The following discussion and analysis of the financial condition and results of operations of Penn Virginia Resource Partners, L.P. and its subsidiaries (the "Partnership," "we," "us" or "our") should be read in conjunction with our consolidated financial statements and the accompanying notes in Item 8, "Financial Statements and Supplementary Data."

Overview of Business

We are a publicly traded Delaware limited partnership formed by Penn Virginia in 2001 that is principally engaged in the management of coal and natural resource properties and the gathering and processing of natural gas in the United States. Both in our current limited partnership form and in our previous corporate form, we have managed coal properties since 1882. We currently conduct operations in two business segments: (i) coal and natural resource management and (ii) natural gas midstream. Our operating income was $115.2 million in 2008, compared to $117.7 million in 2007 and $102.8 million in 2006. In 2008, our coal and natural resource management segment contributed $96.3 million, or 84%, to operating income, and our natural gas midstream segment contributed $18.9 million, or 16%, to operating income.

The following table presents a summary of certain financial information relating to our segments for the years ended December 31, 2008, 2007 and 2006:

                                             Coal and Natural
                                                 Resource            Natural Gas
                                                Management            Midstream         Consolidated
                                                                   (in thousands)
For the Year Ended December 31, 2008:
Revenues                                     $         153,327    $         728,253    $      881,580
Cost of midstream gas purchased                             -               612,530           612,530
Operating costs and expenses                            26,226               37,615            63,841
Impairments                                                 -                31,801            31,801
Depreciation, depletion and amortization                30,805               27,361            58,166

Operating income                             $          96,296    $          18,946    $      115,242


For the Year Ended December 31, 2007:
Revenues                                     $         111,639    $         437,806    $      549,445
Cost of midstream gas purchased                             -               343,293           343,293
Operating costs and expenses                            20,138               26,777            46,915
Depreciation, depletion and amortization                22,690               18,822            41,512

Operating income                             $          68,811    $          48,914    $      117,725


For the Year Ended December 31, 2006:
Revenues                                     $         112,981    $         404,910    $      517,891
Cost of midstream gas purchased                             -               334,594           334,594
Operating costs and expenses                            19,138               23,846            42,984
Depreciation, depletion and amortization                20,399               17,094            37,493

Operating income                             $          73,444    $          29,376    $      102,820

Coal and Natural Resource Management Segment

As of December 31, 2008, we owned or controlled approximately 827 million tons of proven and probable coal reserves in Central and Northern Appalachia, the San Juan Basin and the Illinois Basin. We enter into long-term leases with experienced, third-party mine operators, providing them the right to mine our coal reserves in exchange for royalty payments. We actively work with our lessees to develop efficient methods to exploit our reserves and to maximize production from our properties. We do not operate any mines. In 2008, our lessees produced 33.7 million tons of coal from our properties and paid us coal royalties revenues of $122.8 million, for an average royalty per ton of $3.65. Approximately 86% of our coal royalties revenues in 2008 were derived from coal mined on our properties under leases containing royalty rates based on the higher of a fixed base price or a percentage of the gross sales price. The balance of our coal royalties revenues for the respective periods was derived from coal mined on our properties under leases containing fixed royalty rates that escalate annually.

Coal royalties are impacted by several factors that we generally cannot control. The number of tons mined annually is determined by an operator's mining efficiency, labor availability, geologic conditions, access to capital, ability to market coal and ability to arrange reliable transportation to the end-user. New legislation or regulations have been or may be adopted which may have a significant impact on the mining operations of our lessees or their customers' ability to use coal and which may require us, our lessees or our lessees' customers to change operations significantly or incur substantial costs. See Item 1A, "Risk Factors."

To a lesser extent, coal prices also impact coal royalties revenues. Generally, as coal prices change, our average royalty per ton also changes because the majority of our lessees pay royalties based on the gross sales prices of the coal mined. Most of our coal is sold by our lessees under contracts with a duration of one year or more; therefore, changes to our average royalty occur as our lessees' contracts are renegotiated.

