreements between Black Beauty Land Company, Inc. ("Black Beauty") and Ark, dated March 4, 1986 which are more specifically identified on Exhibit A attached hereto (together, the "Mine Agreements"), Ark assigned to Black Beauty certain leases more specifically identified in said Mine Agreements; and WHEREAS, pursuant to the Mine Agreements, Ark retained an overriding royalty interest on coal mined and sold from the areas more specifically described in the Mine Agreements (together, the "Mine Areas"); and WHEREAS, Ark has agreed to pay to ACIN amounts received pursuant to the overriding royalty interest, if any, paid to Ark under the Mine Agreements; and WHEREAS, Arch desires to guarantee the payment of such amounts to ACIN on the terms and subject to the limitations specified herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. Each capitalized term used herein shall have the meanings specified below. "ACIN" shall have the meaning set forth in the Preamble. "Agreement" shall have the meaning set forth in the Preamble. "Arch" shall have the meaning set forth in the Preamble. "Ark" shall have the meaning set forth in the Preamble. "Black Beauty" shall have the meaning set forth in the Recitals. "Business Day" means a day (other than a Saturday or Sunday) on which banks generally are open in New York City for the conduct of substantially all of their commercial lending activities. "Guaranteed Obligations" means the obligation from time to time of Ark to pay the Royalties pursuant to Section 2.1 of this Agreement. "Mine Agreements" shall have the meaning set forth in the Recitals. "Mine Areas" shall have the meaning given such term in the Recitals. "Party" shall have the meaning set forth in the Preamble. "Royalties" shall mean all (a) "Advance Royalties" received by Ark pursuant to Section 8 of each Mine Agreement, and (b) "Overriding Production Royalties" received by Ark pursuant to Section 9 of each Mine Agreement. "Termination Date" means the date upon which (a) each Mine Agreement has been terminated, and (b) all Royalties have been paid by Ark and/or Arch to ACIN in accordance with the terms of this Agreement. Section 1.2 Gender, Parts, Articles and Sections. Whenever the context requires, the gender of all words used in this Agreement shall include masculine, feminine and neuter, and the number of all words shall include the singular and plural. All references to Article numbers and Section numbers refer to Articles and Sections of this Agreement. All defined terms shall be equally applicable to both the singular and plural forms of the term. ARTICLE II PAYMENT OBLIGATION Section 2.1 Payment. Ark hereby agrees to pay to ACIN any and all Royalties received by Ark from time to time. Ark hereby agrees to make such payments to ACIN within fifteen (15) days of Ark's receipt of such Royalties. If Ark fails to make such payment to ACIN within fifteen (15) days of receipt of the Royalties, interest shall accrue on the outstanding amount at the lesser of 10% per annum or the maximum rate permissible by applicable law until the date of payment, all such interest to be payable on demand. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (unless such next succeeding Business Day is after the Termination Date, in which event the due date shall be the immediately preceding Business Day). ARTICLE III GUARANTY Section 3.1 Guaranty. Arch hereby (a) absolutely, unconditionally and irrevocably guarantees to ACIN the full, punctual and prompt payment when due of the Guaranteed Obligations, and (b) indemnifies and holds harmless ACIN, its successors and assigns, from, and agrees to pay to ACIN, its successors and assigns, all reasonable costs and expenses (including reasonable counsel fees and expenses) incurred by ACIN in enforcing any of its rights under this Agreement; provided, however, Arch shall not be obligated to make any payment under this Section 3.1 until five (5) Business Days after Arch has received written demand therefor from ACIN, which demand shall set forth in reasonable detail the amount for which demand is being made. The guaranty in this Section 3.1 is a continuing guaranty, and shall apply to all 2 Guaranteed Obligations whenever arising and shall remain in full force and effect, and shall not be terminated until all Guaranteed Obligations and all costs and expenses have been paid in full. Section 3.2 Obligations Unconditional. Arch guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, and hereby waives any defenses that Arch or any other person liable for the Guaranteed Obligations may have or assert, other than the terms of this Agreement. Arch further waives notices of protest, presentment, demand (other than the demand for payment described in Section 3.1), nonpayment, nonperformance, promptness, diligence, default, dishonor and any other notice with respect to the Guaranteed Obligations and any requirement that ACIN exhaust any right or take any action against Ark or any other person. The liability of Arch under this Agreement to the fullest extent permitted by law shall be absolute and unconditional. Section 3.3 Insolvency of Ark. The obligation of Arch hereunder shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by ACIN for any reason, including, without limitation, the insolvency, bankruptcy or reorganization of Ark or otherwise, all as though such payment had not been made, and, in such event, Arch will pay to ACIN an amount equal to any such payment that has been rescinded or returned. The provisions of this Section 3.3 shall survive any release or termination of this Agreement. ARTICLE IV MISCELLANEOUS Section 4.1 Termination of the Agreement. Unless otherwise agreed upon by the parties to this Agreement, this Agreement shall terminate on the Termination Date and all obligations of Ark and, except as specified in Section 3.3, Arch hereunder shall immediately cease and Ark and Arch shall have the right to cancel all Royalty payments with respect to any transactions entered into from and after such date. Section 4.2 Notice. Any demand, notice, request, instruction, correspondence or other document to be given hereunder by Arch to ACIN or by ACIN to Ark or any other party to this Agreement (herein collectively called "Notice") shall be in writing and delivered personally or mailed, postage prepaid, or by telecopier, as follows: if to Arch: Arch Coal, Inc. CityPlace One, Suite 300 St. Louis, MO 63141 U.S.A. Attention: Robert G. Jones Facsimile: 314-994-2734 3 if to Ark: Ark Land Company CityPlace One, Suite 300 St. Louis, MO 63141 U.S.A. Attention: Robert G. Jones Facsimile: 314-994-2734 if to ACIN LLC: ACIN LLC P.O. Box 2827 1035 Third Avenue, Suite 300 Huntington, WV 25727 U.S.A. Attention: Nick Carter Facsimile: 304-522-5401 All such Notices shall be effective, if mailed, two Business Days after deposit in the mails; if sent by overnight courier, one Business Day after delivery to the courier company; and if sent by telecopier, when received by the receiving telecopier equipment, respectively; provided, however, that telecopied Notices received by any party after its normal business hours (or on a day other than a Business Day) shall be effective on the next Business Day. Section 4.3 Amendment or Waiver. No amendment, waiver, supplement or other modification of any provision of this Agreement shall be effective unless the same shall be in writing and signed by all parties to this Agreement and then such amendment, waiver, supplement or other modification shall be effective only in the specific instance and for the specific purpose for which given. Section 4.4 Successors and Assigns. This Agreement shall be binding upon Ark and Arch and their successors and assigns and shall inure to the benefit of and be enforceable by ACIN and its successors and assigns; provided that Ark and Arch may not assign or transfer any of their rights or obligations under this Agreement without the prior written consent of ACIN and its successors and assigns. Section 4.5 Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, then the validity, legality and enforceability of the remaining provisions or obligations, or such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. Section 4.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF MISSOURI. 4 Section 4.7 Captions. The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. Section 4.8 Further Assurances. On or after the execution of this Agreement, each Party, at the request of another Party, will execute and deliver to the requesting Party all such further agreements, contracts, instruments and other documents as the requesting Party may reasonably request in order to perform, accomplish, perfect or record, if reasonably necessary, the transactions contemplated by this Agreement and to otherwise carry out the intention of this Agreement. Section 4.9 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 5 IN WITNESS WHEREOF, Arch, Ark and ACIN have caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written. ARCH COAL, INC. By: /s/ Robert J. Messey ----------------------------------- Name: Robert J. Messey Title: Senior Vice President and Chief Financial Officer ARK LAND COMPANY By: /s/ Steven E. McCurdy ----------------------------------- Name: Steven E. McCurdy Title: President ACIN LLC By: NRP (Operating) LLC, ACIN LLC's sole member By: /s/ Nick Carter ----------------------------------- Name: Nick Carter Title: President EXHIBIT A 1. Mine Area Two Agreement dated March 4, 1986 between Black Beauty Land Company, Inc. and Ark Land Company, unrecorded (I-120-2). 2. Mine Area Three Agreement dated March 4, 1986 between Black Beauty Land Company, Inc. and Ark Land Company, unrecorded (I-120-3). EX-10.8 13 h04228exv10w8.txt PURCHASSE & SALE AGREEMENT EXHIBIT 10.8 ================================================================================ PURCHASE AND SALE AGREEMENT ================================================================================ By and Among EL PASO CGP COMPANY COASTAL COAL COMPANY, LLC COASTAL COAL - WEST VIRGINIA, LLC ANR WESTERN COAL DEVELOPMENT COMPANY (COLLECTIVELY "SELLERS") and CSTL LLC (Buyer) ==================== Covering the Acquisition of CERTAIN ASSETS OF COASTAL COAL COMPANY, LLC AND COASTAL COAL - WEST VIRGINIA, LLC AND ANR WESTERN COAL DEVELOPMENT COMPANY ==================== November 6, 2002 TABLE OF CONTENTS 1. DEFINITIONS AND INTERPRETATIONS 1.1. Definitions 1 1.2. Interpretations 1 2. PURCHASE AND SALE OF ASSETS 2.1. Purchase and Sale 1 2.2. Purchase Price 3 2.3. The Closing 3 2.4. Deliveries at the Closing 3 2.5. Assumed Liabilities 4 2.6. Retained Assets and Liabilities 4 3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION 3.1. Representations and Warranties Concerning the Sellers 4 3.2. Representations and Warranties of the Buyer 5 4. REPRESENTATIONS AND WARRANTIES CONCERNING THE ASSETS 4.1. Representations and Warranties Concerning the Assets 6 4.2. Limitations of Representations and Warranties 8 5. PRE-CLOSING COVENANTS 5.1. Satisfaction of Conditions Precedent 9 5.2. Notices and Consents 9 5.3. Operation of Business 9 5.4. Access to Information 10 5.5. Contact with Customers and Vendors 10 5.6. Amendment of Schedules 10 5.7 Financial Statements 11 6. POST-CLOSING COVENANTS 6.1. General 11 6.2. Delivery and Retention of Records 11 6.3. Employee Matters 12 7. CONDITIONS PRECEDENT 7.1. Conditions to Obligation of the Buyer 12 7.2. Conditions to Obligation of the Sellers 13
A-i 8. REMEDIES FOR BREACHES OF AGREEMENT 8.1. Survival of Representations, Warranties and Certain Covenants 14 8.2. Indemnification Provisions for Benefit of the Buyer 14 8.3. Indemnification Provisions for Benefit of the Sellers 15 8.4. Matters Involving Third Parties 15 8.5. Determination of Amount of Adverse Consequences 16 8.6. Tax Treatment of Indemnity Payments 16 9. TAX MATTERS 9.1. Post-Closing Tax Returns 16 9.2. Pre-Closing Tax Returns 16 9.3. Prorated Ad Valorem Taxes 17 9.4. Claims for Refund 17 9.5. Cooperation on Tax Matters 17 9.6. Certain Taxes 18 9.7. Confidentiality 18 9.8. Audits 18 9.9. Control of Proceedings 18 9.10. Powers of Attorney 18 9.11. Remittance of Refunds 18 9.12. Purchase Price Allocation 19 9.13. Closing Tax Certificate 19 10. TERMINATION OF AGREEMENT 10.1. Termination of Agreement 19 10.2. Effect of Termination 20 11. MISCELLANEOUS 11.1. Insurance 20 11.2. Press Releases and Public Announcements 20 11.3. No Third Party Beneficiaries 20 11.4. Succession and Assignment 20 11.5. Counterparts 20 11.6. Notices 20 11.7. Governing Law 21 11.8. Entire Agreement 21 11.9. Severability 22 11.10. Transaction Expenses 22
