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 and the financial statements and footnotes included in the Natural Resource Partners L.P. Form 10-K, as filed on February 27, 2009.
Executive Overview
Our Business
We engage principally in the business of owning, managing and leasing 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, 2008, we owned or controlled approximately 2.1 billion tons of proven and probable coal reserves, of which 59% are low sulfur coal. We lease coal reserves to experienced mine operators under long-term leases that grant the operators the right to mine and sell coal from our reserves in exchange for royalty payments.
Our revenue and profitability are dependent on our lessees' ability to mine and market our coal reserves. Most of our coal is produced by large companies, many of which are publicly traded, with experienced and professional sales departments. A significant portion of our coal is sold by our lessees under coal supply contracts that have terms of one year or more. However, over the long term, our coal royalty revenues are affected by changes in the market for and the market price of coal.
In our coal royalty business, our lessees make payments to us based on the greater of a percentage of the gross sales price or a fixed royalty per ton of coal they sell, subject to minimum monthly, quarterly or annual payments. 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 those 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 recorded as deferred revenue, a liability on our balance sheet.
In addition to coal royalty revenues, we generated approximately 22% of our year- to-date and third quarter revenues from other sources in both 2008 and 2009. These other sources include: aggregate royalties; coal processing and transportation fees; rentals; royalties on oil and gas; timber; overriding royalties; and wheelage payments.
Our Current Liquidity Position
As of September 30, 2009 we had $278 million in available capacity under our existing credit facility, which does not mature until March 2012, as well as approximately $61 million in cash. In connection with the Colt acquisition in the third quarter, the holders of our incentive distribution rights agreed to forego approximately $7.35 million in distributions with respect to each of the third and fourth quarters of 2009, giving us approximately $14.7 million of additional liquidity. In addition, because we amortize substantially all of our long-term debt, we have no need to pay off or refinance any debt obligations other than our regularly scheduled principal payments.
Pursuant to purchase and sale agreements in connection with the Blue Star and Colt acquisitions, we anticipate funding an additional $257 million over the next 27 months, of which approximately $175 million is anticipated to be funded over the next 12 months, as the sellers achieve various development milestones. We anticipate funding these acquisitions through the use of the available capacity under our credit facility and through the issuance of debt and/or equity in the capital markets. We believe that we have enough liquidity to meet our current capital needs.
Current Results
As of September 30, 2009, our reserves were subject to 206 leases with 75 lessees. For the nine months ended September 30, 2009, our lessees produced 35.5 million tons of coal generating $148.3 million in coal royalty revenues from our properties, and our total revenues were $190.2 million.

As a result of declines in production in the first nine months, we recorded lower than expected revenues for the periods ended September 30, 2009. The difficult economic environment and very low prices for natural gas, a competing fuel, impacted demand for coal, particularly within heavily industrialized regions where coal is the dominant generating fuel. While we do not have much visibility into the future of the coal markets, several public coal companies have indicated that they are starting to see signs of a recovery. We expect that during the remainder of 2009, we will experience gradual improvements similar to the changes we have seen in the latter part of the first nine months, but do not expect material improvement during the remainder of this year.
Even though coal royalty revenues from our Appalachian properties represented 67% of our total revenues in the first nine months of 2009, this percentage has continued to decline as we are diligently working to diversify our holdings by expanding our presence in the Illinois Basin. Through our relationship with the Cline Group, we expect our Illinois Basin assets to contribute even more significantly to our total revenues in the remainder of 2009 and 2010.
Because we have significant exposure to metallurgical coal, we are feeling the effects of the global reduction in demand for steel. Several of the metallurgical coal producers on our properties temporarily ceased production during the second quarter, but gradually started calling miners back to work in the third quarter although metallurgical coal prices, which have recently increased off of their lows for the year, should remain steady for the remainder of the year. Approximately 30% of our coal royalty revenues and 23% of the related production during the nine months ended September 30, 2009 were from metallurgical coal.
Political, Legal and Regulatory Environment The political, legal and regulatory environment is becoming increasingly difficult for the coal industry. In June 2009, the White House Council on Environmental Quality announced a Memorandum of Understanding among the Environmental Protection Agency, or "EPA", Department of Interior, and the U.S. Army Corps of Engineers concerning the permitting and regulation of coal mines in Appalachia. While the Council described this memorandum as an "unprecedented step[s] to reduce environmental impacts of mountaintop coal mining," the memorandum broadly applies to all forms of coal mining in Appalachia. The memorandum contemplates both short-term and long-term changes to the process for permitting and regulating coal mines in Appalachia.
These new processes impact only six Appalachian states. In connection with this initiative, the EPA has used its authority to create significant delays in the issuance of new permits and the modification of existing permits. The all-encompassing nature of the changes suggests that implementation of the memorandum will generate continued uncertainty regarding the permitting of coal mines in Appalachia for some time and inevitably will lead, at a minimum, to substantial delays and increased costs.
In addition to the increased oversight of the EPA, the Mine Safety and Health Administration, or MSHA, has increased its involvement in the approval and enforcement of safety issues in connection with mining. MSHA's involvement has increased the cost of mining due to more frequent citations and much higher fines imposed on our lessees as well as the overall cost of regulatory compliance. Combined with the difficult economic environment and the higher costs of mining in general, MSHA's recent increased participation in the mine development process could significantly delay the opening of new mines.
In April 2009, the EPA issued a notice of its findings and determination that emissions of carbon dioxide, methane, and other "greenhouse gases," or "GHGs," presented an endangerment to human health and the environment because such gases are, according to EPA, contributing to warming of the earth's atmosphere and other climatic changes. Finalization of EPA's finding and determination will allow it to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act. In September 2009, EPA proposed two sets of regulations in response to its finding and determination, one to reduce emissions of GHGs from motor vehicles and the other to control emissions from large stationary sources, including coal-fired electric power plants. Although the motor vehicle rules are expected to be adopted in March 2010, it may take EPA several years to adopt and impose regulations limiting emissions of GHGs from stationary sources. Any limitation on emissions of GHGs from our operations and equipment could require us to incur costs to reduce emissions of GHGs associated with our operations. Similarly, any limitation on emissions of GHGs from the operations of consumers of coal could cause them to incur additional costs and reduce the demand for coal.
Finally, on June 26, 2009, the U.S. House of Representatives approved adoption of the "American Clean Energy and Security Act of 2009," also known as the "Waxman-Markey cap-and-trade legislation" or ACESA. The purpose of ACESA is to control and reduce emissions of GHGs in the United States. GHGs are certain gases, including carbon dioxide and methane, that may be contributing to warming of the Earth's atmosphere and other climatic changes. The net effect of ACESA will be to impose increasing costs on the combustion of carbon-based fuels such as coal.