We also earn revenues from other land management activities, such as selling standing timber, leasing fee-based coal-related infrastructure facilities to certain lessees and end-user industrial plants, collecting oil and gas royalties and from coal transportation, or wheelage, fees.

The future impact of the current deterioration of the global economy, including financial and credit markets, on coal production levels and prices is uncertain. Depending on the longevity and ultimate severity of the deterioration, demand for coal may decline, which could adversely effect production and pricing for coal mined by our lessees, and, consequently, adversely affect the royalty income received by us and our ability to make cash distributions to our limited partners and to PVG, the owner of our general partner.

Natural Gas Midstream Segment

Our natural gas midstream segment is engaged in providing natural gas processing, gathering and other related services. As of December 31, 2008, we owned and operated natural gas midstream assets located in Oklahoma and Texas, including five natural gas processing facilities having 300 MMcfd of total capacity and approximately 4,069 miles of natural gas gathering pipelines. Our natural gas midstream business earns revenues primarily from gas processing contracts with natural gas producers and from fees charged for gathering natural gas volumes and providing other related services. In addition, we own a 25% member interest in Thunder Creek, a joint venture that gathers and transports coalbed methane in Wyoming's Powder River Basin. We also own a natural gas marketing business, which aggregates third-party volumes and sells those volumes into intrastate pipeline systems and at market hubs accessed by various interstate pipelines.

In 2008, system throughput volumes at our gas processing plants and gathering systems, including gathering-only volumes, were 98.7 Bcf, or approximately 270 MMcfd. In 2008, 27% and 13% of our natural gas midstream segment revenues and 22% and 11% of our total consolidated revenues related to two of our natural gas midstream customers, Conoco, Inc. and Louis Dreyfus Energy Services.

We continually seek new supplies of natural gas to both offset the natural declines in production from the wells currently connected to our systems and to increase system throughput volumes. New natural gas supplies are obtained for all of our systems by contracting for production from new wells, connecting new wells drilled on dedicated acreage and contracting for natural gas that has been released from competitors' systems. In 2008, our natural gas midstream segment made aggregate capital expenditures of $333.3 million, primarily related to our 25% member interest acquisition of Thunder Creek, the Lone Star acquisition, acquisition of pipeline assets in the Anadarko Basin of Oklahoma and Texas and our capacity expanding capital expenditures related to the Spearman and Crossroads plants. For a more detailed discussion of our acquisitions and investments, see "-Acquisitions and Investments."

Revenues, profitability and the future rate of growth of our natural gas midstream segment are highly dependent on market demand and prevailing NGL and natural gas prices. Historically, changes in the prices of most NGL products have generally correlated with changes in the price of crude oil. NGL and natural gas prices have been subject to significant volatility in recent years in response to changes in the supply and demand for NGL products and natural gas market demand. The current deterioration in global economy, including financial and credit markets, will likely result in a decrease in worldwide demand for oil and domestic demand for natural gas and NGLs. Depending on the longevity and ultimate severity of the deterioration, NGL production from our processing plants could decrease and adversely effect our natural gas midstream processing income and our ability to make cash distributions.

Acquisitions and Investments

Set forth below are brief descriptions of the significant acquisitions that we have made in the years ended December 31, 2008, 2007 and 2006.

Coal and Natural Resource Management Segment

In May 2008, we acquired fee ownership of approximately 29 million tons of coal reserves and approximately 56 million board feet of hardwood timber in western Virginia and eastern Kentucky. The purchase price was $24.5 million in cash and was funded with long-term debt under the Revolver.

In October 2007, we purchased from Penn Virginia oil and gas royalty interests associated with leases of property in eastern Kentucky and southwestern Virginia and with estimated proved oil and gas reserves of 8.7 Bcfe at January 1, 2007. The purchase price was $31.0 million in cash and was funded with long-term debt under the Revolver.

