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Rhino Resource Partners LP (NYSE:RNO)

Q4 2012 Earnings Call

February 28, 2013 10:00 am ET

Executives

Scott Morris

David G. Zatezalo - Chief Executive Officer of Rhino GP LLC, President of Rhino GP LLC and Director of Rhino GP LLC

Christopher I. Walton - Senior Vice President and Chief Operating Officer

Richard A. Boone - Chief Financial Officer of Rhino GP LLC, Principal Accounting officer of Rhino GP LLC and Senior Vice President of Rhino GP LLC

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2012 Rhino Resource Partners Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Scott Morris, Vice President of Investor Relations. Please go ahead.

Scott Morris

Thank you, Dominique, and good morning, everyone. Again, my name is Scott Morris, Vice President of Investor Relations with Rhino Resource Partners.

The earnings release was issued before the market opened this morning and is posted at the partnership's website at www.rhinolp.com. We also have a presentation posted on our website that provides information on our operations and results for the quarter. Representing the partnership today are Dave Zatezalo, President and Chief Executive Officer; Chris Walton, Senior Vice President and Chief Operating Officer; and Rick Boone, Senior Vice President and Chief Financial Officer.

Before I turn the call over to Dave, I'll read the following Safe Harbor statement. This conference call contains certain forward-looking statements. Forward-looking statements may be identified by words such as expects, intends, anticipates, plans, believes, seeks, estimates, will or words of similar meaning and include, but are not limited to, statements regarding the outlook for the partnership's future business and financial performance. Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.

Actual outcomes and results may differ materially due to various factors that are summarized in today's earnings release and are described more fully from time to time in the partnership's filings with the SEC. We refer you to these sources for additional information. Rhino expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations or otherwise.

This call is the property of Rhino Resource Partners LP. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the expressed written consent of the partnership is prohibited. A replay of this call will be available from today at 12 p.m. until Thursday, March 7, 2013, at 11:59 p.m. Eastern time. To access the replay, call (888) 286-8010 in the United States and Canada or (617) 801-6888 internationally and enter the confirmation code 90299476. The webcast will also be archived on the partnership's website for 1 year.

With that, I'll turn the call over to Dave Zatezalo, President and Chief Executive Officer. Dave?

David G. Zatezalo

Thank you, Scott. I'd like to thank those of who are participating in Rhino Resource Partners Fourth Quarter 2012 Earnings Call. I'm pleased to announce that our focus on safety and improved operating efficiency during 2012 has resulted in the best year for safety performance in our history. I'd like to congratulate our employees on their dedication and focus to safety as we attempt to improve even further on these efforts in the coming year.

Despite the continued down tune -- downturn in both the steam and met coal markets, we continued to deliver positive operating results in the quarter, as we had EBITDA of $21.9 million, which represents our sixth consecutive quarter of EBITDA exceeding $20 million. On January 22, we announced a cash distribution of $0.445 per common unit or $1.78 per unit on an annualized basis, with no distribution, again, being paid on the subordinated units. We continue to focus on maximizing cash flows and reducing our debt. We reduced our long-term debt balance by approximately $6.4 million during the fourth quarter, while we spent approximately $6.0 million on expansion capital expenditures during the quarter, primarily in the Utica Shale region, but in other areas as well.

Our announcement of the initial multiyear coal sales contract for our Pennyrile property in western Kentucky provides us the opportunity to begin construction of the mine, with initial earthwork development scheduled to begin within the next few weeks and production targeted to commence in mid-2014. With Pennyrile located directly on the navigable Green River in western Kentucky, this property provides unique low-cost access to a large customer base, including export markets. We anticipate this project will generate long-term, stable and predictable cash flows, similar to our Hopedale and Castle Valley operations once it is in full production.