A-ii EXHIBITS Exhibit A: Definitions and Interpretations Exhibit B: Description of Assets Exhibit C: Form of Special Warranty Deed Exhibit D: Form of Assignment Agreement -Overriding Royalty Exhibit E: Form of Lease Agreements Exhibit F: Form of Assignment Agreement - Leases Exhibit G: Form of Bill of Sale Exhibit H: Disclosure Schedule Exhibit I: Form of Legal Opinions A-iii PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement") dated as of November 6, 2002 is by and among (1) EL PASO CGP COMPANY, a Delaware corporation ("El Paso CGP"); COASTAL COAL COMPANY, LLC, a Delaware limited liability company ("Coastal Coal"); COASTAL COAL - WEST VIRGINIA, LLC, a Delaware limited liability company ("Coastal Coal WV"); and ANR WESTERN COAL DEVELOPMENT COMPANY, a Delaware corporation ("ANR WCDC") (individually a "Seller" and collectively the "Sellers") and (2) CSTL LLC, a Delaware limited liability company, (the "Buyer"). The Sellers and the Buyer are sometimes referred to collectively herein as the "Parties" and individually as a "Party." RECITALS WHEREAS, El Paso CGP, directly and through subsidiaries owns (1) all of the outstanding membership interests of Coastal Coal and Coastal Coal WV and (2) all of the issued and outstanding stock of ANR WCDC; WHEREAS, Coastal Coal owns various real properties and coal reserves in Virginia and Kentucky and Coastal Coal WV owns various real properties and coal reserves in the state of West Virginia and each is qualified to do business in the respective states where it owns property; WHEREAS, ANR WCDC owns certain overriding royalty interests with respect to certain lignite reserves located in North Dakota; and WHEREAS, this Agreement contemplates a transaction in which the Buyer will purchase, and Coastal Coal, Coastal Coal WV and ANR WCDC (collectively, the "Seller Parties") will sell, certain of their respective rights, title and interests in and to such real properties, coal reserves and royalties in return for the consideration specified herein. NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATIONS 1.1 Definitions. Unless otherwise provided to the contrary in this Agreement, capitalized terms in this Agreement shall have the meanings set forth in Section 1.1 of Exhibit A. 1.2 Interpretations. Unless expressly provided to the contrary in this Agreement, this Agreement shall be interpreted in accordance with the provisions set forth in Section 1.2 of Exhibit A. ARTICLE II PURCHASE AND SALE OF ASSETS 2.1 Purchase and Sale. Subject to the terms and conditions of this Agreement, (a) the Seller Parties agree to sell to the Buyer, and the Buyer agrees to purchase from the Seller Parties all of such Seller Parties' right, title and interest in the following assets and properties (all of which are collectively referred to as the "Assets"): 1 (a) Coastal Coal Assets. Coastal Coal's right, title and interest in the following assets and properties (all of which are collectively referred to as the "Coastal Coal Assets"): (i) approximately 137,628 acres of surface and/or mineral estates located in Wise, Dickenson, Russell, Scott, and Lee Counties in Virginia and Bell, Breathitt, Clay, Floyd, Harlan, Knott, Leslie, Letcher, Perry and Pike Counties in Kentucky, and also certain non-coal properties located in Bedford, Botetourt, Carroll, Montgomery, Pulaski, Roanoke, Smyth, Tazewell, Washington and Wythe Counties, Virginia; Ashe County, North Carolina; Walker County, Georgia; and Archer, Coleman, Montague, Witchita, Young and Jack Counties, Texas (the "Coastal Coal Real Property"); (ii) all mineral and coal leases, surface leases, oil and gas agreements, timber agreements, servitudes, easements, roads, rights of access, ingress and egress and rights of way (collectively the "Coastal Coal Easements") relating to or useful in connection with the Coastal Coal Real Property and identified on Exhibit B; (iii) all records in the possession of the Sellers pertaining directly to the Coastal Coal Real Property or Coastal Coal Easements, including maps, files reserve information and other similar materials pertaining to such assets (the "Coastal Coal Records"); provided that Coastal Coal will be given reasonable access to the Coastal Coal Records as reasonably necessary to conduct coal mining operations and related activities pursuant to the Lease Agreements; and (iv) the tangible assets contained within or associated with the Coastal Coal land office at Hazard, Kentucky, including the office building, furniture, furnishings, file cabinets, computers, printers, vehicles, and related assets and the tangible assets contained within or associated with the loading facility known as Esco Dock located in Pike County, Kentucky (collectively the "Tangible Assets"). The Coastal Coal Real Property, Coastal Coal Easements and the Tangible Assets are more fully described in Exhibit B. (b) Coastal Coal WV Assets. Coastal Coal WV's right, title and interest in the following assets and properties (all of which are collectively referred to as the "Coastal Coal WV Assets"): (i) approximately 37,668 acres of surface and/or mineral estates located in Preston and Taylor Counties in West Virginia (the "Coastal Coal WV Real Property"); (ii) all mineral and coal leases, surface leases, oil and gas agreements, timber agreements, servitudes, easements, roads, rights of access, ingress and egress and rights of way (collectively the "Coastal Coal WV Easements") relating to or useful in connection with the Coastal Coal WV Real Property and identified on Exhibit B; and (iii) all records in the possession of the Sellers pertaining directly to the Coastal Coal Real Property or Coastal Coal Easements, including maps, files, reserve information and other similar materials pertaining to such assets (the "Coastal Coal WV Records"); provided that Coastal Coal WV will be given reasonable access to the Coastal Coal WV Records as reasonably necessary to conduct coal mining operations and related activities pursuant to the Lease Agreements. 2 The Coastal Coal WV Real Property and Coastal Coal WV Easements are more fully described in Exhibit B. (c) ANR WCDC Assets. ANR WCDC's right, title, and interest in the following assets and properties (all of which are collectively referred to as the "ANR WCDC Properties") (i) the Overriding Royalty Contract; and (ii) any maps, files, reserve information and other similar materials pertaining to the Overriding Royalty Contract (the "ANR WCDC Records"). For avoidance of doubt, the Assets shall not include any of the following: (a) the inventories owned by Coastal Coal and Coastal Coal WV (including inventories of extracted coal and other raw materials and supplies) that are located on or are in transit to the Sites (although Buyer shall receive all royalty attributable to such inventory, to the extent such coal is sold after the date hereof), (b) preparation plants, buildings, infrastructure, machinery, equipment, vehicles, furniture, supplies, replacement parts, tools and any other tangible personal property that are located on or are in transit to the Sites, (c) any leases, licenses, coal sale agreements, supply agreements, railroad agreements and any other agreements or contracts not specifically listed in Exhibit B to which the Seller Parties or their Affiliates are a party, whether written or oral, (d) any governmental licenses or permits relating to the Assets or the operation of the business of the Affiliates of the Sellers, and (e) any accounts, accounts receivable, notes and notes receivable, reclamation and performance bonds, deposit, pre-paid rentals and royalties, cash and cash equivalents and other securities and instruments. 2.2 Purchase Price. In consideration for the sale of the Assets, the Buyer agrees to pay to El Paso CGP (or its designee) at the Closing $69,000,000.00 (the "Purchase Price") payable by wire transfer of immediately available funds, and such payment shall constitute the receipt by each of the Sellers of the purchase price as allocated pursuant to Section 9.12 hereof. 2.3 The Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of El Paso CGP located at 1001 Louisiana Street, Houston, Texas 77002, commencing at 10:00 a.m. local time on the second business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated by this Agreement (other than conditions with respect to actions each Party will take at the Closing itself), or such other date as the Buyer and El Paso CGP may mutually determine (the "Closing Date"). 2.4 Deliveries at the Closing. At the Closing, (a) the Seller Parties will deliver to the Buyer the various certificates, instruments, and documents referred to in Section 7.1(d), (b) the Buyer will deliver to the Sellers the various certificates, instruments, and documents referred to in Section 7.2(d), (c) Coastal Coal and Coastal Coal WV, respectively, will execute and deliver to the Buyer one or more special warranty deeds substantially in the form attached as Exhibit C that are necessary to convey (i) the Coastal Coal Real Property and the Coastal Coal Easements and (ii) the Coastal Coal WV Real Property and the Coastal Coal WV Easements, together with sales listing forms required by applicable law, (d) ANR WCDC will execute and deliver to the Buyer and the Buyer will execute and deliver to the Sellers the Assignment Agreement substantially in the form attached as Exhibit D to transfer the Overriding Royalty Contract, (e) Coastal Coal and Coastal Coal WV, respectively, will execute and deliver to the Buyer and the Buyer will execute and deliver to the Sellers the Lease Agreements substantially in the form attached as Exhibit E with regard to (i) the lease of the Coastal Coal Real Property and such of the Coastal Coal Easements as are set forth therein to Coastal Coal for the purpose of mining, processing and transporting coal from such properties and (ii) the lease of the Coastal Coal WV Real Property and such 3 of the Coastal Coal WV Easements as are set forth therein to Coastal Coal WV for the purpose of mining, processing and transporting coal from such properties, (f) the Seller Parties will execute and deliver the Assignment Agreements substantially in the form of Exhibit F, assigning those leases identified in Exhibit B, (g) the Seller Parties will execute and deliver the Bill of Sale, substantially in the form of Exhibit G, transferring title to the Tangible Assets and (h) the Buyer will pay the Purchase Price by wire transfer to El Paso CGP (or its designees). 2.5 Assumed Liabilities. On the Closing Date, the Buyer will assume and will be obligated to fully and timely pay, perform, and discharge in accordance with their terms, only those liabilities specifically identified in Section 2.5 of the Disclosure Schedule (the "Assumed Liabilities"). 2.6 Retained Assets and Liabilities. On the Closing Date, El Paso CGP or its Affiliates shall retain and will be (a) obligated to fully and timely pay, perform and discharge in accordance with their terms and (b) entitled to receive any proceeds, recoveries (monetary or otherwise) and benefits, associated with the matters specifically identified in Section 2.6 of the Disclosure Schedule (the "Retained Assets and Liabilities"). On or prior to the Closing Date, to the extent permitted and required, the Sellers shall cause the Retained Assets and Liabilities to be assigned or otherwise transferred to El Paso CGP or its Affiliates. To the extent that any of the Retained Assets and Liabilities cannot be assigned or otherwise transferred to El Paso CGP or its designee prior to the Closing Date (including where such an assignment or transfer would constitute a breach or default under any agreement, encumbrance or commitment, would violate any Law or would in any way adversely affect the rights or increase the obligations of El Paso CGP or its designee), then the Buyer will execute and deliver any other documents, certificates, agreements and other writings, and take such other actions, in each case, as may be reasonably necessary, desirable or requested by El Paso CGP in order to provide or impose upon El Paso CGP or its designee the benefits and the obligations associated with such Retained Assets and Liabilities. ARTICLE III REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION 3.1 Representations and Warranties Concerning the Sellers. Except as set forth in the Disclosure Schedule set forth in Exhibit H, the Sellers represent and warrant to the Buyer as follows: (a) Organization of the Sellers and Affiliates. Each of El Paso CGP and ANR WCDC is a corporation, each of which is duly organized, validly existing, and in good standing under the Laws of the state of Delaware. Each of Coastal Coal and Coastal Coal WV is a limited liability company, each of which is duly organized, validly existing, and in good standing under the Laws of the state of Delaware. Each of the Sellers is duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the ownership or leasing of its properties makes such qualification necessary, except where the failure to qualify would not have a material adverse effect on the Sellers or their ability to consummate the transactions contemplated by this Agreement. El Paso CGP, directly or through subsidiaries, owns (i) all of the outstanding membership interests of Coastal Coal and Coastal Coal WV and (ii) all of the issued and outstanding shares of ANR WCDC. (b) Authorization of Transaction. Each of the Sellers has full power and authority (including full company power and authority) to execute and deliver this Agreement and to perform its obligations under this Agreement. This Agreement constitutes the valid and legally binding obligation of each of the Sellers enforceable in accordance with its terms and conditions, subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights 4 generally, and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). None of the Sellers need give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Authority in order to consummate the transactions contemplated by this Agreement. (c) Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any Governmental Authority to which any of the Sellers is subject or any provision of their Organizational Documents or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which any of the Sellers is a party or by which it is bound or to which any of its assets is subject, except for (x) required consents to transfer and related provisions as set forth in Schedule 3.1(c) of the Disclosure Schedule, (y) any other third-party approvals or consents contemplated in this Agreement; and (z) such violations, defaults, breaches, or other occurrences that do not have a Material Adverse Effect on the ability of any of the Sellers to consummate the transactions contemplated by this Agreement. (d) Brokers' Fees. Neither the Sellers nor their Affiliates have any liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Buyer could become liable or obligated. (e) Solvency. As of the date of this Agreement, and after consummation of the transactions contemplated by this Agreement, none of the Sellers are insolvent or unable to pay its debts or have made a general assignment with or for the benefit of its creditors, and no proceeding under any bankruptcy, insolvency or reorganization law has been commenced by or with respect to any of the Sellers. 