In September 2007, we acquired fee ownership of approximately 62,000 acres of forestland in northern West Virginia. The purchase price was $93.3 million in cash and was funded with long-term debt under the Revolver.

In June 2007, we acquired a combination of fee ownership and lease rights to approximately 51 million tons of coal reserves, along with a preparation plant and coal handling facilities. The property is located on approximately 17,000 acres in western Kentucky. The purchase price was $42.0 million in cash and was funded with long-term debt under the Revolver.

In May 2006, we acquired lease rights to approximately 69 million tons of coal reserves. The reserves are located on approximately 20,000 acres in southern West Virginia. The purchase price was $65.0 million in cash and was funded with long-term debt under the Revolver.

Natural Gas Midstream Segment

In July 2008, we completed the Lone Star acquisition. Lone Star's assets are located in the southern portion of the Fort Worth Basin of North Texas and include approximately 129 miles of gas gathering pipelines and approximately 240,000 acres dedicated by active producers. The Lone Star acquisition expanded the geographic scope of the natural gas midstream segment into the Barnett Shale play in the Fort Worth Basin. We acquired this business for approximately $164.3 million and a liability of $4.7 million, which represents the fair value of a $5.0 million guaranteed payment, plus contingent payments of $30.0 million and $25.0 million. Funding for the acquisition was provided by $80.7 million of borrowings under the Revolver, 2,009,995 PVG common units (which we purchased from two subsidiaries of Penn Virginia for $61.8 million) and 542,610 of our newly issued common units. The contingent payments will be triggered if revenues from certain assets located in a defined geographic area reach certain targets by or before June 30, 2013 and will be funded in cash or common units, at our election.

In April 2008, we acquired a 25% member interest in Thunder Creek, a joint venture that gathers and transports coalbed methane in Wyoming's Powder River Basin. The purchase price was $51.6 million in cash, after customary closing adjustments and was funded with long-term debt under the Revolver.

In June 2006, we completed the acquisition of approximately 115 miles of gathering pipelines and related compression facilities in Texas and Oklahoma. These assets are contiguous to our Panhandle System. The purchase price was $14.7 million and was funded with cash. Subsequently, we borrowed $14.7 million under the Revolver to replenish the cash used for the acquisition.

Liquidity and Capital Resources

Liquidity and Working Capital

Liquidity is defined as the ability to convert assets into cash or to obtain cash. Short-term liquidity refers to the ability to meet short-term obligations of 12 months or less. Liquidity is a matter of degree and is expressed in terms of working capital and the current ratio and, due to the recent deterioration of the credit and financial markets, in terms of the availability of borrowing capacity against existing credit facilities and debt instruments. Our consolidated working capital (current assets minus current liabilities) and consolidated current ratio (current assets divided by current liabilities) are as follows as of December 31, 2008 and 2007:

                                            As of December 31,
                                             2008        2007
                    Current Assets        $  117,445   $ 103,734
                    Current Liabilities       89,613     133,488

                    Working Capital       $   27,832   $ (29,754 )

                    Current Ratio               1.31        0.78

As discussed in more detail in "Long-Term Debt" below, as of December 31, 2008, we had availability of $130.3 million under our Revolver.

On an ongoing basis, we generally satisfy our working capital requirements and fund our capital expenditures using cash generated from our operations, borrowings under the Revolver and proceeds from equity offerings. We fund our debt service obligations and distributions to unitholders solely using cash generated from our operations. We believe that the cash generated from our operations and our borrowing capacity will be sufficient to meet our working capital requirements and anticipated capital expenditures (other than major capital improvements or acquisitions). We believe that the cash generated from our operations will be sufficient to meet our scheduled debt payments under the Revolver and distribution payments. See Note 14 - "Partners' Capital and Distributions," in the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for a tabular presentation of distribution thresholds.

