Coal landholder Natural Resource Partners LP (NYSE: NRP) said May 2 that its lessees continue to perform as expected in this weak coal environment, but overall performance by those coal producers is being hit hard by a warm winter and cheap natural gas available to power generators.
Nick Carter, NRP President and COO, said in a May 2 earnings statement: “While production and revenues have increased over the first quarter 2011, production curtailments announced by lessees earlier this year have caused our first quarter results to be modestly below the fourth quarter 2011, but on track with our guidance issued in February.”
NRP reported revenues of $91.9m in the first quarter, an 8% increase over the first quarter 2011. Net income attributable to the limited partners increased 13% to $50.3m for the first quarter of 2012, compared to $44.4m for the first quarter of 2011.
“While we expect the first half of 2012 to be weak, we expect the metallurgical coal markets to begin to recover modestly in the second half,” said Carter. “The bright light for the coal industry continues to be domestic demand for metallurgical coal driven by the increased production of automobiles in the United States. In addition, metallurgical coal exports are up over 7% year-to-date.”
With NRP’s strong position in metallurgical coal reserves and further diversification into the Illinois Basin steam coal business, much of which is being exported, NRP said it is better protected from the weak domestic demand and the declines being experienced in Central Appalachia thermal coal.
Thermal coal demand has been and will continue to be weak in the near term as the U.S. has experienced a very mild winter. Coal inventories at utilities continue near all-time highs, low natural gas prices have caused switching of natural gas for some normal coal burn, and new environmental regulations have caused uncertainty, NRP noted. NRP, though, believes at this point that things are near the maximum level of switching that can occur in the electrical grid and there should not be any further major degradation of the coal burn due to switching without additions to infrastructure.
First quarter 2012 coal royalty revenues declined 8% to $59.9m from $65.4m last year due to a decline in realizations for coal royalty revenue per ton. Coal production increased modestly to 12.1 million tons, with an increase in Northern Appalachia offsetting an 11% decrease in Central Appalachia. Average coal royalty revenue per ton decreased 10% from the first quarter of 2011 to $4.95.
The most dramatic changes were seen in Northern Appalachia and the Gulf Coast region. In Northern Appalachia, production resumed on a property with an old lease that has a very low royalty rate, while production from a new lease in the Gulf Coast region significantly improved the royalties per ton from that region. Met coal production accounted for 31% of this quarter’s production and 45% of coal royalty revenue.
During the first quarter, NRP recognized as revenue $9.6m in minimums associated with the idled Gatling Ohio deep mine, which is a Chris Cline operation in Ohio that ran into geology problems recently. Excluding those minimums, NRP generated $22.4m of its first quarter revenues from sources other than coal royalty revenues, compared to $19.5m for the same period in 2011.
During the first quarter of 2012, NRP completed acquisitions totaling $126.7m, of which $79.7m was funded from cash. The remaining $47m was funded through NRP’s credit facility. The coal acquisitions were: $40m for reserves from Colt LLC at Cline’s Deer Run longwall mine in Illinois; $50m for the infrastructure assets at the Sugar Camp longwall mine in Illinois; $8.9m for a contractual override at the Sugar Camp mine in Illinois; and $2.8m for met coal reserves adjacent to current NRP holdings in Central Appalachia.