3.2 Representations and Warranties of the Buyer. The Buyer hereby represents and warrants to the Sellers as follows: (a) Organization of the Buyer. The Buyer is a limited liability company duly organized, validly existing, and in good standing under the Laws of the state of Delaware. (b) Authorization of Transaction. The Buyer has full power and authority (including full company power and authority) to execute and deliver this Agreement and to perform its obligations under this Agreement. This Agreement constitutes the valid and legally binding obligation of the Buyer, enforceable in accordance with its terms and conditions, subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium, or similar Laws affecting creditors' rights generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Buyer need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Authority in order to consummate the transactions contemplated by this Agreement. (c) Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any Governmental Authority to which the Buyer is subject or any provision of its Organizational Documents or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any Party the right to 5 accelerate, terminate, modify, or cancel, or require any notice, approval or consent under any agreement, contract, lease, license, instrument, or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject, except for such violations, defaults, breaches, or other occurrences that do not, individually or in the aggregate, have a material adverse effect on the ability of the Buyer to consummate the transactions contemplated by this Agreement. (d) Brokers' Fees. The Buyer has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Sellers or its Affiliates could become liable or obligated. (e) Financing. The Buyer has sufficient immediately available funds to enable it to make payment of the Purchase Price at Closing without encumbrance or delay and without causing the Buyer to become insolvent or to declare insolvency. The Buyer expressly acknowledges that, in executing this Agreement, the Sellers are relying on the Buyer's representation with regard to the availability of the necessary funds for the payment of the Purchase Price upon Closing and that there is no condition precedent under this Agreement with regard to the Buyer's ability to obtain financing. (f) Sellers' Breach of Representation or Warranty. To the Buyer's Knowledge as of the date of this Agreement, there is no fact or circumstance that would cause the Sellers to be in breach of any representation or warranty set forth in this Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES CONCERNING THE ASSETS 4.1 Representations and Warranties Concerning the Assets. Except as set forth in the Disclosure Schedule set forth in Exhibit G, the Sellers represent and warrant to the Buyer as follows: (a) Title to the Real Property. To the Sellers' Knowledge, the Assets are free and clear of all Encumbrances, except for (i) Permitted Encumbrances, (ii) the Encumbrances disclosed in the Disclosure Schedule and (iii) Encumbrances which do not have a Material Adverse Effect. The Sellers have delivered or made available to the Buyer all material title reports, title insurance policies, title commitments, title opinions and title abstracts relating to the Coastal Coal Real Property and Easements and the Coastal Coal WV Real Property and Easements (the "Title Information") which are in the possession and control of the Sellers. To Sellers' Knowledge, all Title Information is true and accurate except to the extent such inaccuracy would not have a Material Adverse Effect or as set forth in the Disclosure Schedule. (b) No Adverse Claims. To the Sellers' Knowledge, there are no adverse claims to any of the Coastal Coal Real Property and Easements or the Coastal Coal WV Real Property and Easements, except for (i) Permitted Encumbrances, (ii) those claims which would not have a Material Adverse Effect, and (iii) those claims disclosed in the Disclosure Schedule. There are no eminent domain, zoning or condemnation proceedings pending, or to the Sellers' Knowledge, threatened against any of (i) the Coastal Coal Real Property or Easements or (ii) the Coastal Coal WV Real Property or Easements, except such proceedings that would not have a Material Adverse Effect. (c) Contracts and Commitments. The Overriding Royalty Contract is in full force and effect, except where the failure to be in full force and effect would not have a Material Adverse Effect. To the Sellers' Knowledge, ANR WCDC has performed all material obligations required to be performed by it to date under the Overriding Royalty Contract, and is not in default under any material 6 obligation of such contracts, except when such default would not have a Material Adverse Effect. To the Sellers' Knowledge, the Outleases are in full force and effect and each party thereto has performed all material obligations required to be performed by it under such Outleases, and is not in default under any material obligation of such Outleases, except when such default would not have a Material Adverse Effect. (d) Material Change. To the Sellers' Knowledge, since October 1, 2002 there has been no Material Adverse Effect. (e) Tax Matters. Except as would not have a Material Adverse Effect: (i) There is no dispute or claim concerning any Tax liability with respect to the Assets claimed or raised by any authority in writing. (ii) There are no outstanding agreements or waivers extending the statutory period of limitations applicable to any Tax Returns required to be filed by or with respect to the Assets and for which the Buyer may be responsible. (iii) Each of the Seller's Affiliates has filed all Tax Returns with respect to the Assets that it was required to file and such Tax Returns (with respect to the Assets) are accurate in all respects. All Taxes shown as due with respect to the Assets on any such Tax Returns have been paid. (iv) To Sellers' Knowledge, no special assessments for improvements are outstanding or have been completed as of the date of this Agreement. (f) Litigation. Section 4.1(f) of the Disclosure Schedule sets forth each instance in which any of the Assets (i) is subject to any outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is the subject of any action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction, or is the subject of any pending or, to the Sellers' Knowledge, threatened claim, demand, or notice of violation or liability from any Person, except where any of the foregoing would not have a Material Adverse Effect. (g) Environmental Matters. To the Sellers' Knowledge: (i) With respect to the Assets, each of Coastal Coal and Coastal Coal WV is in compliance with all applicable federal, state and local Laws (including common law) relating to the protection of the environment as in effect on or before the date of this Agreement, including, without limitation, the Surface Mining Control and Reclamation Act of 1977, 30 U.S.C. section 1201 et seq., the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. section 9601, et seq. ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. section 6901, et seq., the Clean Air Act, as amended, 42 U.S.C. section 7401, et seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. section 1251, et seq., and the Oil Pollution Act of 1990, 33 U.S.C. section 2701, et seq. and the statutes, regulations, rules and orders of all agencies responsible for supervision and enforcement of environmental and mining laws of Kentucky, Virginia and West Virginia (collectively, the "Environmental Laws" and individually an "Environmental Law"), except as set forth in Section 4.1(g) of the Disclosure Schedule, and except for such instances of noncompliance that do not have a Material Adverse Effect. 7 (ii) Each of Coastal Coal and Coastal Coal WV, with respect to the Assets, has obtained all permits, licenses, franchises, authorities, consents, and approvals, and has made all filings and maintained all material information, documentation, and records, as necessary under applicable Environmental Laws for operating its assets and business as it is presently conducted, and all such permits, licenses, franchises, authorities, consents, approvals, and filings remain in full force and effect, except as set forth in Section 4.1(g) of the Disclosure Schedule, and except for such matters that do not have a Material Adverse Effect. (iii) Except as set forth in Section 4.1(g) of the Disclosure Schedule, and except as does not have a Material Adverse Effect, (A) there are no pending or, to the Sellers' Knowledge, threatened claims, demands, actions, administrative proceedings or lawsuits against either of Coastal Coal or Coastal Coal WV, with respect to the Assets under any Environmental Laws and none of the Sellers has any Knowledge (without any obligation of due inquiry) of facts which would give rise to the same and (B) none of the Assets are, subject to any outstanding injunction, judgment, order, decree or ruling, under any Environmental Laws. (iv) None of the Sellers has received any written notice that either Coastal Coal or Coastal Coal WV, with respect to the Assets, is or may be a potentially responsible party under CERCLA or any analogous state law in connection with any site actually or allegedly containing or used for the treatment, storage or disposal of Hazardous Substances. None of the Sellers makes any representation or warranty relating to any Environmental Law, except as expressly set forth in this Section 4.1(g). Notwithstanding anything to the contrary in this Section 4.1(g), none of the Sellers makes any representation or warranty in this Section 4.1(g) with respect to the lands associated with the Overriding Royalty Contract. (h) Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any Governmental Authority to which any Asset or the Sellers are subject or (ii) to the Sellers' Knowledge, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice or trigger any rights to payment or other compensation under any agreement, contract, lease, license, instrument, or other arrangement to which any Asset is subject, except for (xx) required consents to transfer and related provisions and any other third party appraisals or consents contemplated in this Agreement or (yy) where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, right to payment or other compensation, or Encumbrance would not have a Material Adverse Effect, or would not materially adversely affect the ability of the Sellers to consummate the transactions contemplated by this Agreement. None of the Sellers needs to give notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Authority in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent, or approval would not have a Material Adverse Effect or would not materially adversely affect the ability of the Sellers to consummate the transactions contemplated by this Agreement. 4.2 Limitations of Representations and Warranties. The following limitations apply with regard to any representations and warranties by the Sellers: (a) The Buyer acknowledges that (i) it has had and pursuant to this Agreement will have before Closing access to the Sellers, the Assets, and the officers and employees of the Sellers and 8 (ii) in making the decision to enter into this Agreement and consummate the transactions contemplated hereby, the Buyer has relied solely on the basis of its own independent investigation and upon the express representations, warranties, covenants, and agreements set forth in this Agreement. Without limiting the above, Buyer has, prior to the execution and delivery of this Agreement, (i) reviewed the environmental site assessments of some of the Coastal Coal and Coastal Coal WV Real Property (the "Real Property") that were provided to the Buyer and are more fully described in Section 4.2 of the Sellers' Disclosure Schedule, (ii) had full opportunity to conduct to its satisfaction inspections of the Real Property, and (iii) fully completed all inspections of the Real Property. Buyer acknowledges, after such review and inspections, that no further investigation of the Real Property is necessary for purposes of acquiring the Assets for Buyer's intended use. THE BUYER ACKNOWLEDGES THAT THERE ARE NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT. (b) WITHOUT LIMITING THE ABOVE, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, THE SELLERS MAKE NO AND DISCLAIM ANY REPRESENTATION OR WARRANTY, WHETHER EXPRESS OR IMPLIED, AND WHETHER BY COMMON LAW, STATUTE, OR OTHERWISE REGARDING ALL GEOLOGICAL DATA, RESERVE OR RESOURCE DATA, SUFFICIENCY OF MINING RIGHTS (EXCEPT AS EXPRESSLY SET FORTH IN SECTION 4.1(a) ABOVE), PROCESSING CAPABILITIES OF THE ASSETS, MINEABILITY OF COAL, QUALITY OF COAL RESERVES AND INVENTORIES. THE ACREAGES OF THE COASTAL COAL REAL PROPERTY AND THE COASTAL COAL WV REAL PROPERTY SET FORTH IN THIS AGREEMENT ARE APPROXIMATIONS AND ANY REPRESENTATION OR WARRANTY WITH RESPECT THERETO IS DISCLAIMED. ARTICLE V PRE-CLOSING COVENANTS 5.1 Satisfaction of Conditions Precedent. From the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement, each Party will use all commercially reasonable efforts to take all action and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement, including without limitation the satisfaction of the conditions precedent set forth in Article VII. Without limiting the generality of the foregoing, the Buyer and the Sellers agree to cooperate to take all commercially reasonable actions to satisfy the conditions precedent and consummate the transactions contemplated under this Agreement not later than December 31, 2002. 5.2 Notices and Consents. From the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement, the Sellers will give any notices to third parties, and will use its commercially reasonable efforts to obtain the third party consents, listed on Section 5.2 of the Disclosure Schedule. Each of the Parties will give any notices to, make any filings with, and use all commercially reasonable efforts to obtain any authorizations, consents, and approvals of Governmental Authorities. 5.3 Operation of Business. From the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement, the Sellers will not, without the consent of the Buyer (which consent shall not be unreasonably withheld or delayed), except as expressly contemplated by this Agreement or Section 5.3 of the Disclosure Schedule, engage in any practice, take any action, or enter into any transaction outside the Ordinary Course of Business. Without limiting the generality of the foregoing, the Sellers will not, without the consent of the Buyer (which consent shall not be unreasonably 9 withheld, delayed or conditioned), except as expressly contemplated by this Agreement or as set forth in Section 5.3 of the Disclosure Schedule, do any of the following: (a) cause or allow any of the Assets to become subject to an Encumbrance, except for Permitted Encumbrances and other Encumbrances identified in Section 5.3(a) of the Disclosure Schedule; or (b) except in the Ordinary Course of Business, amend in any material respect, or terminate the Overriding Royalty Contract or any material agreement, contract, lease, license or other instrument affecting or related to the Coastal Coal Assets or the Coastal Coal WV Assets before the expiration of the term thereof, other than to the extent the Overriding Royalty Contract or any of them terminate or are terminable pursuant to their respective terms in the Ordinary Course of Business. Notwithstanding anything to the contrary above, El Paso CGP shall have the right to negotiate and enter into agreements with third parties to purchase the equity interests in Coastal Coal, Coastal Coal WV and other Affiliates of the Sellers at any time during the term of this Agreement. 