We believe our Utica Shale investment has added significant realizable value to the partnership, which will diversify our cash flows and reduce our overall risk. We saw the first benefits of our diversification efforts in our oil and gas business, as we've recorded our initial revenue in December 2012 from wells producing on our Utica shale acreage. We believe the Utica wells drilled on our acreage by Gulfport can add significant cash flows to our business once additional infrastructure is put in place. Our Utica position of 6,850 net acres has substantial value, as demonstrated by recent transactions. Our well site preparation business, Razorback, has completed the construction of 3 drill pads, and we expect this area to continue to grow as the pace of drilling increases.

I will now turn the call over to Chris Walton, our Senior Vice President and Chief Operating Officer, for his discussion of our operations. Chris?

Christopher I. Walton

Thank you, Dave. In regards to Rhino's coal operations, our steam coal at Hopedale and Castle Valley remain fully contracted through 2013 and '14. In addition, our steam coal customers that had previously delayed shipments earlier in the year took all of their 2012 contracted shipments by the end of the year. We have completed contract negotiations with our metallurgical coal customers for 2013 shipments at an acceptable price level, which will keep our Central App mines open and work crews in place.

We continue to see an increase in inquiries for our met coal, which have led to some limited spot met sales, giving us greater confidence that the met market has bottomed and is improving. However, we only participate in these sales when the prices are acceptable to us. Our ongoing efforts at Rhino Eastern joint venture to improve safety, productivity and cost structure at this operation have continued to show positive results. But due to the weak market conditions, we have reduced production at Rhino Eastern to align it with projected sales until market conditions improve.

As Dave mentioned, we signed a multiyear initial sales contract for our Pennyrile mine with a regional utility customer for 800,000 tons per year, and we are continuing discussions with additional customers, which leads us to believe that there's a high level of interest for this quality coal. Initial earthwork development is scheduled to begin in the next few weeks at Pennyrile, with production targeted to commence in mid-2014. Once in full operation, we believe that Pennyrile will add another significant pillar to our base steam coal operations, and that will allow for long-term contracts and generate long-term stable cash flows.

In Northern App, our Hopedale operation continues to perform well, with contracted steam coal sales and predictable cash flows. Our Clinton Stone operations sold approximately 469,000 tons of limestone in 2012, which represents an 11% increase year-over-year. We saw our limestone sales prices increase for the first time since 2009 due to growing demand for this quality product.

At our Sands Hill operation, we have reduced our production schedule to align 2013 production with committed sales while we seek additional customer contracts. In our Western region, the Castle Valley mine continues to perform well, with over 1 million tons sold during 2012. That's more than twice the tons sold in 2011. We've seen spot sales activity increase for coal from Castle Valley, which provides us additional cash flow opportunities from this operation.

In Central App, our Tug Fork prep plant is operational and being utilized on a reduced basis. We're preparing high-wall mining operations at Remining 3 surface mines in order to effectively produce met coal from this operation. Recent customer inquiries and spot met sales support our view that utilization will increase at both the Tug Fork prep plant and high-wall miner. Our Remining 3 and Grapevine surface mines at the Tug Fork complex produce quality metallurgical coal that can take advantage of spot and term sales as the met coal market improves.

Our Central App operations had a good reclamation year, and we're able to obtain leases totaling $6.1 million in 2012. The results from our Elk Horn coal leasing operations continued to reflect positive results in a challenging Central App coal basin. Our Rhino Eastern joint venture has demonstrated substantial organizational improvement, which is evident in the safety and operating results for this operation.

We began production on our Eagle #3 mine, a Rhino Eastern joint venture during the third quarter. At full capacity, Eagle #3 is expected to produce at a rate of approximately 490,000 tons per year. And finally, our well site preparation business in the Utica shale has performed well. We have completed the construction of 3 drill pads, and we expect this area to continue to grow as drilling is expected to continue to increase in the area.

With that, I'll turn the call back over to Dave.