Our ability to satisfy our obligations and planned expenditures will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry and natural gas midstream market, some of which are beyond our control. In addition, depending on the longevity and ultimate severity of the current deterioration of the global economy, including financial and credit markets, our ability to grow may be significantly adversely affected, as may our ability to make acquisitions and cash distributions to our limited partners and to PVG, the owner of our general partner. This is due to our debt capacity not being as readily expandable as in the past, which is driven by the overall restrictions on lending by the banking industry. Because of these restrictions to our debt capacity and deterioration in the financial and credit markets, we are anticipating a decrease in capital spending in 2009.

Cash Flows

The following table summarizes our cash flow statements for the years ended
December 31, 2008, 2007 and 2006, consolidating our segments:



                                                   Coal and Natural
                                                       Resource              Natural Gas
For the Year Ended December 31, 2008                  Management              Midstream           Consolidated
                                                                            (in thousands)
Cash flows from operating activities:
Net income contribution                          $             59,192      $         45,308      $      104,500
Adjustments to reconcile net income to net
cash provided by operating activities
(summarized)                                                   41,463                  (258 )            41,205
Net change in operating assets and
liabilities                                                      (831 )              (5,698 )            (6,529 )

Net cash provided by operating activities        $             99,824      $         39,352             139,176

Net cash used in investing activities            $            (25,272 )    $       (305,758 )          (331,030 )

Net cash provided by financing activities                                                               181,808

Net decrease in cash and cash equivalents                                                        $      (10,046 )


                                                   Coal and Natural
                                                       Resource              Natural Gas
For the Year Ended December 31, 2007                  Management              Midstream           Consolidated
                                                                            (in thousands)
Cash flows from operating activities:
Net income contribution                          $             51,681      $          4,942      $       56,623
Adjustments to reconcile net income to net
cash provided by operating activities
(summarized)                                                   22,238                51,206              73,444
Net change in operating assets and
liabilities                                                     3,964                (6,207 )            (2,243 )

Net cash provided by operating activities        $             77,883      $         49,941             127,824

Net cash used in investing activities            $           (177,101 )    $        (47,081 )          (224,182 )

Net cash provided by financing activities                                                               104,448

Net increase in cash and cash equivalents                                                        $        8,090


                                                   Coal and Natural
                                                       Resource              Natural Gas
For the Year Ended December 31, 2006                  Management              Midstream           Consolidated
                                                                            (in thousands)
Cash flows from operating activities:
Net income contribution                          $             55,015      $         18,913      $       73,928
Adjustments to reconcile net income to net
cash provided by operating activities
(summarized)                                                   22,478                10,878              33,356
Net change in operating assets and
liabilities                                                     1,450                (1,390 )                60

Net cash provided by operating activities        $             78,943      $         28,401             107,344

Net cash used in investing activities            $            (92,692 )    $        (36,984 )          (129,676 )

Net cash provided by financing activities                                                                10,579

Net decrease in cash and cash equivalents                                                        $      (11,753 )

Net Cash Provided by Operating Activities

Changes to our working capital and to our current ratio are largely affected by net cash provided by operating activities. Net cash provided by operating activities primarily came from the following sources:

Coal and natural resource management segment:

• the collection of coal royalties;

• the sale of standing timber;

• the collection of coal transportation, or wheelage, fees;

• distributions received from our equity investees; and

Natural gas midstream segment:

• the collection of revenues from natural gas processing contracts with natural gas producers;

• the collection of revenues from our natural gas marketing business; and

• settlements from our natural gas midstream commodity derivatives.

We use the cash provided by operating activities in the coal and natural resource management segment and the natural gas midstream segment in the following ways:

• operating expenses, such as core-hole drilling costs and repairs and maintenance costs;

• taxes other than income, such as severance and property taxes;

• general and administrative expenses, such as office rentals, staffing costs and legal fees;

• interest on debt service obligations;

• capital expenditures;

• repayments of borrowings; and

• distributions to our partners.