5.4 Access to Information. The Sellers will permit representatives of the Buyer to have reasonable access at all reasonable times, and in a manner so as not to interfere with the normal business operations of Coastal Coal, Coastal Coal WV and ANR WCDC to all premises, properties, personnel, books, records (including Tax records), contracts, and documents of or pertaining to the Assets. Any information obtained by the Buyer, its employees, representatives, consultants, attorneys, agents, lenders and other advisors under this Section 5.4 shall be subject to the confidentiality and use restrictions contained in the Confidentiality Agreement. All "due diligence" activities of the Buyer shall be conducted in accordance with applicable Laws and the Buyer shall indemnify the Sellers and their Affiliates from and against all damages, losses and liabilities incurred as a result of such activities. During the period prior to Closing, in no event shall Buyer or its Affiliates or their respective officers, directors, employees, counsel, financial advisors or other representatives be permitted to conduct Phase II environmental assessments or any other sampling or testing of soil and/or ground or surface water at, or under, any real property associated with the Subject Assets, without the prior written consent of the Sellers, which consent shall not be unreasonably withheld or delayed. 5.5 Contact with Lessees, Customers and Vendors. The Buyer shall not, prior to the Closing Date, contact any lessee, customer, vendor, supplier or employee of, or any other Person having business dealings with, Sellers or their Affiliates with respect to any aspect of the Assets or the transactions contemplated hereby, without the prior consent of the Sellers, which consent shall not be unreasonably withheld or delayed. 5.6 Amendment of Schedules. Each Party agrees that, with respect to the representations and warranties of such Party contained in this Agreement, such Party shall have the continuing obligation until the Closing to supplement or amend the Disclosure Schedules applicable to that Party with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedules. For the purposes of determining whether the conditions set forth in Article VII have been fulfilled, the Disclosure Schedules shall be deemed to include only that information contained therein on the date of this Agreement and shall be deemed to exclude all information contained in any supplement or amendment thereto. However, if the Closing shall occur, then all matters disclosed pursuant to any such supplement or amendment at or prior to the Closing shall be deemed included in the Disclosure Schedule and no Party shall be entitled to make a claim for indemnification under this Agreement with regard to such 10 supplemental information based on the absence of any such supplemental information in the Disclosure Schedule as of the date of this Agreement, pursuant to the terms of this Agreement. 5.7 Financial Statements. As soon as practicable following the date of this Agreement, the Sellers and the Buyer will cooperate in communicating with the Securities and Exchange Commission ("SEC") to determine the form and the periods of the audited financial statements and unaudited interim financial statements acceptable to the SEC to be filed by the Buyer in its Form 8-K and related amendment thereto regarding the purchase of the Assets. As soon as practicable following the date of this Agreement, (i) the Sellers shall provide financial statements and footnotes to the Buyer and its auditors and (ii) upon receipt of such financial statements and footnotes from the Seller, the Buyer will cause its auditors to commence an audit of the applicable financial statements. Upon receiving the response from the SEC detailing the form and the periods of such financial statements, the Seller shall provide financial statements and footnotes in the form agreed-upon by the SEC to the Buyer and its auditors. The Sellers shall cooperate fully with the Buyer and its auditors in completing the required audit(s) of annual periods and review(s) of interim periods in a timely manner, allowing the Buyer to file the required Form 8-K and 8-K amendment(s) in accordance with Regulation S-K and S-X. The audit(s) and interim period review(s) shall be completed prior to the Closing Date. The fees and costs of audit(s) and interim period review(s) shall be borne by the Buyer. ARTICLE VI POST-CLOSING COVENANTS 6.1 General. In case at any time after the Closing any further action is necessary to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as the other Parties reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Article VIII). 6.2 Delivery and Retention of Records. On or before sixty (60) days after the Closing Date, at the Buyer's request, the Sellers will deliver or cause to be delivered to the Buyer at its office in Huntington, West Virginia or Hazard, Kentucky, or such other mutually agreeable location, all files, records, information and data relating to the Coastal Coal Records, the Coastal Coal WV Records and the ANR WCDC Records (collectively, the "Records"). Each of the Sellers (and their successors and assigns) may retain a copy of the Records to the extent that they relate to the operation of their businesses. The Buyer agrees to (a) hold the Records and not to destroy or dispose of any portion thereof for a period of ten years from the Closing Date or such longer time as may be required by Law, provided that, if it desires to destroy or dispose of such Records during such period, it will first offer in writing at least sixty (60) days before such destruction or disposition to surrender them to the Sellers and if the Sellers do not accept such offer within twenty (20) days after receipt of such offer, the Buyer may take such action and (b) following the Closing Date to afford (i) the Sellers, (ii) the Sellers' successors and assigns and (iii) any of their accountants, and counsel, during normal business hours, upon reasonable request, at any time, full access to the Records and to the Buyer's employees at no cost to the Sellers (other than for reasonable out-of-pocket expenses); provided that such access will not be construed to require the disclosure of Records that would cause the waiver of any attorney-client, work product or like privilege; provided, further, that in the event of any litigation nothing herein shall limit any Party's rights of discovery under applicable Law. Nothing herein shall impose any liability upon Buyer in the event of destruction or loss of any Records as a result of casualty. The Buyer agrees to provide the Sellers and their successors and assigns to the interests in Coastal Coal, Coastal Coal WV and their Affiliates involved in the coal mining business reasonable access to the Records after the Closing Date in order for 11 Sellers to comply with their obligations under this Agreement (including without limitation, the preparation of the Closing Date Statement, the preparation of any required tax returns in accordance with this Agreement and to comply with any indemnity obligations), to conduct any historical audit of the financial statements of Coastal Coal and Coastal Coal WV in accordance with generally accepted accounting principles and in accordance with Regulation S-X of the Securities and Exchange Commission and, to the extent required, to perform any obligations or to receive any benefits associated with the Retained Assets and Liabilities. The Sellers agree (and shall bind its successors and assigns) to keep the terms and conditions of the Outleases confidential; provided that the Sellers shall not be obligated to keep such terms and conditions confidential to the extent that they are already in possession of the public or becomes available to the public other than through the act or omission of the Sellers in breach hereof. 6.3 Employee Matters. As of the Closing Date, the employees listed on Section 6.3 of the Disclosure Schedule as of the Closing (the "Current Employees") shall be offered employment with the Buyer or its Affiliates in the same positions, at the same level of wages and/or salary, and at a work location which is within 50 miles of their work location immediately prior to the Closing Date; provided, however, except as may be specifically required by applicable Law or any contract, neither the Buyer nor its Affiliates, on the one hand, nor any employee, on the other hand, shall be obligated to continue any employment relationship or any specific terms of employment for any specific period of time. As of the Closing Date, all Current Employees shall cease active participation in all employee benefit plans and arrangements of the Sellers and their Affiliates. As of the first day following the Closing Date, all Current Employees shall be permitted to participate in the employee benefits plans and arrangements of the Buyer and its Affiliates on the same terms as similarly situated employees of the Buyer or any of its Affiliates. To the extent any employee benefit plan, program or policy of the Buyer or their Affiliates is made available to the Current Employees immediately prior to the Closing Date with respect to any welfare benefit plans to which such employees may become eligible, the Buyer or its Affiliates shall cause such plans to provide credit for any co-payments or deductibles by such employees and waive all pre-existing condition exclusions and waiting periods, other than limitations or waiting periods that have not been satisfied under any welfare plans maintained by the Seller and its Affiliates for their employees prior the Closing Date. ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Obligation of the Buyer. The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) the representations and warranties of the Sellers contained in Section 3.1 and Article IV shall be true and correct when made and as of the Closing Date (other than representations and warranties that are made as of a specific date which shall have been true and correct as of such date), except to the extent that any failures of such representations and warranties to be so true and correct would not have a Material Adverse Effect; provided, however, that if any representation and warranty of the Sellers is determined to be untrue or incorrect prior to the Closing Date and such failure of such representation and warranty to be so true and correct would have a Material Adverse Effect, then the Buyer shall notify the Sellers upon such determination, and the Sellers shall have the right, but not the obligation, to cure such failure on or before the Closing Date, in which case, if cured, such failure shall be deemed to have been waived; 12 (b) the Sellers shall have performed and complied with all of its covenants hereunder through the Closing except to the extent that any failure to perform or comply would not have a Material Adverse Effect; (c) there shall not be any injunction, judgment, order, decree, ruling, or charge in effect preventing consummation of any of the transactions contemplated by this Agreement; (d) the Sellers shall have delivered to the Buyer an officer's certificate to the effect that each of the conditions specified in subsections 7.1(a)-(c) is satisfied in all respects; (e) any governmental approvals required to consummate the transactions contemplated by this Agreement shall have been received; (f) the Buyer shall have either (i) completed the audit requirements with respect to the Assets in accordance with the SEC Requirements as set forth in Section 5.7(b) or (ii) shall have reasonably determined that, based upon its review of the Sellers' accounting records, the SEC Requirements will be capable of being completed in a reasonable period of time; and (g) the Sellers shall have delivered to the Buyer an opinion of Robert W. Baker, Senior Vice President and Deputy General Counsel of El Paso (relying to the extent deemed necessary by such counsel on the opinion of Delaware counsel), or other counsel to the Sellers that is reasonably acceptable to the Buyer, substantially in the form attached as Exhibit I. The Buyer may waive any condition specified in this Section 7.1 if it executes a writing so stating at or before the Closing. 