David G. Zatezalo

Thank you, Chris. In relation to our non-coal activities, we are extremely encouraged by the initial results of our diversification efforts. Gulfport has now commenced on the 25th well in the Utica Shale area, with 10 sets of test results that have been publicly announced. The initial test results announced by Gulfport have been very positive and show a relatively high concentration of hydrocarbon liquids.

Our review of the test results from wells drilled in the Utica region show that the wells drilled on our acreage have some of the highest barrel of oil equivalent test results of all the Utica wells drilled to date, which demonstrates the substantial potential value these wells can generate. We believe our oil and gas investments, along with other opportunities in the Utica area, will provide this partnership with substantial long-term value.

I'll now turn the call over to Rick Boone, our Chief Financial Officer and Senior Vice President. Rick?

Richard A. Boone

Thank you, Dave, and good morning to everyone. Thanks for joining in our call today. My comments today will be based on Rhino's consolidated results for the quarter. However, our press release provides detail by our business segments, which have been defined on previous calls and in our SEC filings.

During Q4 2012, Rhino continued its strong financial performance while operating in extremely weak market conditions. Q4 2012 marked the sixth straight quarter with EBITDA exceeding $20 million. Looking at our results of operations, total revenue for the quarter was $86.5 million and coal revenues totaled $78.9 million, both down from the fourth quarter of 2011 due to weakness in the coal markets. Other revenues for the quarter were $7.7 million compared to $11.5 million for the prior period, as coal lease revenue from our Elk Horn operation was lower due to lessees being challenged in the current market.

Net income for the quarter totaled $9.4 million, which was lower versus net income of $12.7 million in the fourth quarter of 2011. Adjusted EBITDA was $21.9 million for the fourth quarter, which was lower compared to the same period of 2011 due to the decreased net income. The variances I just mentioned in revenue, net income and EBITDA were primarily driven by lower sales volumes. Even though we saw lower bottom line results in Q4 of '12 versus Q4 of '11, we were able to maintain acceptable margins and we lowered our cost of operations on a total company basis.

Overall, coal revenues per ton decreased quarter-over-quarter as we experienced a higher mix of lower-priced steam sales from our Western Bituminous steam coal operations. On a per ton basis, coal revenues in the fourth quarter of 2012 were $66.74 compared to $68.62 in the same period of 2011, a decrease of $1.88 per ton. Cost of operations per ton was $51.14 in the fourth quarter of 2012 compared to $53.44 in the fourth quarter of 2011. This decrease in cost of operations per ton can also be attributed to a higher mix of lower-cost tons from our Western Bituminous operations.

Rhino had actual maintenance capital expenditures of $3.2 million for the quarter, while expansion capital expenditures were approximately $6 million, consisting primarily of our continuing investment in the Utica Shale. Rhino has sufficient liquidity through its revolving credit facility to amply operate the business, fund its capital requirements and pay distributions. At December 31, 2012, Rhino had total availability of $72.6 million, which includes cash of $0.5 million and available credit under our facility of $72.1 million.

As Dave mentioned earlier, we were able to lower our long-term debt by $6.4 million during the fourth quarter, and we ended the year with a leverage ratio of less than 2:1. We have issued guidance for 2013, which is included in our earnings release that were distributed this morning. This guidance assumes no spot sales activity, which could potentially provide some upside to our results as the coal markets improve.

With that, I'd like to turn the call back to Dave for his closing remarks.

David G. Zatezalo

Thank you, Rick. To summarize, we continue to focus on our goals of maximizing our cash flow and reducing our debt during the ongoing market downturn. We believe that focusing on these areas will position Rhino to be an even stronger participant in the market once the downturn reverses. We are excited about the Pennyrile project in western Kentucky and the diversity that the Utica operations are bringing to Rhino. On behalf of the Board of Directors and employees of Rhino Resource Partners, I'd like to thank you for your participation today.