Net cash provided by operating activities in 2008 increased by $11.4 million, or 9%, to $139.2 million from $127.8 million in 2007. The overall increase in net cash provided by operating activities in 2008 compared to 2007 was primarily attributable to increased cash received from the sales of residue gas and NGLs, which was primarily driven by increased system throughput volume; increased coal royalties received, which was driven primarily by increased production and sales prices of coal in the Central Appalachian and Illinois Basin regions; and increased cash received from the sale of standing timber, which was due primarily to increased harvesting from our September 2007 forestland acquisition. These increases were partially offset by increased cash outflows from our natural gas midstream commodity derivative settlements.

Net cash provided by operating activities in 2007 increased by $20.5 million, or 19%, to $127.8 million from $107.3 million in 2006. This increase was primarily attributable to increased sales of NGLs, which was primarily driven by increased volumes of processed gas and a higher frac spread during 2007 than in 2006; and decreased cash outflows for our natural gas midstream commodity derivative settlements. These increases were partially offset by a decrease in coal royalties received, which was driven by a decrease in coal production from subleased properties in the Central Appalachian region.

Net Cash Used in Investing Activities

Net cash used in investing activities increased by $106.8 million, or 48%, from $224.2 million in 2007 to $331.0 million in 2008. The cash used in investing activities for the years ended December 31, 2008, 2007 and 2006 were used primarily for capital expenditures. The following table sets forth capital expenditures by segment made during the years ended December 31, 2008, 2007 and 2006:

                                                       Year Ended December 31,
                                                    2008        2007        2006
                                                           (in thousands)
      Coal and natural resource management
      Acquisitions (1)                            $  27,075   $ 176,918   $  76,402
      Expansion capital expenditures                     -           85      15,103
      Other property and equipment expenditures         195          84         100

      Total                                          27,270     177,087      91,605


      Natural gas midstream
      Acquisitions (2)                              259,417          -       14,626
      Expansion capital expenditures                 59,385      38,686      15,394
      Other property and equipment expenditures      14,505       9,767       9,414

      Total                                         333,307      48,453      39,434


      Total capital expenditures                  $ 360,577   $ 225,540   $ 131,039

(1) Coal and natural resource management segment acquisitions in 2007 include an $11.5 million lease receivable associated with the acquisition of fee ownership and lease rights to coal reserves in western Kentucky and $31.0 million of oil and gas royalty interests that we purchased from Penn Virginia. Coal and natural resource management segment acquisitions in 2006 include the acquisition of assets and liabilities other than property or equipment of $1.2 million.

(2) Natural gas midstream segment acquisitions in 2008 include the following non-cash items, all of which was given as consideration in the Lone Star acquisition: newly issued PVR units valued at $15.2 million; PVG units, which were purchased from Penn Virginia, valued at $68.0 million; and a $4.7 million guaranteed payment which will be paid in 2009.

In 2008, we made aggregate capital expenditures of $360.6 million. These capital expenditures consisted primarily of discretionary capital expenditures which included our 25% member interest acquisition in Thunder Creek, the Lone Star acquisition, pipeline assets in the Anadarko Basin of Oklahoma and Texas, expansion capital expenditures related to the Spearman and Crossroads plants and the acquisition of approximately 29 million tons of coal reserves and an estimated 56 million board feet of hardwood timber in western Virginia and eastern Kentucky. Our natural gas midstream segment also incurred approximately $14.5 million of maintenance capital expenditures for equipment overhauls and connecting wells in existing areas.

In 2007, we made aggregate capital expenditures of $225.5 million. These capital expenditures consisted primarily of discretionary capital expenditures, which included our coal reserve acquisitions, a forestland acquisition, an oil and gas royalty interest acquisition and natural gas midstream gathering system expansion projects. Our natural gas midstream segment also incurred $9.8 million of maintenance capital expenditures for equipment overhauls and connecting wells in existing areas.

In 2006, we made aggregate capital expenditures of $131.0 million. These capital expenditures consisted primarily of discretionary capital expenditures, which included our coal reserve acquisitions, coal loadout facility construction projects, a natural gas midstream acquisition and coal and natural gas midstream . . .