Coal Reserves and Production

As of December 31, 2004, we had approximately 558 million tons of proven and probable coal reserves located on 241,000 acres in Virginia, West Virginia, New Mexico and eastern Kentucky. Our reserves are located on six separate properties:

• the Wise property, located in Wise and Lee Counties, Virginia and Letcher and Harlan Counties, Kentucky;
• the Coal River property, located in Boone, Fayette, Kanawha, Lincoln and Raleigh Counties, West Virginia;
• the New Mexico property, located in McKinley County, New Mexico;
• the Northern Appalachia property, located in Barbour, Harrison, Lewis, Monongalia and Upshur Counties, West Virginia;
• the Spruce Laurel property, located in Boone and Logan Counties, West Virginia; and
• the Buchanan property, located in Buchanan County, Virginia.
  
  

Proven Reserves—Proven reserves are reserves for which: (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely, and the geologic character is so well defined, that the size, shape, depth and mineral content of reserves are well-established.

Probable Reserves—Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are more widely spaced or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

In areas where geologic conditions indicate potential inconsistencies related to coal reserves, we perform additional exploration to ensure the continuity and mineability of the coal reserves. Consequently, sampling in those areas involves drill holes or channel samples that are spaced closer together than those distances cited above.

Our lessees mine coal using both underground and surface methods. Our lessees currently operate 24 surface mines and 41 underground mines. Approximately 64 percent of the coal produced from our properties in 2004 came from underground mines and 36 percent came from surrface mines. Most of our lessees use the continuous mining method in all of their underground mines located on our properties. In continuous mining, main airways and transportation entries are developed and remote-controlled continuous miners extract coal from “rooms,” leaving “pillars” to support the roof. Shuttle cars transport coal to a conveyor belt for transportation to the surface. In several underground mines, our lessees use two continuous miners running at the same time, also known as a supersection, to improve productivity and reduce unit costs.

Two of our lessees use the longwall mining method to mine underground reserves. Longwall mining uses hydraulic jacks or shields, varying from four feet to twelve feet in height, to support the roof of the mine while a mobile cutting shearer advances through the coal. Chain conveyors then move the coal to a standard deep mine conveyor belt system for delivery to the surface. Continuous mining is used to develop access to long rectangular panels of coal that are mined with longwall equipment, allowing controlled caving behind the advancing machinery. Longwall mining is typically highly productive when used for large blocks of medium to thick coal seams.

Surface mining methods used by our lessees include use auger and highwall miners, in conjunction with surface mining, to enhance production, improve reserve recovery and reduce unit costs. On our New Mexico property, a combination of the dragline and truck-and-shovel surface mining methods is used to mine the coal. Dragline and truck-and-shovel mining uses large capacity machines to remove overburden to expose the coal seams. Wheel loaders then load the coal in haul trucks for transportation to a loading facility.

Our lessees’ customers are primarily utilities. Coal produced from our properties is transported by rail, barge and truck, or a combination of these means of transportation. Coal from the Virginia portion of the Wise property and the Buchanan property is primarily shipped to electric utilities in the Southeast by the Norfolk Southern railroad. Coal from the Kentucky portion of the Wise property is primarily shipped to electric utilities in the Southeast by the CSX railroad. Coal from the Coal River and Spruce Laurel properties is shipped to steam and metallurgical customers by the CSX railroad, by barge along Kanawha River, by truck or by a combination thereof. Coal from the Northern Appalachia property is shipped by barge on the Monongahela River, by truck and by the CSX and Norfolk Southern railroads. Coal from the New Mexico property is shipped to steam markets in New Mexico and Arizona by the Burlington Northern Santa Fe railroad. All of our properties contain and have access to numerous roads and state or interstate highways.

The Wise Property

The Wise property consists of 103,000 acres located in Wise and Lee Counties, Virginia, and Letcher and Harlan Counties, Kentucky. We own 66,000 acres in fee and own the mineral interests in an additional 37,000 acres. We first acquired the majority of this property in 1882, and the first lease entered into with a lessee for a portion of this property was in 1902. As of December 31, 2004, the property included 204 million tons of coal reserves and related infrastructure, including a unit train loadout facility capable of loading 4,500 tons of coal per hour that can sample, blend and load coal into unit trains of up to 108 railcars within a four-hour period.

As of December 31, 2004, we leased 81.5 percent of the Wise property reserves pursuant to 26 separate leases. Production from the property totaled 10.0 million tons for the year ended December 31, 2004 and was shipped to our lessees’ customers via truck, the Norfolk Southern railroad and the CSX railroad.