Operator, please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Jim Rollyson of Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

So I guess, first question, Dave in your minority interest line, which has been a positive contributor for quite a while, it slipped negative this quarter, and I'm just trying to understand the pieces there. I know Rhino Eastern has been part of that, and I'm assuming that the investment in the Gulfport, Utica stuff is in there, which I know, short-term, has been a drag, and that should change in '13. But just maybe talk about the parts there and kind of how you see that proceeding as you go through 2013.

Richard A. Boone

Jim, this is Rick, I'm going to take that question. Primarily, what you're seeing there in Q4 is the Rhino Eastern operation. There's been very little operating results shift from Utica, but there's been, as we said, some revenue. But primarily, what you're seeing is the downturn in the met market as prices have dropped off in the joint venture for Rhino Eastern.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

And when you mentioned in the press release that you signed some contracts on the met side for 2013 at prices that were acceptable, can you maybe give us some sense of what kind of pricing or what kind of margin that generates and kind of how that, you think, would drive the minority interest for 2013?

David G. Zatezalo

Yes. We -- the minority interest in Rhino Eastern, Jim, is -- that coal is all sold through Patriot Coal sales, so we don't -- we are not actually party to those contracts. We have certain thresholds that we will not go below, but we are not party to them as Rhino per se. Most of the met coal that we have sold, we have sold out of eastern Kentucky. It is accretive to our revenue. It is at $99.44 a ton for 2013. We feel that's fairly accretive to us. I would tell you that the coal that is sold out of Rhino Eastern amounts to an average of about $125 a ton.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. So you think that you'll make money in minority interest this year a little bit or ...

David G. Zatezalo

We'll make a little bit. Now we have scaled back Rhino Eastern to only 2 operating machine shifts per day because of some of the prices that have been bantered about. We're not really interested in producing and selling at that, so we're trying to see just how low we can go without becoming cash negative there.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Got you. Maybe something a little more positive, your costs have been very strong -- very favorable despite the fact that volumes have been down. Maybe how you see that, when you think about that in 2013, just given your volume outlook.

David G. Zatezalo

It's always a battle to keep costs down, and I think our management group has done a very good job on that as has our workforce. One of the true keys to all that is it starts with safety performance. Safety performance really does matter to you financially, and so we concentrate on that very nicely. We have been lucky in some cases, and we've been able to use up old things that we had around and not have to go out and buy new. And we have concentrated more on rebuilds than on, perhaps, new purchases of equipment. So it also is a little bit different in that we're seeing greater volumes out of, for example, Castle Valley, where the costs are inherently lower than other places in the company, and it's partially because we're mining less in Central App and probably will into the future, which is our most expensive products. So I'm not sure that answers your question, but ...

Richard A. Boone

I'll add one thing, Jim. In Q4 -- or by the end of Q4, we did realign the workforce at Rhino Eastern. We're going through that process in Q4. As Dave said, we've cut the units down, and we're -- we have the proper number of employees now to operate those units. So we're thinking we can, at a minimal, break even on that and probably see some upside later in the year.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. That's helpful. And last one is, nice job on securing contracts on Pennyrile, great selling coal from a mine that doesn't exist yet. Some sense maybe of when you think about that up and running, when you look at the pricing you've got on the 800,000 tons, plus whatever you're in discussions with today relative to your costs, what kind of margin are you looking at generating at Pennyrile?

David G. Zatezalo

Jim, we generally would expect to make on the order of a $10 a ton margin on that product.

Operator

[Operator Instructions] And your next question comes from the line of Paul Forward of Stifel, Nicolaus.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Just wanted to ask, say, a couple of things. I think there was -- in the quarter, there was a $2.7 million gain on an asset sale. So just wondering if you could expand a little bit on what that was. And maybe, as you look into 2013, do you see yourself continuing to kind of manage the portfolio and sell non-core assets?