7.2 Conditions to Obligation of the Sellers. The obligation of the Sellers to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) the representations and warranties of the Buyer contained in Section 3.2 shall be true and correct when made and as of the Closing Date (other than representations and warranties that are made as of a specific date which shall have been true and correct as of such date), except to the extent that any failures of such representations and warranties to be so true and correct would not have a material adverse effect on the Sellers; provided, however, that if any representation and warranty of the Buyer is determined to be untrue or incorrect prior to the Closing Date and such failure of such representation and warranty to be so true and correct would have a material adverse effect, then Sellers shall notify Buyer upon such determination, and Buyer shall have the right, but not the obligation, to cure such failure on or before the Closing Date, in which case, if cured, such failure shall be deemed to have been waived; (b) the Buyer shall have performed and complied with all of its covenants hereunder through the Closing except to the extent any failure to perform or comply would not have a material adverse effect on the Sellers; (c) there shall not be any injunction, judgment, order, decree, ruling, or charge in effect preventing consummation of any of the transactions contemplated by this Agreement; (d) the Buyer shall have delivered to the Sellers a certificate to the effect that each of the conditions specified in subsections 7.2(a)-(c) is satisfied in all respects; 13 (e) any governmental approvals required to consummate the transactions contemplated by this Agreement shall have been received; (f) all third party consents required to effectuate the transaction under this Agreement have been received by the Sellers on terms acceptable to it, in its sole discretion; and (g) the Buyer shall have delivered to the Sellers an opinion of the law firm of Huddleston, Bolen, Beatty, Porter & Copen LLP (relying to the extent deemed necessary by such counsel on the opinion of Delaware counsel), or other counsel to the Buyer that is reasonably acceptable to the Seller, substantially in the form attached as Exhibit I. The Sellers may waive any condition specified in this Section 7.2 if it executes a writing so stating at or before the Closing. ARTICLE VIII REMEDIES FOR BREACHES OF AGREEMENT 8.1 Survival of Representations, Warranties and Certain Covenants. (i) All of the representations and warranties of the Sellers contained in Articles III and IV and in any documentation or certificates delivered pursuant to Section 7.1(d) or as described in Section 2.1 shall survive the Closing under this Agreement for a period of two years after the Closing Date; (ii) the representations and warranties in Section 4.1(e) shall survive the Closing with respect to any given claim that would constitute a breach of such representation or warranty until the earlier of four (4) years from the Closing Date or the expiration of the statute of limitations applicable to the underlying Tax matter giving rise to that claim; and (iii) the representations and warranties in Section 4.1(g) shall survive the Closing under this Agreement for a period of three years after the Closing Date. The representations and warranties of the Buyer contained in Section 3.2 shall survive the Closing for a period of two years after the Closing Date. The covenants contained in this Agreement to be performed after the Closing shall survive the Closing indefinitely. 8.2 Indemnification Provisions for Benefit of the Buyer. (a) El Paso CGP shall indemnify and hold Buyer harmless from and against any and all Adverse Consequences whatsoever arising out of or resulting from: (i) Any breach of warranty or misrepresentation by the Sellers or the nonperformance of any covenant or obligation to be performed by the Sellers to the extent that and only to the extent that (A) there is an applicable survival period pursuant to Section 8.1; and that (B) the Buyer makes a written claim for indemnification against the Sellers pursuant to Section 11.6 within such survival period; (ii) Any liability arising out of the ownership, conduct or operation of the Assets prior to the Closing Date (other than the Assumed Liabilities) to the extent that the Buyer makes a written claim for indemnification against the Sellers pursuant to Section 11.6 within five years of the Closing Date; (iii) Any claim which may be asserted against the Buyer or any of the Assets, by any of the Sellers' employees, independent contractors, their employees, or agents with respect to liabilities incurred by or on the Sellers' behalf prior to the Closing Date, whether covered by a collective bargaining agreement or not, including labor costs, severance pay, pension benefits, employee benefits, 14 workers' compensation, vacation and holiday benefits, sick pay, multiemployer withdrawal liability, any and all employee benefits, and any other costs associated therewith; (iv) Any attempt (whether or not successful) by any person to cause or require Buyer to pay or discharge any debt, obligation or liability relating to the Sellers not associated with the Assets or an Assumed Liability. (b) Limitations of Indemnification. The following limitations shall apply with regard to the Sellers' obligations to indemnify the Buyer Indemnitees pursuant to this Section 8.2: (i) The Sellers' and their Affiliates' liability under this Agreement shall not exceed 25% of the Purchase Price paid in accordance with Section 2.2. The limitations on Sellers' indemnification obligations set forth in the prior sentence shall not apply to losses resulting from fraud or willful misconduct by the Sellers. (ii) The Sellers and their Affiliates will have no liability for any Adverse Consequences, unless and until the aggregate Adverse Consequences for which the Buyer Indemnitees are entitled to recover under this Agreement exceeds 1% of the Purchase Price paid in accordance with Section 2.2 (the "Threshold Amount"); provided, however, once such amount exceeds the Threshold Amount, the Buyer Indemnitees will be entitled to recover all amounts to which they are entitled in excess of the Threshold Amount, subject to the limitations set forth in (i) above. (iii) The Sellers and their Affiliates shall not be liable to the Buyer Indemnitees for any Adverse Consequences associated with a claim that is based upon any fact, matter or circumstance within the actual knowledge of the Buyer, the Buyer Indemnitees and their Affiliates as of the date hereof, as well as such facts, matters or circumstances which before the Closing Date had been communicated to the Buyer, the Buyer Indemnitees or their Affiliates in writing. (iv) The Buyer acknowledges and agrees that the indemnification provisions in this Article VIII and the termination rights in Section 10.1 shall be the exclusive remedies of the Buyer, the Buyer Indemnitees and their Affiliates with respect to the transactions contemplated by this Agreement. Furthermore, the Buyer waives any right to assert any claim or otherwise hold any of the Sellers, other than El Paso CGP, liable for or responsible for any indemnification of the Buyer Indemnitees and their Affiliates under this Agreement, with it being acknowledged that only El Paso CGP shall be liable for or responsible for indemnifying the Buyer Indemnitees and their Affiliates under this Agreement. 8.3 Indemnification Provisions for Benefit of the Sellers. The Buyer shall indemnify and hold the Sellers forever harmless from and against all Adverse Consequences whatsoever arising out of or resulting from: (a) Any breach of warranty or misrepresentation by the Buyer contained herein, or the non-performance of any covenant or obligation to be performed by the Buyer to the extent that and only to the extent that (A) there is an applicable survival period pursuant to Section 8.1; and that (B) the Sellers make a written claim for indemnification against the Buyer pursuant to Section 11.6 within such survival period; or (b) The ownership, conduct or operation of the Assets from and after the Closing Date and any Assumed Liability. 15 8.4 Matters Involving Third Parties. (a) If any third party shall notify any Party (the "Indemnified Party") with respect to any matter (a "Third Party Claim") that may give rise to a right to claim for indemnification against any other Party (the "Indemnifying Party") under Section 8.2 or Section 8.3, then the Indemnified Party shall promptly (and in any event within five business days after receiving notice of the Third Party Claim) notify the Indemnifying Party thereof in writing. (b) The Indemnifying Party will have the right to assume and thereafter conduct the defense of the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party; provided, however, that the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably) unless the judgment or proposed settlement involves only the payment of money damages and does not impose an injunction or other equitable relief upon the Indemnified Party. (c) Unless and until the Indemnifying Party assumes the defense of the Third Party Claim as provided in subsection 8.4(b), the Indemnified Party may defend against the Third Party Claim in any manner it reasonably may deem appropriate. (d) In no event will the Indemnified Party consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party which consent shall not be withheld unreasonably. 8.5 Determination of Amount of Adverse Consequences. The Adverse Consequences giving rise to any indemnification obligation hereunder shall be limited to the actual loss suffered by the Indemnified Party (i.e., reduced by any insurance proceeds or other payment or recoupment received, realized or retained by the Indemnified Party as a result of the events giving rise to the claim for indemnification), net of any reduction in Taxes of the Indemnified Party (or the affiliated group of which it is a member) occasioned by such loss or damage. The amount of the actual loss and the amount of the indemnity payment shall be computed by taking into account the timing of the loss or payment, as applicable, using a 10% interest or discount rate, as appropriate. Upon the request of the Indemnifying Party, the Indemnified Party shall provide the Indemnifying Party with information sufficient to allow the Indemnifying Party to calculate the amount of the indemnity payment in accordance with this Section 8.5. An Indemnified Party shall take all reasonable steps to mitigate damages in respect of any claim for which it is seeking indemnification and shall use reasonable efforts to avoid any costs or expenses associated with such claim and, if such costs and expenses cannot be avoided, to minimize the amount thereof. 8.6 Tax Treatment of Indemnity Payments. All indemnification payments made under this Agreement, including any payment made under Article VIII, shall be treated as purchase price adjustments for Tax purposes. ARTICLE IX TAX MATTERS 9.1 Post-Closing Tax Returns. The Buyer shall prepare or cause to be prepared and file or cause to be filed any Post-Closing Tax Returns with respect to the Assets. The Buyer shall pay (or shall cause to be paid) any Taxes due with respect to such Tax Returns. 16 9.2 Pre-Closing Tax Returns. The Sellers shall prepare or cause to be prepared and file or cause to be filed all Pre-Closing Tax Returns with respect to the Assets. The Sellers shall pay (or cause to be paid) any Taxes due with respect to such Tax Returns. 9.3 Prorated Ad Valorem Taxes.Ad valorem real property taxes on the Assets shall be prorated and adjusted on the basis of the actual days in the fiscal year, the Sellers to have the last day, to and including the date of Closing. Taxes for all prior years shall be paid by the Sellers. If the Closing shall occur before the tax rate is fixed for the then current fiscal year, the apportionment of taxes shall be upon the basis of the tax rate for the preceding year applied to the latest assessed valuation. General assessments, whether matured or unmatured, shall be paid in full by the Sellers. All other assessments shall be paid by the Buyer. It is acknowledged by the Parties that the Buyer is purchasing certain real property (the Coastal Coal and Coastal Coal WV Real Property being collectively for purposes of this section the "Real Property") exclusive of the buildings and improvements thereon which will be retained by the Sellers (the "Retained Property") and which will thereafter be subject to assessment for taxation as personal property or as part of the leasehold estate being created under the Lease Agreements and that the County Assessor (or other appropriate assessing official) of the Counties in the jurisdictions in which the real estate is located may not separately assess the Real Property from the Retained Property until the applicable next assessment date (being July 1st in West Virginia) following the Closing Date. Accordingly, there will be at least one year during which the Real Property may be assessed together with the Sellers's Retained Property. For example, if the Closing is in October of 2002, the Real Property and Retained Property may not be separately assessed until July 1, 2003 (for tax year 2004). As a result the taxes for the year 2003 on the Real Property would be combined with the taxes on the Retained Property. If the Real Property and the Retained Property are not separately assessed, then the Buyer shall submit to the Sellers a statement for the Sellers's pro rata share of such taxes calculated by prorating the amount of taxes for land with respect to other real property composing the tax parcel of which the Real Property is a part and determining the portion of the taxes applicable to the Retained Property based upon its relative value. The Sellers shall give to the Buyer after the Sellers's receipt of the Buyer's statement therefor and at least fifteen (15) days prior to the date payable without interest or penalty, a check payable to the appropriate County Treasurer for the amount specified in the statement or, upon delivery of a paid receipt evidencing prior payment by the Buyer to any such County Treasurer of such sums as are due, the Sellers shall reimburse the Buyer for the amount specified. 9.4 Claims for Refund. The Buyer shall not file any claim for refund of taxes with respect to the Assets for whole or partial taxable periods on or before the Closing Date. 9.5 Cooperation on Tax Matters. (a) The Buyer and the Sellers shall cooperate fully, as and to the extent reasonably requested by the other parties, in connection with the filing of Tax Returns pursuant to this Section and any audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Buyer and the Sellers shall (i) retain all books and records with respect to Tax matters pertinent to the Assets relating to any whole or partial taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by the Buyer or any Sellers, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (ii) give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Buyer or any Sellers, as the case may be, shall allow the other party to take possession of such books and records. 17 (b) The Buyer and the Sellers further agree, upon request, to use their best efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). 