The U.S. Senate has begun work on its own legislation for controlling and reducing emissions of GHGs in the United States. If the Senate adopts GHG legislation that is different from ACESA, the Senate legislation would need to be reconciled with ACESA and both chambers would be required to approve identical legislation before it could become law. President Obama has indicated that he is in support of the adoption of legislation to control and reduce emissions of GHGs through an emission allowance permitting system that results in fewer allowances being issued each year but that allows parties to buy, sell and trade allowances as needed to fulfill their GHG emission obligations. Although it is not possible at this time to predict whether or when the Senate may act on climate change legislation or how any bill approved by the Senate would be reconciled with ACESA, any laws or regulations that may be adopted to restrict or reduce emissions of GHGs could have an adverse effect on demand for our coal.
Distributable Cash Flow
Under our partnership agreement, we are required to distribute all of our available cash each quarter. Because distributable cash flow is a significant liquidity metric that is an indicator of our ability to generate cash flows at a level that can sustain or support an increase in quarterly cash distributions paid to our partners, we view it as the most important measure of our success as a company. Distributable cash flow is also the quantitative standard used in the investment community with respect to publicly traded partnerships.
Our distributable cash flow represents cash flow from operations less actual principal payments and cash reserves set aside for scheduled principal payments on our senior notes. Although distributable cash flow is a "non-GAAP financial measure," we believe it is a useful adjunct to net cash provided by operating activities under GAAP. Distributable cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing or financing activities. Distributable cash flow may not be calculated the same for NRP as for other companies. A reconciliation of distributable cash flow to net cash provided by operating activities is set forth below.
Reconciliation of GAAP "Net cash provided by operating activities" to Non-GAAP "Distributable cash flow"

                                                  For the Three Months Ended                For the Nine Months Ended
                                                         September 30,                            September 30,
                                                                              (Unaudited)
                                                  2009                  2009                 2009                 2008
Net cash provided by operating
activities                                    $      38,120         $      58,273        $     138,799         $  159,143
Less scheduled principal payments                    (7,693 )              (7,691 )            (17,235 )          (17,234 )
Less reserves for future principal
payments                                             (8,059 )              (4,308 )            (24,177 )          (12,924 )
Add reserves used for scheduled
principal payments                                    7,693                 7,691               17,235             17,234

Distributable cash flow                       $      30,061         $      53,965        $     114,622         $  146,219