David G. Zatezalo

Yes, a couple of things. It's not actually one particular item. We sold an old property, which was not producing in eastern Kentucky. It was a very small cash gain, but there were some reclamation liabilities that were avoided and removed from that, and that ended up being favorable to us. We didn't sell it for a lot of money. The other thing was a piece of surface that we sold to MarkWest in Ohio so that they could put in an oil transloading facility on it, and we realized about $1 million from that. So those were the items. Rick, was there something else?

Richard A. Boone

No, that's it.

David G. Zatezalo

We have certain non-core assets. We had somebody who wanted to buy this property in eastern Kentucky. We didn't -- it wasn't even on our next 5-year plan so ...

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

And I guess, do you see yourselves just taking further opportunities in 2013 to have slimmed down the portfolio maybe in Central App, if there are buyers of assets at this really low point in the market? Do you see yourselves strategically making some moves there? Or are you just going to be opportunistic?

David G. Zatezalo

We don't have a plan to sell certain assets, if that's what you're asking. In some cases, there are people who want a particular asset for one reason or another. We would always consider selling it. We have a lot of bottled assets right now in Central App. It's no particular secret that, that market doesn't look too encouraging in the next several years and to the extent that we can extricate ourselves from some of that, we will do so. But we don't have any active plan where we're trying to market assets.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I think you talked about the Elk Horn properties being down in 2012 and the results in 2012. I'm just wondering as you look out in 2013, what sort of -- as you see plans by the lessees to likely curtail production, what sort of outlook do you have for the royalty business in Elk Horn in 2013? I mean, how tough is it going to be for that?

David G. Zatezalo

I think it's going to be a business that maintains profitability and cash margins, certainly. We have taken steps there to keep our breakeven very low at Elk Horn coal. They've done a wonderful job with that actually. We will -- personally, I think 2013 is going to be a lower-than-normal year for Elk Horn. If you listen to all the people that have leases from you, you'd probably come to a better conclusion. But I guess, it just believes on -- it just depends on what you think the Central App market is going to do in the near term. I think it's going to be another year of challenges, and fortunately, the leasing business is a fairly low breakeven business. So I think the contribution will probably be down in 2013.

Richard A. Boone

Paul, we have already considered that in our guidance.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Right. So within the guidance, there is some contribution from Elk Horn. Would you care to share a number? Or is that just kind of baked in there?

David G. Zatezalo

It is baked in, and I don't have that in front of me. We -- all I can remember is we expect Elk Horn to be down approximately 25% from '12 to '13, and the exact number escapes me, I'm sorry.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Okay. As far as the met coal markets go, can you give us a little bit of a sense of where these markets are right now, to the extent that there are markets for met coal? In the past, sometimes you've given us some ranges on, well, for high-vol B, this is the price and for your premium mid vol, it's here. Can you give us a little bit of a sense of where we might be right now?

David G. Zatezalo

Well, I will attempt to, but I don't think I'll say anything different from what other people have already said in their earnings announcements. I mean, starting with high-vol C. I think high-vol C is probably in the $74 to $80 range. High-vol B is probably close to $90 at this point, and the As are probably between $95 and $110. I think that all of those have moved up about $5 since the beginning of this year. We are trying to -- we are seeing a little bit of a price increase in that market. Certainly, not back to where it was in the past, but we are seeing probably $5 to $6 a ton price improvement.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Well, that's good. That definitely beats the alternative.

David G. Zatezalo

Yes, and it's -- we have done what I believe that most producers have done in those markets. We have scaled back everywhere we could, and in some cases, we are keeping properties open because you don't want to destroy your organization and you want to keep your mines active and going, but we're not running near as much as we can. So I mean, the prices are not back to a point where I would consider boosting -- trying to regain that capacity. But they are -- they are definitely off of their floor. And I -- based on recent spot sales and spot opportunities we've had, I would consider them to be $5 to $6 a ton better than they were.

Operator

This concludes today's question-and-answer session. I would like to hand the call back over to Scott Morris for any closing remarks.

Scott Morris

Again, we'd like to thank everyone for their participation today, and we will speak with you again next quarter. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

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