9.6 Certain Taxes. The Sellers will file all necessary Tax Returns and other documentation with respect to all transfer (including without limitation, stock transfer), recording, documentary, sales, use, stamp, registration and other Taxes and fees, and, if required by applicable Law, the Buyer will, and will cause its Affiliates to, join in the execution of any such Tax Returns and other documentation. Notwithstanding anything set forth in this Agreement to the contrary, the Buyer will be obligated to bear and shall pay at Closing, any transfer, documentary, sales, recording, use, stamp, registration and other Taxes and fees incurred in connection with this Agreement and the transactions contemplated under this Agreement. The Buyer agrees to indemnify, defend and hold the Sellers harmless for all such taxes and fees. 9.7 Confidentiality. Any information shared in connection with Taxes shall be kept confidential, except as may otherwise be necessary in connection with the filing of Tax Returns or reports, refund claims, tax audits, tax claims and tax litigation, or as required by Law. 9.8 Audits. The Sellers and the Buyer shall provide prompt written notice to the others of any pending or threatened tax audit, assessment or proceeding that it becomes aware of related to the Assets for whole or partial periods for which it may be indemnified by the other party hereunder. Such notice shall contain factual information (to the extent known) describing the asserted tax liability in reasonable detail and shall be accompanied by copies of any notice or other document received from or with any tax authority in respect of any such matters. If an indemnified party has knowledge of an asserted tax liability with respect to a matter for which it may be indemnified hereunder and such party fails to give the indemnifying party prompt notice of such asserted tax liability, then (a) if the indemnifying party is precluded by the failure to give prompt notice from contesting the asserted tax liability in any forum, the indemnifying party shall have no obligation to indemnify the indemnified party for any Taxes arising out of such asserted tax liability, and (b) if the indemnifying party is not so precluded from contesting, but such failure to give prompt notice results in a detriment to the indemnifying party, then any amount which the indemnifying party is otherwise required to pay the indemnified party pursuant to this Section shall be reduced by the amount of such detriment, provided, the indemnified party shall nevertheless be entitled to full indemnification hereunder to the extent, and only to the extent, that such party can establish that the indemnifying party was not prejudiced by such failure. Section 9.10 shall control the procedure for Tax indemnification matters to the extent it is inconsistent with any other provision of this Agreement. 9.9 Control of Proceedings. The party responsible for the Tax under this Agreement shall control audits and disputes related to such Taxes (including action taken to pay, compromise or settle such Taxes). Reasonable out of pocket expenses with respect to such contests shall be borne by the Sellers and the Buyer in proportion to their responsibility for such Taxes as set forth in this Agreement. Except as otherwise provided by this Agreement, the noncontrolling party shall be afforded a reasonable opportunity to participate in such proceedings at its own expense. 9.10 Powers of Attorney. The Buyer shall provide the Sellers and their Affiliates with such powers of attorney or other authorizing documentation as are reasonably necessary to empower them to execute and file returns they are responsible for hereunder, file refund and equivalent claims for Taxes they are responsible for, and contest, settle, and resolve any audits and disputes that they have control over under Section 9.8 (including any refund claims which turn into audits or disputes). 18 9.11 Remittance of Refunds. If the Buyer or any Affiliate of the Buyer receives a refund of any Taxes attributable to a Pre-Closing Tax Period that the Sellers is responsible for hereunder, or if the Sellers or any Affiliate of the Sellers receives a refund of any Taxes attributable to a Post-Closing Tax Period that the Buyer is responsible for hereunder, the party receiving such refund shall, within thirty days after receipt of such refund, remit it to the party who has responsibility for such Taxes hereunder. For the purpose of this Section 9.11, the term "refund" shall include a reduction in Tax and the use of an overpayment as a credit or other tax offset, and receipt of a refund shall occur upon the filing of a return or an adjustment thereto using such reduction, overpayment or offset or upon the receipt of cash. 9.12 Purchase Price Allocation. Within thirty (30) days of the date of this Agreement and in any event prior to Closing, the Sellers and the Buyer shall attempt to agree upon the allocation of the Purchase Price among the Assets for all purposes (including Tax and financial accounting purposes). The Buyer, the Sellers and their applicable Affiliates will file all Tax Returns (including amended Tax Returns and claims for refund) and information reports in a manner consistent with such agreed upon allocation. 9.13 Closing Tax Certificate. At the Closing, the Sellers shall deliver, or cause each of its selling Affiliates to deliver, to the Buyer a certificate signed under penalties of perjury (i) stating that it is not a foreign corporation, foreign partnership, foreign trust or foreign estate, (ii) providing its U.S. Employer Identification Number and (iii) providing its address, all pursuant to Section 1445 of the Code. At the Closing, the Buyer shall deliver to the Sellers a statement providing its U.S. Employment Identification Number and its address. ARTICLE X TERMINATION OF AGREEMENT 10.1 Termination of Agreement. The Parties may terminate this Agreement, as provided below: (a) the Buyer and the Sellers may terminate this Agreement by mutual written consent at any time before the Closing; (b) the Buyer may terminate this Agreement by giving written notice to the Sellers at any time before Closing if the Closing shall not have occurred on or before January 31, 2003 (unless the failure results primarily from the Buyer itself breaching any representation, warranty or covenant contained in this Agreement); (c) the Sellers may terminate this Agreement by giving written notice to the Buyer at any time before the Closing if the Closing shall not have occurred on or before January 31, 2003 (unless the failure results primarily from the Sellers breaching any representation, warranty or covenant contained in this Agreement); (d) the Buyer or the Sellers may terminate this Agreement if any court of competent jurisdiction or any governmental, administrative or regulatory authority, agency or body shall have issued an order, decree or ruling or shall have taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated hereby or impairing use or exploitation of any Assets and such order, decree, ruling or other action shall have become final and nonappealable; and (e) the Sellers may terminate this Agreement by giving written notice to the Buyer at any time before the Closing to the extent that the Buyer does not provide its consent to the assignment of 19 the Lease Agreements to a third party (whether pursuant to a direct assignment or pursuant to a transfer of control) designated by the Sellers. 10.2 Effect of Termination. If any Party terminates this Agreement pursuant to Section 10.1, all rights and obligations of the Parties with respect to any Assets not theretofore sold to the Buyer hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party then in breach); provided that the confidentiality provisions contained in the Confidentiality Agreement and Sections 11.2 and 11.3 of this Agreement shall survive termination. ARTICLE XI MISCELLANEOUS 11.1 Insurance. The Buyer acknowledges and agrees that, following the Closing, the Insurance Policies of the Sellers and its Affiliates may be terminated or modified to exclude coverage of all or any portion of the Assets by the Sellers or El Paso Corporation or their Affiliates and, as a result, the Buyer acknowledges that the Assets will not be insured by Sellers. The Buyer further acknowledges that the Sellers only maintained such Insurance Policies (including self insurance and deductible levels) that it deemed necessary in its sole discretion or that were required by Law. Notwithstanding Section 11.1, if any claims are made or losses occur prior to the Closing Date that relate solely to the Assets and such claims, or the claims associated with such losses, properly may be made against the policies retained by the Sellers or its Affiliates pursuant to Section 11.1 or under policies otherwise retained by the Sellers or its Affiliates after the Closing, then, subject to any limitations under the Insurance Policies (including without limitation time restrictions on "claims made" policies), the Sellers shall use its reasonable commercial efforts so that the Buyer can file, notice, and otherwise continue to pursue these claims pursuant to the terms of such policies; however nothing in this Agreement shall require the Sellers to maintain or to refrain from asserting claims against or exhausting any retained policies and the Sellers shall not be required to proceed against any direct or indirect self-insured primary insurance programs or policies of, or maintained by El Paso Corporation or any of its Affiliates, including arrangement with carriers for claims administration service under cost-plus reimbursement agreements, assumed retention, deductible or retrospective rating plans or other plans or arrangements to the extent that risk of loss thereunder is ultimately assumed or paid by El Paso or its Affiliates. 11.2 Press Releases and Public Announcements. No Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement without the prior written approval of the other Parties; provided that any Party may make any public disclosure it believes in good faith is required by applicable Law or any listing or trading agreement concerning its publicly traded securities (in which case the disclosing Party will advise the other Parties before making the disclosure). 11.3 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. 11.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Party. 11.5 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but which together will constitute one and the same instrument. 20 11.6 Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Buyer: CSTL LLC c/o Natural Resource Partners L.P. Suite 300, 1035 Third Avenue Huntington, WV 25727 Attn: Nick Carter Tel: (304) 522-5757 Fax (304) 522 5401 With copy to: CSTL LLC c/o Natural Resource Partners L.P. Suite 3600 601 Jefferson Street Houston, TX 77002 Attn: Dwight L. Dunlap Tel: (713) 751-7514 Fax: (713) 650-0606 If to the Sellers: El Paso CGP Company 1001 Louisiana Houston, Texas 77002 Attn: Greg Jenkins Tel: (713) 420-4917 Fax: (713) 420-5118 With a copy to: 1001 Louisiana Houston, Texas 77002 Attn: Robert W. Baker Tel: (713) 420-7021 Fax: (713) 420-7025 Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the addresses set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. 11.7 Governing Law. This Agreement shall be governed by and construed in accordance with the domestic Laws of the state of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the state of Delaware or any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the state of Delaware. 21 11.8 Entire Agreement. This Agreement (including the documents referred to in this Agreement) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they have related in any way to the subject matter of this Agreement. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer and the Sellers. 11.9 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 11.10 Transaction Expenses. Each of the Buyer and the Sellers will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby. 22 ***** IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. CSTL LLC By NRP (Operating) LLC, its sole managing member, By: /s/ Nick Carter ---------------------------------------------- Title: President and Chief Operating Officer EL PASO CGP COMPANY By: /s/ H. Brent Austin ---------------------------------------------- Title: President and Chief Operating Officer COASTAL COAL COMPANY, LLC By: /s/ Kevin Crutchfield ---------------------------------------------- Title: President COASTAL COAL - WEST VIRGINIA, LLC By: /s/ Kevin Crutchfield ---------------------------------------------- Title: President ANR WESTERN COAL DEVELOPMENT COMPANY By: /s/ Bennett K. Hatfield ---------------------------------------------- Title: Executive Vice President 23 Natural Resource Partners L.P., a Delaware limited partnership, hereby (i) unconditionally and irrevocably agrees with the Sellers to perform, when due, all of the Buyer's obligations pursuant to the Purchase Agreement, (ii) agrees to be fully bound and obligated by the terms hereof to the same extent as is the Buyer, (iii) waives all defenses as a surety including notice, (iv) agrees that its obligations under this paragraph shall not be impaired, diminished or discharged by any extension of time granted by the Sellers, by any course of dealing between the Sellers and the Buyer, or by any event or circumstance which might operate to discharge a guarantor and (v) covenants to take any and all actions and execute and deliver further documents reasonably requested by the Sellers to implement and enforce such foregoing obligations. NATURAL RESOURCES PARTNERS L.P. By NRP (GP) LP, its General Partner By GP Natural Resources Partners LLC, its general partner By: /s/ Nick Carter --------------------------------------------- Name: Nick Carter Title: President and Chief Operating Officer 24 D-1 EX-10.9 14 h04228exv10w9.txt 1ST AMENDMENT TO PURCHASE & SALE AGREEMENT EXHIBIT 10.9 FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT THIS FIRST AMENDMENT (this "Amendment") to the PURCHASE AND SALE AGREEMENT dated as of November 6, 2002 (the "Agreement"), is made and entered into as of December 4, 2002 by and among (1) EL PASO CGP COMPANY, a Delaware corporation ("El Paso CGP"); COASTAL COAL COMPANY, LLC, a Delaware limited liability company ("Coastal Coal"); COASTAL COAL - WEST VIRGINIA, LLC, a Delaware limited liability company ("Coastal Coal WV"); and ANR WESTERN COAL DEVELOPMENT COMPANY, a Delaware corporation ("ANR WCDC") (individually a "Seller" and collectively the "Sellers") and (2) CSTL LLC, a Delaware limited liability company (the "Buyer"). Capitalized terms used but not defined herein have the meanings set forth in the Agreement. WHEREAS, the Parties have agreed to amend the terms of the Deed/Lease Agreements to provide El Paso CGP or its designee an overriding royalty interest; WHEREAS, in consideration of granting El Paso CGP such an overriding royalty interest the Parties have agreed to reduce the Purchase Price from $69 million to $57 million; and WHEREAS, the Parties have agreed to delete certain conditions precedent and post-closing covenants with regard to the preparation of financial statements. NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Sellers and Buyer hereby agree as follows: 1. Amendment. 