Transcript Natural Resource Partners

Natural Resource Partners L.P.
Morgan Stanley Small Cap Conference
New York, New York
June 16, 2006
Forward-Looking Statements
The statements made by representatives of Natural Resource Partners
L.P. (“NRP”) during the course of this presentation that are not
historical facts are forward-looking statements. Although NRP believes
that the assumptions underlying these statements are reasonable,
investors are cautioned that such forward-looking statements are
inherently uncertain and necessarily involve risks that may affect NRP’s
business prospects and performance, causing actual results to differ
from those discussed during the presentation.
Such risks and uncertainties include, by way of example and not of
limitation: general business and economic conditions; decreases in
demand for coal; changes in our lessees’ operating conditions and
costs; changes in the level of costs related to environmental protection
and operational safety; unanticipated geologic problems; problems
related to force majeure; potential labor relations problems; changes in
the legislative or regulatory environment; and lessee production cuts.
These and other applicable risks and uncertainties have been described
more fully in NRP’s 2005 Annual Report on Form 10-K. NRP undertakes
no obligation to publicly update any forward-looking statements,
whether as a result of new information or future events.
2
Overview of Natural Resource Partners
• Own and manage coal properties in the three major coal producing
regions of the United States:
– Appalachia, Illinois Basin and Western US
– Eleven States
• Lease reserves to experienced mine operators under long-term
leases in exchange for royalty payments
• Royalty payments based on percentage of sales price or fixed
price, with periodic minimum payments
• Lessees provide coal to diverse group of utilities, steel companies
and industrial users
3
Evolution Since Natural Resource Partners’ IPO
IPO (10/11/2002)
Current
Reserves:
~1.2 billion tons
~2.0 billion tons (1)
Annual Production: (2)
30.5 million tons
53.6 million tons
Number of Leases:
62
176 (3)
Number of Lessees:
31
68 (3)
Market Capitalization:
$454 million
$1,425 million (4)
Distribution per Unit:
$0.5125 quarterly
$0.79 quarterly
$2.05 annualized
$3.16 annualized
Senior Notes:
$0 million
$256 million (3)
Drawn on Revolver:
$0 million
$10 million(3)
Total Revolver Size:
$100 million
$175-$300 million (5)
$1 million
$67 million(3)
Cash on Hand
_______________________
(1)
(2)
(3)
(4)
(5)
As of 12/31/2005
For 2002 and 2005, respectively
As of 3/31/2006
Based on $56.25 per unit
As of 03/31/06 NRP had $165 million of $175 million capacity available
under its credit facility. NRP also retains the right to increase the size of
the credit facility to $300 million without obtaining lender consents.
4
Diverse Portfolio of Properties
Northern Powder River Basin
Reserves – 132 mm tons (7%)
Low Sulfur
•
•
•
2.0 billion tons at 12/31/05
23% Met / 77% Steam
58% Low Sulfur / 35% Compliance
Illinois Basin (1)
Reserves – 62 mm tons (3%)
Medium and High Sulfur
Coal Producing Basins in U.S.
States in which NRP has Coal Reserves
Appalachia
Reserves – 1,835 mm tons (90%)
Low, Medium, High Sulfur
Note: Reserve information as of December 31, 2005
(1) Does not include reserves associated with the 2nd and 3rd closings of Williamson Development acquisition in 2006.
