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| Review of PVR Coal |
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Our coal and land management business set a new record for revenues in 2006, up 18 percent to $113.0 million from $95.8 million in 2005. Coal royalty revenue was the largest contributor to the year-over-year increase, up $15.5 million, or 19 percent, to $98.2 million. Driven primarily by production growth, 2006 operating income in this segment increased 19 percent to $73.4 million from $61.7 million in 2005.
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During 2006, worldwide and domestic demand for coal and other hydrocarbons continued to be strong, although coal prices began to decline from their highs during the fourth quarter and subsequently stabilized in the first quarter of 2007. We believe declines in coal prices primarily impact operators who have a high cost structure, and also operators who do not have long-term contracts in place. In our case, most of our lessees tend to be low-cost operators who have long-term contracts with most of their customers. |
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In 2006, approximately 70 percent of the coal produced from our properties required our lessees to pay us royalties based on a percentage of the price they received for selling the coal. Most of that coal is sold by our lessees under long-term contracts. Prices under those contracts increased significantly for contracts renewed during 2005 and 2006. The royalties we received on the other 30 percent of coal produced from our properties were based on fixed rates per ton, which escalate annually. As a result of these factors, our average royalty rates in 2006 increased nine percent to $2.99 per ton from $2.74 per ton in 2005. |
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