Acquisitions
We are a growth-oriented company and have closed a number of acquisitions over the last several years. Our most recent acquisitions are briefly described below.
Colt - In September 2009, we signed a definitive agreement to acquire approximately 200 million tons of coal reserves related to the Deer Run Mine in Illinois from Colt LLC, an affiliate of the Cline Group, through eight separate transactions for a total purchase price of $255 million. Upon closing of the first transaction, NRP paid $10.0 million, funded through its credit facility, and acquired approximately 3.3 million tons of reserves associated with the initial production from the mine. Future closings anticipated through 2012 will be associated with completion of certain milestones relating to the new mine's construction.
Blue Star - In July 2009, we acquired approximately 121 acres of limestone reserves in Wise County, Texas from Blue Star Materials, LLC for a purchase price of $24 million. As of September 30, 2009, we had funded $12.0 million of the acquisition with borrowings under our credit facility. The remaining payments are expected to be made over the next six months upon completion of certain development milestones.
Gatling Ohio - In May 2009, we completed the purchase of the membership interest in two companies from Adena Minerals, LLC, an affiliate of the Cline Group. The companies own coal reserves and infrastructure assets, related to Cline's Yellowbush Mine located on the Ohio River in Meigs County, Ohio. We issued 4,560,000 common units to Adena Minerals in connection with this acquisition. In addition, the general partner of Natural Resource Partners granted Adena Minerals an additional nine percent interest in the general partner.

Massey - Jewell Smokeless. In March 2009, we acquired from Lauren Land Company, a subsidiary of Massey Energy, the remaining four-fifths interest in coal reserves located in Buchanan County, Virginia in which we previously held a one-fifth interest. Total consideration for this purchase was $12.5 million.
Macoupin. In January 2009, we acquired coal reserves and infrastructure assets related to the Shay No. 1 mine in Macoupin County, Illinois for $143.7 million from Macoupin Energy, LLC, an affiliate of the Cline Group.
Coal Properties. In October 2008, we acquired an overriding royalty for $5.5 million from Coal Properties Inc. This overriding royalty agreement is for coal reserves located in the states of Illinois and Kentucky.
Mid-Vol Coal Preparation Plant. In April 2008, we completed construction of a coal preparation plant and coal handling infrastructure under our memorandum of understanding with Taggart Global USA, LLC. The total cost to build the facilities was $12.7 million.
Licking River Preparation Plant. In March 2008, we signed an agreement for the construction of a coal preparation plant facility under our memorandum of understanding with Taggart Global USA, LLC. The total cost for the facility, located in Eastern Kentucky, was $8.9 million.

Results of Operations

                                                   Three Months Ended                Increase           Percentage
                                                      September 30,                 (Decrease)            Change
                                                  2009               2008
                                                         (In thousands, except percent and per ton data)
                                                                           (Unaudited)
Coal:
Coal royalty revenues
Appalachia
Northern                                      $      3,998         $  3,433        $        565                  16 %
Central                                             33,688           40,371              (6,683 )               (17 %)
Southern                                             4,849            5,397                (548 )               (10 %)

Total Appalachia                                    42,535           49,201              (6,666 )               (14 %)
Illinois Basin                                       5,413            6,438              (1,025 )               (16 %)
Northern Powder River Basin                          1,359            2,684              (1,325 )               (49 %)

Total                                         $     49,307         $ 58,323        $     (9,016 )               (15 %)

Production (tons)
Appalachia
Northern                                             1,238            1,172                  66                   6 %
Central                                              6,984            8,859              (1,875 )               (21 %)
Southern                                               799            1,015                (216 )               (21 %)

Total Appalachia                                     9,021           11,046              (2,025 )               (18 %)
Illinois Basin                                       1,723            2,441                (718 )               (29 %)
Northern Powder River Basin                            539            1,448                (909 )               (63 %)

Total                                               11,283           14,935              (3,652 )               (24 %)

Average gross royalty per ton
Appalachia
Northern                                      $       3.23         $   2.93        $       0.30                  10 %
Central                                               4.82             4.56                0.27                   6 %
Southern                                              6.07             5.32                0.75                  14 %
Total Appalachia                                      4.72             4.45                0.26                   6 %
Illinois Basin                                        3.14             2.64                0.50                  19 %
Northern Powder River Basin                           2.52             1.85                0.67                  36 %
Combined average gross royalty per ton                4.37             3.91                0.46                  12 %

Aggregates:
Royalty revenue                               $      1,400         $  1,980        $       (580 )               (29 %)
Aggregate royalty bonus                       $        300         $    300        $          -                   -
Production                                           1,148            1,484                (336 )               (23 %)
Average base royalty per ton                  $       1.22         $   1.33        $      (0.11 )                (8 %)

Coal Royalty Revenues and Production. Coal royalty revenues comprised approximately 77% of our total revenue for each of the three month periods ended September 30, 2009 and 2008. The following is a discussion of the coal royalty revenues and production derived from our major coal producing regions:
Appalachia. Primarily due to lower production by our lessees in the Northern and Central Appalachian regions, coal royalty revenues decreased in the three month period ended September 30, 2009 compared to the same period of 2008. The lower production was due to a number of factors, including mine closures and temporary idling due to increasing costs, a difficult regulatory environment, increasingly difficult geologic conditions and some mines moving to adjacent properties. This decline in production was in part offset by a higher royalty per ton in all regions. We expect that our lessees in Appalachia will continue to experience these difficulties, which may cause future production levels to continue to decline.
Illinois Basin. Production and coal royalty revenues decreased primarily due to a mine moving off our property and lower shipments from our Williamson property.