5
Stable and Predictable Historical Performance
(Tons in millions)
Coal Production
•
60
50
40
30
20
10
0
•
2002
2003
Appalachia
2004
Illinios Basin
2005
NPRB
•
150
($ in millions)
125
100
•
50
Diversified sources of royalty
revenues
Downside price protection
without limiting upside;
minimum royalty payments of
$29.6 mm at 12/31/05
Coal Royalty Revenues
75
Royalty structure supports
stable revenues
Transportation / customer
diversity
25
0
2002
2003
Appalachia
2004
Illinios Basin
2005
NPRB
6
No Direct Operating Costs or Risks
Operating Cost
Operating Risks
• Capital Expenditures
• Reclamation Exposure
• Labor
• Regulatory / Permitting
• Employee Benefits
• Competition
• Property Taxes
• Weather
• Transportation / Processing
• Economy
7
Strong Cash Flow and Distribution Strength
• Increased distributions 12 out of 13 quarters since IPO, 54%
overall
• Two full quarters of distributions reserved in cash balance
– $22.3 mm per quarter based on $0.79 per unit ($3.16
annualized) including GP and IDRs
– Cash balance at 3/31/06 - $67.4 mm
• Midpoint of guidance for distributable cash flow for 2006 $106 mm
• Current coverage ratio based on $3.16 per unit and 2006
guidance – 1.19x
• Room for distribution growth in 2006
• Cash available for acquisitions to fuel future growth
8
Attractive Tax Structure Due to Coal
•
Distributions are treated as return of capital
•
Unitholders are taxed on the income generated by the
partnership
•
Coal royalty revenues are taxed as long term capital gains
•
Approximately 60% of the revenue generated is sheltered by
depletion deductions
•
Depletion does not have to be recaptured upon sale of the
units
•
If units are held for more than one year, receive capital gains
treatment on the sale
9
Favorable Current Coal Fundamentals
Domestic Demand
•
Electricity generated from coal is currently 50%, EIA projects to
increase to 57% by 2030
•
High natural gas prices
•
Coal-fired equipment has become cleaner
•
Increase in plans to build new coal-fired plants
•
Scrubbers being added to existing coal-fired plants
•
Future demand – coal-to-liquids and coal-gasification technology
•
Increased U.S. export market
•
Continued demand due to growth of Chinese and Indian
economies
10
NRP – A Proxy for the Coal Industry
•
Over 2 billion tons of low, medium and high sulfur coal
reserves
•
68 lessees produce approximately 5% of the US production
from our 176 leases
•
Three major coal producing regions in eleven states
– Appalachia
• Northern
• Central
• Southern
– Illinois Basin
– Northern Powder River Basin
•
2005 production:
•
2006 estimated production: metallurgical – 20% steam – 80%
•
Only coal company to have reserves that stretch the entire
Appalachian coal chain
metallurgical – 27%
steam – 73%
11
Investment Highlights
•
Attractive portfolio of long-life, diverse properties
•
Lease to operators with diverse customer base
•
Distribution supported by stable, royalty-based cash flows
•
No direct exposure to mining operating costs or risks
•
Well-positioned for growth via coal and mineral acquisitions
•
Demonstrated ability to grow asset base and distributions
•
Coal royalty revenues are taxed at capital gains rates
12
Supplemental Data
13
First Quarter 2006 Highlights
• Increased distributions for the eleventh consecutive quarter to
$0.79 per unit (annualized rate of $3.16)
• Reported record financial results
– Net income increased 40% over 1Q 2005 to $1.01 per unit
– Coal royalty revenues increased 20%
– Distributable cash flow increased 45%
– Distribution increased 15%
• Sold timber assets for a net gain of $2.2 mm or $0.08 per unit
• Completed the second phase of the Williamson Development
acquisition for $35 million
• Financed the above acquisition with $50 mm in long term debt
at 5.05% including a pay down of $15 mm on our credit facility
14
Strong Balance Sheet – 3/31/06
Cash
$ 67.4 mm
Total assets
$ 729.7 mm
Fixed rate debt
$ 256.3 mm
Floating rate debt
$ 10.0 mm
Debt / Total capitalization
37%
Weighted average interest rate on Senior Notes
(Fixed)
5.2%
15
Weighted Average Interest Rate on Senior Notes
Amount
Series
Outstanding
12/31/05
Fixed Interest
Rate
2006 Annual
Payment
A
$53.4 mm
5.55%
$3.3 mm
B
$67.9 mm
4.91%
$6.05 mm
C
$35.0 mm
5.55%
$0 mm
D
$100.0 mm
5.05%
$0 mm
Total
$206.3 mm
5.19%
$9.35 mm
16
Active Acquisition History – Major Acquisitions
Acquisition
Date
Reserves
(mm tons)
AFG ( Penn Central)
Nov 2005
179
Area F/Lexington
Sep 2005
25
(1)
Jul 2005/Jan 2006
88
(2)
Plum Creek Timber Company
Mar 2005
85
BLC Properties
Jan 2004
176
East Kentucky
Nov 2003
21
PinnOak
Jul 2003
79
Alpha Natural Resources
Apr 2003
353
El Paso Properties (Coastal Coal)
Dec 2002
108
Williamson Development
Total
(1)
(2)
Does not include 14 million tons of override reserves.
Closed on the first two phases of this acquisition. Expect to complete the final
acquisition of the remaining reserves in the middle of 2006. Reflects owned reserves
of 88 million tons in total, of which NRP has closed on approximately 2/3rds. Does
not include 56 million tons of override reserves.
1,130
17