1.1 Purchase Price Reduction - Section 2.2 of the Agreement is hereby amended to reduce the Purchase Price from $69 million to $57 million. 1.2 Deliveries at the Closing Amendment - The following changes shall be made with respect to the documents to be delivered at Closing: (a) Deed - The form of the special warranty deeds referred to in Section 2.4 and attached as Exhibit C to the Agreement for Dickenson, Lee, Russell, Scott and Wise Counties, Virginia and Preston County, West Virginia shall be amended to conform to the form attached to this Amendment. Coastal Coal and Coastal Coal WV, respectively, will execute and deliver such deeds to the Buyer that are necessary (a) to convey to the Buyer (i) the Coastal Coal Real Property and the Coastal Coal Easements and (ii) the Coastal Coal WV Real Property and the Coastal Coal WV Easements, together with sales listing forms required by applicable law and (b) to convey to El Paso CGP or its designee an overriding royalty interest in the identified properties. (b) Leases - The form of the Lease Agreements referred to in Section 2.4 and attached as Exhibit E to the Agreement for VICC and Kingwood shall be amended to conform to the form attached to this Amendment. The Parties agree that the effective date for purposes of the lease payments under the Lease Agreements and the overriding royalty interests under the special warranty deeds set forth above shall be the first day of the month of the month of Closing. 1 1.3 Financial Statement Amendments - The following provisions of the Agreement shall be deleted as set forth below with regard to the preparation of financial statements and submissions to the Securities and Exchange Commission: (a) Section 5.7 shall be deleted in its entirety; and (b) Section 7.1(f) shall be deleted in its entirety. 1.4 Employee Matters Amendment - Section 6.3 of the Agreement is hereby amended and replaced in its entirety with the following: 6.3 Employee Matters. (a) As of December 31, 2002, the employees listed on Section 6.3 of the Disclosure Schedule as of the Closing (the "Current Employees") shall be offered employment with the Buyer or its Affiliates in the same positions, at the same level of wages and/or salary, and at a work location which is within 50 miles of their work location as of December 31, 2002; provided, however, except as may be specifically required by applicable law or any contract, neither the Buyer nor its Affiliates, on the one hand, nor any employee, on the other hand, shall be obligated to continue any employment relationship or any specific terms of employment for any specific period of time. As of December 31, 2002, all Current Employees shall cease active participation in all employee benefit plans and arrangements of the Sellers and their Affiliates. As of December 31, 2002, all Current Employees shall be permitted to participate in the employee benefits plans and arrangements of the Buyer and its Affiliates on the same terms as similarly situated employees of the Buyer or any of its Affiliates. To the extent any employee benefit plan, program or policy of the Buyer or their Affiliates is made available to the Current Employees as of December 31, 2002 with respect to any welfare benefit plans to which such employees may become eligible, the Buyer or its Affiliates shall cause such plans to provide credit for any co-payments or deductibles by such employees and waive all pre-existing condition exclusions and waiting periods, other than limitations or waiting periods that have not been satisfied under any welfare plans maintained by the Seller and its Affiliates for their employees as of December 31, 2002. (b) For the period from Closing until December 31, 2002, the Sellers agree to make the Current Employees available to provide support or services to the Buyer in its operation of the Assets after the Closing consistent with the type of support the Current Employees provided immediately prior to Closing (the "Services"). The Sellers shall provide or cause to be provided to the Buyer the Services pursuant to this Section 6.3(b) with the same degree of care, skill and diligence with which the Sellers perform similar services for its own account or the account of its affiliates. In no event shall the Sellers or its Affiliates be liable for any damages or liability (including without limitation any special, incidental, consequential, any lost profits or punitive damages) arising out of or in connection with any Services to be rendered by the Sellers pursuant to this Section 6.3(b). The Sellers make no representations or warranties, expressed or implied, with respect to the Services to provided pursuant to this Section 6.3(b). Buyer agrees that Sellers shall be allowed reasonable access to the Current Employees at no cost during the period from December 31, 2002 through June 30, 2003, so that Current Employees can provide transitional assistance to Sellers with respect to (a) the sale of Sellers mining operations, (b) relocation of property and lease records, and (c) various property and lease management issues as they arise. 2. Effect of This Agreement - From and after the date of this Amendment, all references in the Agreement to the Agreement shall mean the Agreement, as amended, modified or supplemented hereby. 2 Except as specifically amended, modified or supplemented above, the Agreement shall remain in full force and effect (subject to the conditions precedent to effectiveness contained in the Agreement) and is hereby ratified and confirmed. 3. Headings - The headings used for the sections and articles herein are for convenience and reference purposes only and shall in no way affect the meaning or interpretation of the provisions of this Amendment. 4. Counterparts - This Amendment may be executed in several counterparts, each of which is an original and all of which constitute one and the same instrument. IN WITNESS WHEREOF, the parties set forth below have caused this Amendment to be duly executed as of December 4, 2002. CSTL LLC By NRP (Operating) LLC, its sole managing member, By: /s/ Kevin Wall --------------------------------- Kevin Wall, Its Vice President EL PASO CGP COMPANY By: /s/ Kevin Crutchfield --------------------------------- Title: Pres ------------------------------ COASTAL COAL COMPANY, LLC By: /s/ Kevin Crutchfield --------------------------------- Title: Pres ------------------------------ COASTAL COAL - WEST VIRGINIA, LLC By: /s/ Kevin Crutchfield --------------------------------- Title: Pres ------------------------------ 3 ANR WESTERN COAL DEVELOPMENT COMPANY By: /s/ Bennett K. Hatfield --------------------------------- Title: Executive Vice President ------------------------------ ACCEPTED AND AGREED TO AS OF DECEMBER 4, 2002 NATURAL RESOURCES PARTNERS L.P. By NRP (GP) LP, its General Partner By GP Natural Resources Partners LLC, its general partner By: /s/ Kevin Wall ---------------------------------- Name: Kevin Wall Title: Vice President 4 EX-10.10 15 h04228exv10w10.txt LEASE AMENDMENT NO.1 TO COAL MINING LEASE EXHIBIT 10.10 LEASE AMENDMENT NO. 1 THIS LEASE AMENDMENT NO. 1, made and entered into this the 20th day of November, 2002, by and between ACIN LLC, as Lessor and ARK LAND COMPANY, as Lessee. WITNESSETH: THAT WHEREAS, the Lessor and Lessee are parties to a coal lease dated October 17, 2002 ("Lease") concerning certain property located in Letcher County, Kentucky and Wise County, Virginia, THAT WHEREAS, the Lessor and Lessee are also parties (together with Arch Coal, Inc.) to that certain Royalty Pass Through Agreement and Guaranty dated October 10, 2002 (the "Royalty Pass Through Agreement") concerning certain royalties to be paid by the Lessee to the Lessor with respect to property located in Knox County, Indiana, and WHEREAS, the parties hereto have agreed to amend the Lease and to terminate the Royalty Pass Through Agreement in accordance with the terms of this Lease Amendment No. 1; NOW, THEREFORE, in consideration of the premises and the further consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. The Lease is amended by adding a new paragraph to Section 4 thereof as follows: "In addition to, and not in substitution of, all other payments called for herein, Lessee will pay to Lessor non-recoupable rental payments as follows: a. On the date of execution hereof the sum of Eight Hundred Thirty Nine Thousand ($839,000). b. On the first day of the month of February, May, August and November in each year designated below, payments in the following amounts: 2003 -- $270,000 2004 -- 290,000 2005 -- 295,000 2006 -- 205,000 2007 -- 205,000"
2. The Royalty Pass Through Agreement is hereby terminated and rendered void. Arch Coal, Inc. is hereby released and relieved from any further obligation or liability arising under the Royalty Pass Through Agreement. 3. Except as amended herein, the Lease remains in full force and effect. IN WITNESS WHEREOF, ACIN LLC and Ark Land Company have caused this Lease Amendment No. 1 to be executed by their respective duly authorized officers as of the day and year first above written. ACIN LLC By NRP (OPERATING) LLC Its Sole Operating Manager By: /s/ Nick Carter Nick Carter Its: President and Chief Operating Officer ARK LAND COMPANY By: /s/ Steve McCurdy ------------------ Its:President 2 STATE OF West Virginia COUNTY OF Cabell, SS: The foregoing instrument was acknowledged before me this 25th day of November, 2002, by Nick Carter, President and Chief Operating Officer of NRP (Operating) LLC, the sole operating manager of ACIN LLC, on behalf of ACIN LLC. My commission expires November 26, 2007. Chasity L. Chapman Notary Public (S E A L) STATE OF Missouri COUNTY OF St. Louis, SS: I, Erika M. Dominick, a Notary Public in and for the State and County aforesaid do certify that Steven E. McCurdy, who signed the above writing dated November 22, 2002, for ARK LAND COMPANY, has this day, in my said County, before me, acknowledged the said writing to be the act and deed of said corporation. Given under my hand and notarial seal this 22nd day of November, 2002. My commission expires September 30, 2003. Erika M. Dominick Notary Public (S E A L) 3 EX-21.1 16 h04228exv21w1.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT NRP (Operating) LLC, a Delaware limited liability company; WPP LLC, a Delaware limited liability company; GNP LLC, a Delaware limited liability company; NNG LLC, a Delaware limited liability company; ACIN LLC, a Delaware limited liability company; CSTL LLC, a Delaware limited liability company; and WBRD LLC, a Delaware limited liability company. EX-99.1 17 h04228exv99w1.txt AUDITED BALANCE SHEETS OF NRP (GP) LP NRP (GP) LP REPORT OF INDEPENDENT AUDITORS To NRP (GP) LP We have audited the accompanying consolidated balance sheet of NRP (GP) LP as of December 31, 2002. This financial statement is the responsibility of NRP (GP) LP'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 December 31, 2002 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP March 13, 2003 Houston, Texas NRP (GP) LP CONSOLIDATED BALANCE SHEET (IN THOUSANDS) DECEMBER 31, 2002
ASSETS Current assets: Cash and cash equivalents ................................... $ 7,754 Accounts receivable ......................................... 7,593 Accounts receivable - affiliate ............................. 1,450 Other ....................................................... 511 --------- Total current assets ...................................... 17,308 Property and equipment, at cost ................................. 433,430 Less accumulated depreciation and depletion ................. (59,243) --------- Net property and equipment .................................. 374,187 Loan financing costs, net ....................................... 1,225 --------- Total assets .......................................... $ 392,720 ========= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable ............................................ $ 735 Accounts payable - affiliate ................................ 667 Property and franchise taxes payable ........................ 1,731 Accrued interest ............................................ 200 --------- Total current liabilities ............................. 3,333 Deferred revenue ................................................ 13,252 Long-term debt .................................................. 57,500 Minority Interest ............................................... 311,968 Partners' capital: Limited Partners' Capital ................................... 6,666 General partner's interest .................................. 1 --------- Total partners' capital ............................... 6,667 --------- Total liabilities and partners' capital ............... $ 392,720 =========