Northern Powder River Basin. Coal royalty revenues and production decreased on our Western Energy property due to the normal variations that occur due to the checkerboard nature of ownership and an unplanned outage at one of the power plants that this mine supplies.
Aggregates Royalty Revenues and Production. Aggregate production decreased during the second quarter resulting in lower royalty revenue. The lower production is mainly attributed to lower demand in the region.

                                                    Nine Months Ended                Increase           Percentage
                                                      September 30,                 (Decrease)            Change
                                                 2009               2008
                                                         (In thousands, except percent and per ton data)
                                                                           (Unaudited)
Coal:
Coal royalty revenues
Appalachia
Northern                                      $     9,931         $  11,838        $     (1,907 )               (16 %)
Central                                           101,874           117,642             (15,768 )               (13 %)
Southern                                           14,755            14,697                  58                  <1 %

Total Appalachia                                  126,560           144,177             (17,617 )               (12 %)
Illinois Basin                                     16,234            14,995               1,239                   8 %
Northern Powder River Basin                         5,500             8,329              (2,829 )               (34 %)

Total                                         $   148,294         $ 167,501        $    (19,207 )               (11 %)

Production (tons)
Appalachia
Northern                                            3,304             4,436              (1,132 )               (26 %)
Central                                            21,962            27,430              (5,468 )               (20 %)
Southern                                            2,438             3,239                (801 )               (25 %)

Total Appalachia                                   27,704            35,105              (7,401 )               (21 %)
Illinois Basin                                      5,005             5,899                (894 )               (15 %)
Northern Powder River Basin                         2,840             4,493              (1,653 )               (37 %)

Total                                              35,549            45,497              (9,948 )               (22 %)

Average gross royalty per ton
Appalachia
Northern                                      $      3.01         $    2.67        $       0.34                  13 %
Central                                              4.64              4.29                0.35                   8 %
Southern                                             6.05              4.54                1.51                  33 %
Total Appalachia                                     4.57              4.11                0.46                  11 %
Illinois Basin                                       3.24              2.54                0.70                  28 %
Northern Powder River Basin                          1.94              1.85                0.08                   4 %
Combined average gross royalty per ton               4.17              3.68                0.49                  13 %
Aggregates:
Royalty revenue                               $     3,377         $   5,028        $     (1,651 )               (33 %)
Aggregate royalty bonus                       $     1,320         $   2,544        $     (1,224 )               (48 %)
Production                                          2,629             3,876              (1,247 )               (32 %)
Average base royalty per ton                  $      1.28         $    1.30        $      (0.01 )                (1 %)

Coal Royalty Revenues and Production. Coal royalty revenues comprised approximately 78% of our total revenue for each of the nine month periods ended September 30, 2009 and 2008. The following is a discussion of the coal royalty revenues and production derived from our major coal producing regions:
Appalachia. Primarily due to lower production by our lessees, coal royalty revenues decreased in the nine month period ended September 30, 2009 compared to the same period of 2008. Production was lower across all three Appalachian regions. Although production was lower, our royalty per ton increased across all regions, partially offsetting the production decline. The lower production was due to a number of factors, including mine closures and temporary idling due to increasing costs, a difficult regulatory environment, increasingly difficult geologic conditions and some mines moving to adjacent properties. We expect that our lessees in Appalachia will continue to experience these difficulties, which may cause current production levels and potentially the prices being realized by our lessees to decline.
Illinois Basin. Both production and coal royalty revenues decreased for the nine month period ended September 30, 2009 compared to the same period for 2008. These decreases were primarily due to a mine moving to adjacent property and slightly lower shipments from our Williamson property partially offset by the production at Williamson being a higher royalty per ton.

Northern Powder River Basin. Coal royalty revenues and production decreased on our Western Energy property due to the normal variations that occur due to the checkerboard nature of ownership and an unplanned outage at one of the power plants that this mine supplies. Near the end of the first quarter, the mine on this property experienced a brief work stoppage during the negotiation of a new labor contract.
Aggregates Royalty Revenues and Production. Aggregate production decreased during the nine months ended September 30, 2009 resulting in lower royalty revenue. The lower production is mainly attributed to lower demand in the region.
Other Operating Results
Coal Processing and Transportation Revenues. We generated $1.5 million and . . .