The Coal River Property

The Coal River property consists of 84,000 acres located in Boone, Fayette, Kanawha, Lincoln and Raleigh Counties, West Virginia. We own 53,000 acres in fee, the mineral interests to 19,000 acres and lease 12,000 acres from third parties. We acquired rights to this property pursuant to four acquisitions between 1996 and 2002, and the first lease we entered into with a lessee for this property was in 1996. As of December 31, 2004, the Coal River property included 194 million tons of proven and probable coal reserves in West Virginia and related infrastructure and other assets, including a coal loading dock on the Kanawha River, a 900-ton per hour coal preparation plant, a unit train loading facility and a modular coal preparation plant. In January 2004, we completed the construction of a new coal loadout facility for one of our lessees on our Coal River property in West Virginia. The $4.4 million loadout facility is designed for the high-speed loading of 150-car unit trains and became operational on February 1, 2004.

As of December 31, 2004, we leased 88.9 percent of the Coal River property reserves pursuant to 9 leases. Production from the property totaled 7.8 million tons for the year ended December 31, 2004 and was shipped to our lessees’ customers via truck, barge and the CSX railroad.

The New Mexico Property

The New Mexico property consists of over 4,000 acres located in McKinley County, New Mexico. We acquired the mineral interests to this property in December 2002 in connection with the Peabody Acquisition. As of December 31, 2004, the New Mexico property included approximately 68 million tons of proven and probable coal reserves

As of December 31, 2004, we had leased all of the New Mexico property reserves to Peabody. Production from the property totaled 5.5 million tons for the year ended December 31, 2004 and was shipped to our lessee’s customers via the Burlington Northern Santa Fe railroad.

The Northern Appalachia Property

The Northern Appalachia property consists of over 18,000 acres of mineral interests located in Barbour, Harrison, Lewis, Monongalia and Upshur Counties, West Virginia. We acquired the mineral interests to this property through the Upshur Acquisition in August 2002 and the Peabody Acquisition in December 2002. As of December 31, 2004, the Northern Appalachia property included approximately 44 million tons of proven and probable coal reserves.

As of December 31, 2004, we leased substantially all of the Northern Appalachia property reserves pursuant to eight leases. Production from the property totaled 5.6 million tons for the year ended December 31, 2004 and was shipped to our lessees’ customers via truck, barge and the CSX and Norfolk Southern railroads.

The Spruce Laurel Property

The Spruce Laurel property consists of 12,000 acres located in Boone and Logan Counties, West Virginia. We own 10,000 acres in fee and lease 2,000 acres from third parties. We first acquired the rights to this property in 1963. As of December 31, 2004, the Spruce Laurel property included approximately 46 million tons of proven and probable coal reserves.

As of December 31, 2004, we leased all of the Spruce Laurel property reserves pursuant to eight leases. Production from the Spruce Laurel property was 1.9 million tons for the year ended December 31, 2004 and was shipped to our lessees’ customers via a belt line and the CSX railroad.

The Buchanan Property

The Buchanan property consists of 20,000 acres located in Buchanan County, Virginia. We own the mineral interests to 6,500 acres, and we lease the mineral rights to 13,400 acres from third parties. We first acquired the rights to this property in 1997. As of December 31, 2004, the Buchanan property included approximately 1.3 million tons of coal reserves.

As of December 31, 2004, we leased all of the Buchanan property reserves pursuant to three leases. Production from the Buchanan property was 0.4 million tons for the year ended December 31, 2004 and was shipped to our lessees’ customers via the Norfolk Southern railroad and via truck.

Timber

The Partnership’s approximately 167 Mbf of timber inventory only includes timber that can be harvested and is greater than 12 inches in diameter. Our timberlands are located on our Wise, Spruce Laurel and Coal River properties and contain various hardwood species, including red oak, white oak, yellow poplar and black cherry. In 2004, we sold 2.6 Mbf of timber, which generated timber revenues of $0.7 million. Timber is sold in a competitive bid process involving sales of standing timber on individual parcels and, from time to time, on a contract basis where independent contractors harvest and sell the timber. Timber revenues are recognized when the timber has been sold or harvested by the independent contractors. Title and risk of loss pass to the independent contractors upon the execution of the contract. In addition, if the contractors do not harvest the timber within the specified time period, the title of the timber reverts back to the Partnership with no refund of original payment.