The accompanying notes are an integral part of these financial statements. NRP (GP) LP NOTES TO CONSOLIDATED BALANCE SHEET 1. BASIS OF PRESENTATION AND ORGANIZATION 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 ("WPP"), Great Northern Properties Limited Partnership ("GNP"), New Gauley Coal Corporation ("NGCC"), and Ark Land Company, an affiliate of Arch Coal, Inc., as limited partners, to be the general partner of Natural Resource Partners L.P ("NRP"). On April 15, 2002 GP Natural Resource Partners LLC contributed $1, and the limited partners contributed a total of $999 to the Partnership in exchange for 0.001% general partner interest and an aggregate 99.999% limited partner interest respectively. Natural Resource Partners L.P., a Delaware limited partnership, was formed in April 2002 to own and manage certain coal royalty producing properties contributed to the Partnership by WPP, GNP, NGCC and Arch Coal, Inc. (collectively "predecessors" or "predecessors companies"). The predecessor companies contributed assets to NRP on October 17, 2002. The chief executive officer of the Partnership's general partner controls the general partners of WPP and GNP and is the controlling shareholder of NGCC. He also controls the Partnership. In accordance with EITF 87-19, "Change of Accounting Basis in Master Limited Partnership Transactions," the assets of WPP, GNP and NGCC were contributed to NRP at historical costs. The assets contributed by Arch Coal, Inc., which consisted solely of land and coal reserves, were recorded at their fair values. As the general partner of NRP, the Partnership engages principally in the business of owning and managing coal properties in the three major coal-producing regions of the United States: Appalachia, the Illinois Basin and the Western United States. As of December 31, 2002, NRP controlled approximately 1.23 billion tons of proven and probable coal reserves in eight states. NRP does not operate any mines. NRP leases coal reserves, through its wholly owned subsidiary, NRP (Operating) LLC, to experienced mine operators under long-term leases that grant the operators the right to mine NRP's coal reserves in exchange for royalty payments. NRP's lessees are generally required to make payments to NRP based on the higher of a percentage of the gross sales price or a fixed price per ton of coal sold, in addition to a minimum payment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Partnership and consolidated accounts of NRP due to the Partnership's control over NRP. Intercompany transactions and balances have been eliminated. USE OF ESTIMATES Preparation of the accompanying balance sheet 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 balance sheet. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT Land and coal property are carried at historical cost for properties contributed to NRP by WPP, GNP and NGCC. The coal properties contributed by Arch Coal Inc. have been accounted for using purchase accounting based on their estimated fair value. 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 Partnership's accounts receivable result from amounts due from third-party companies in the coal industry. This concentration of customers may affect 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, due to their short-term nature or variable interest rates that reflect market rates. DEFERRED FINANCING COSTS Deferred financing costs consists of legal and other costs related to the issuance of the Partnership's revolving credit facility. These costs are amortized over the term of the facility. NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. Adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on the Partnership's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1, 2002, did not have a material impact on the Partnership's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard is not expected to have a significant impact on the Partnership's financial statements. 3. ACQUISITION On December 4, 2002, NRP purchased the land and mineral rights to approximately 120 million tons of coal and 25,000 acres of surface land for $57.5 million, including transaction costs, from certain subsidiaries of El Paso Corporation. El Paso Corporation retained an overriding royalty interest in certain assets. The acquisition was funded with NRP's revolving credit facility. The factors used in determining the fair market value of the assets included, but were not limited to, discounted future net cash flows, the quality of the reserves, the probability of continued coal mining on the property, and marketability of the coal. The results of operations of this transaction were included in the Partnership's consolidated financial statements since December 4, 2002. 4. PROPERTY AND EQUIPMENT Property and equipment includes:
DECEMBER 31, 2002 (IN THOUSANDS) -------------- Land.................................................... $ 13,532 Coal properties......................................... 411,434 Other................................................... 8,464 --------- $ 433,430 =========
5. REVOLVING CREDIT FACILITY At December 31, 2002, NRP had borrowed $57.5 million on its $100 million revolving credit facility. NRP has a $100 million unsecured revolving credit facility, which matures in October 2005, when all principal payments are due in full. The revolving credit facility allows NRP to elect the interest rate at (i) LIBOR plus an applicable margin ranging from 1.25% to 1.75%, based on certain financial data or (ii) the higher of the federal funds rate plus 0.50% or the prime rate as announced by the agent bank. The revolving credit facility bore interest at a rate of 2.72% at December 31, 2002. The revolving credit facility includes a $12 million distribution loan sub-limit that can be used for quarterly distributions. The financial covenants require NRP to maintain a ratio of consolidated total indebtedness to consolidated EBITDA (as defined in the credit agreement) that does not exceed 2.5 to 1.0 and a ratio of consolidated EBITDA to consolidated interest expense of at least 4.0 to 1.0. NRP is currently in compliance with all of the covenants of the revolving credit facility. 6. RELATED PARTY TRANSACTIONS Quintana Mineral Resources Corporation, a company controlled by Corbin J. Robertson, Jr., Chairman and CEO of the Partnership's general partner, provided certain administrative services to NRP and charged it for direct costs related to the administrative services. Additionally, WPP provides certain administrative services for NRP and allocated a portion of its overhead to NRP in 2002. At December 31, 2002, NRP had accounts receivable from affiliates of $1.4 million due from Arch Coal, Inc. which is primarily made up of $436,000 in minimum royalty payments received by Arch Coal, Inc. that were due to NRP and a $839,000 advance rental payment from the Pardee lease. NRP also had accounts payable to affiliates of $667,000, which includes overhead reimbursements to Quintana Minerals Corporation and Western Pocahontas Properties of $135,000 and $256,000, respectively, as well as $276,000 for coal royalties received by NRP from lessees that were due to Western Pocahontas Properties. 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 NRP's properties by its lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. As owner of surface interests in some properties, NRP and the Partnership may be liable for certain environmental conditions occurring at the surface properties. The terms of substantially all of the NRP's coal leases require the lessee to comply with all applicable laws and regulations, including environmental laws and regulations. Lessees post reclamation bonds assuring that reclamation will be completed as required by the relevant permit, and substantially all of the leases require the lessee to indemnify NRP against, among other things, environmental liabilities. Some of these indemnifications survive the termination of the lease. Because NRP has no employees, Western Pocahontas employees make regular visits to the mines to ensure compliance with lease terms, but the duty to comply with all regulations rests with the lessees. Management believes that NRP's lessees will be able to comply with existing regulations and does not expect any lessee's failure to comply with environmental laws and regulations to have a material impact on the Partnership's financial condition or results of operations. Neither the Partnership nor NRP has incurred, or is aware of, any material environmental charges imposed on it related to NRP's properties for the period ended December 31, 2002. NRP is not associated with any environmental contamination that may require remediation costs. However, lessees do, from time to time, conduct reclamation work on the properties under lease to them. Because NRP is not the permittee of the mines being reclaimed, it is not responsible for the costs associated with these reclamation operations. However, in the event any of NRP's lessees are unable to complete its reclamation obligations and their bonding company likewise fails to meet the obligations or provide money to the state to perform the reclamation, NRP could be held liable for these costs. NRP is also indemnified by WPP, GNP, NGCC and Arch Coal Inc., jointly and severally, for three years after the closing of the initial public offering against environmental and tax liabilities attributable to the ownership and operation of the assets contributed to NRP prior to the closing. The environmental indemnity is limited to a maximum of $10.0 million. 8. MAJOR LESSEES The Partnership depends on a few lessees of NRP for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 REVENUES PERCENT -------- ------- (DOLLARS IN THOUSANDS) Lessee A.................................. $1,815 13.1% Lessee B.................................. $2,120 15.3% Lessee C.................................. $1,994 14.4%
9. INCENTIVE PLAN Prior to NRP's initial public offering, GP Natural Resource Partners LLC, the general partner of the Partnership, adopted the Natural Resource Partners Long-Term Incentive Plan (the "Plan") for employees and directors of GP Natural Resource Partners LLC and its affiliates who perform services for NRP. The Plan provides for the granting of restricted units and unit options. The Plan permits the granting of awards covering a number of common units equal to three percent of the number of common units outstanding immediately following NRP's initial public offering of common units. The Plan is administered by the compensation committee of GP Natural Resource Partners LLC's board of directors. Subject to the rules of the exchange upon which the common units are listed at the time, GP Natural Resource Partners LLC's board of directors or the compensation committee also has the right to alter or amend the Plan or any part of the Plan from time to time, including increasing the number of units that may be granted. Except upon the occurrence of unusual or nonrecurring events, no change in any outstanding grant may be made that would materially reduce the benefit intended to be made available to a participant without the consent of the participant. A restricted unit is a "phantom" unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, its fair market value in cash. The compensation committee may make grants under the Plan to employees and directors containing such terms as the compensation committee shall determine. The compensation committee will determine the period over which the restricted units granted to employees and directors will vest. The committee may provide for an acceleration of vesting based upon the achievement of specified financial objectives. In addition, the restricted units will vest upon a change in control of the Partnership, NRP, or GP Natural Resource Partners LLC. If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's restricted units will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Common units to be delivered upon the vesting of restricted units may be common units acquired by GP Natural Resource Partners LLC in the open market, common units already owned by GP Natural Resource Partners LLC, common units acquired by GP Natural Resource Partners LLC directly from NRP, from another affiliate or any other person or entity or any combination thereof. GP Natural Resource Partners LLC will be entitled to reimbursement by NRP for the cost incurred in acquiring common units. Unit options under the Plan will have an exercise price that may not be less than the fair market value of the units on the date of grant. In general, units will become exercisable over a period determined by the compensation committee. The compensation committee may provide for an acceleration of vesting based upon the achievement of specified financial objectives. In addition, the units will become exercisable upon a change in control as described for restricted units above. If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's options will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Upon exercise of a unit option, GP Natural Resource Partners LLC will acquire common units as describe above for restricted units. The Natural Resource Partners Annual Incentive Compensation Plan (the "Compensation Plan") was adopted in October 2002. The Compensation Plan is designed to enhance the performance of GP Natural Resource Partners LLC and its affiliates' key employees by rewarding them with cash awards for achieving annual financial and operational performance objectives. The compensation committee in its discretion may determine individual participants and payments, if any, for each year. The board of directors of GP Natural Resource Partners LLC may amend or change the Compensation Plan at any time. NRP will reimburse GP Natural Resource Partners LLC for payments and costs incurred under the Compensation Plan. 10. SUBSEQUENT EVENT Cash Distributions On January 21, 2003, NRP declared a cash distribution of $0.4234 per unit. Total distributions of $9.8 million were paid on February 14, 2003. EX-99.2 18 h04228exv99w2.txt SECTION 1350 CERTIFICATIONS CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF GP NATURAL RESOURCE PARTNERS LLC PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Corbin J. Robertson, Jr., Chief Executive Officer and Chairman of the Board of GP Natural Resource Partners LLC, the general partner of the general partner of Natural Resource Partners L.P. (the "Company"), hereby certify, to my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Corbin J. Robertson, Jr. ----------------------------------- Name: Corbin J. Robertson, Jr. Date: March 28, 2003 A signed original of this written statement required by Section 906 has been provided to Natural Resource Partners L.P. and will be retained by Natural Resource Partners L.P. and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION OF CHIEF FINANCIAL OFFICER OF GP NATURAL RESOURCE PARTNERS LLC PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dwight L. Dunlap, Chief Financial Officer and Treasurer of GP Natural Resource Partners LLC, the general partner of the general partner of Natural Resource Partners L.P. (the "Company"), hereby certify, to my knowledge, that: 3. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 4. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Dwight L. Dunlap ----------------------------------- Name: Dwight L. Dunlap Date: March 28, 2003 A signed original of this written statement required by Section 906 has been provided to Natural Resource Partners L.P. and will be retained by Natural Resource Partners L.P. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----