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Rhino Resource Partners, L.P. (NYSE:RNO)

Q1 2013 Earnings Call

May 2, 2013 11:00 am ET

Executives

Scott Morris – Vice President-Investor Relations

David G. Zatezalo – President and Chief Executive Officer

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

Richard A. Boone – Senior Vice President and Chief Financial Officer

Analysts

Praveen Narra – Raymond James

Paul Forward – Stifel Financial Corp.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2013 Rhino Resource Partners Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and -session and instructions will be given at that time. As a reminder, this conference is being recorded.

I’d 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, Karen, 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 additional information on our operations and results for the quarter. Representing the partnerships 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, May 9, 2013, at 11:59 p.m. Eastern time. To access the replay, call (888) 286-8010 in the U.S. and Canada or (617) 801-6888 internationally and enter the confirmation code 54076828. 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 First Quarter 2013 Earnings Call. Rhino delivered positive cash flow during the quarter despite the ongoing price weakness and lower volumes in both the met and steam coal markets. Our diversification in oil and gas is fundamentally changing the complexion of our company. We expect this to become evident as cash flow from our Utica Shale joint venture investment ramps up, which is occurring now as takeaway capacity becomes increasingly online.

We received $10.5 million in April from the sale of our royalty interest from property owned in the Utica, which provided a boost to our liquidity. This liquidity will benefit us while we are in a transition period where we expect earnings from Utica to begin kick in and while we are building out the Pennyrile energy property in western Kentucky, which will add to our stable predictable cash flow generators. While quarterly results reflect a weaker coal environment, we have managed our cost, which reduced volumes, particularly in Central Appalachia, where we’ve continued to turn away business that does not justify bringing capacity back online.

On April 22, we announced a cash distribution of $0.44 per common unit or $1.78 per unit on annualized basis with no distribution being paid on subordinated units. As mentioned, we are progressing with our Pennyrile in western Kentucky and production remains on target from mid-2014. While the initial 800,000 ton contract would justify opening the mine, we are encouraged by the potential customers responses and continue to work on additional sales.

Pennyrile is located on the navigable Green River in western Kentucky and provides unique low-cost access to a large customer base, including export markets. This project will be coming on line in the time that should enable us to take advantage of improving market conditions.

In our oil and gas activities, three wells we’re producing on a limited basis during the first quarter on our Utica acreage. Since then an additional six wells began production during April, which includes two of the Shugert wells that have shown very positive daily production rates as they’ve come online.

For those of you who have looked at it, please refer to page 10 of the presentation that we posted on our website, which tells you a little about those wells that are coming online. an additional five wells are planned to be online in the second quarter of 2013, and the cash flow from our Utica Shale investment is forecast to provide a significant contribution to the overall cash flow of the partnership. And this is reflected and shown in our forward guidance.

At our coal operations, we continue to focus on safety while controlling operating costs. We’ve previously reduced production to align it with projected sales until market conditions improve and the result is that our inventories are down to very low levels. Any significant incremental sales will have to be done at price justify adding workforce. Our growth capital outlays are focused on the Utica Shale where we expect significant returns in the Pennyrile, which we expect to be a long-term cash contributor.

I’ll 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. Good morning, everyone. Our quarterly results reflect expected reductions on volumes and prices and contract expirations. these were incorporated into the guidance, which we issued at year-end, which is $50 million to $60 million for our coal operations and $10 million to $20 million for oil and gas operations. We continue to remain comfortable with this guidance as we expect significant long-term cash flow from oil and gas activities, anticipate 2013 will be a trough year in our coal business as we’re expecting a relatively small contribution from our Central Appalachian operations.

We expect the higher level of stable cash flow beginning next year once Pennyrile goes into operation. In Northern Appalachia, the unit price improved and cost declined as Hopedale remained fully contracted through 2014 while volumes declined at Sands Hill. Our Rhino Western operations, The Castle Valley, experienced higher unit costs. we were deeply saddened by the accidental death of one of our colleagues during the quarter. While sales volumes were down in Central App operations, we’re pleased that our unit cost rose only slightly.

As Dave mentioned, our initial development commenced in late first quarter of 2013 at Pennyrile and the production is on target to begin in mid-2014. we have signed an initial five-year contracts agreement with the regional utility customer for 800,000 tons per year. We continued discussions with additional customers for long-term sales agreements. Pennyrile consists of a large contiguous fully-permitted proven reserve of 32 million tons located on the navigable Green River in western Kentucky has unique low-cost access to large customer base including export markets.

Once in full operation, we believe the Pennyrile will add another significant pillar to our base steam coal operations that allow for long-term contracts, generate long-term stable cash flows. In Northern App, our year-over-year coal revenues per ton increased $2.95 to $58.09, our cost of operations cost per ton fell by $1.79 to $40.01. Sales volume fell by approximately 100,000 tons to 349,000 tons, primarily due to the contract expirations at Sands Hill while we’ve reduced our production in line committed sales. While Rhino has seen increased sales inquiries, prices have not been sufficient to justify increasing production, however, our limestone sales in Northern Appalachia continues to be strong during this quarter.

In the Western region, year-over-year coal revenues per ton at our Castle Valley operation decreased $0.57 to $40.50, while the cost of operations per ton rose by $3.90 to $31.96. Volumes were approximately flat at 237,000 tons. We’ve seen an increase in inquiries for spots sales of coal at Castle Valley mine and have taken advantage of some of these opportunities in limited cases.

In Central App, year-over-year coal revenues per ton decreased $3.15 to $89.32, while the cost of operations per ton rose by $7 to $68.21. Year-over-year sales volumes increased by 43,000 tons to 420,000 tons, while year-over-year production volumes fell by 181,000 tons to 388,000 tons. Inventories are now at low levels and with the short decline in production, we are pleased we have kept a lid on our unit costs.

Our high-wall miner was recently moved to the Remining 3 surface mine and we expect it to return to Grapevine mine in the third quarter. We continue to make limited spot met sales and steam sales at both the Tug River and Rob Fork complexes. In addition, we incurred a one time non-cash charge of $1 million during the quarter due to the loss of a continuous miner at our Access energy mine.

Our Elk Horn coal leasing operations continued to generate cash flow, but the results were weaker as challenges continue in the Central App coal basin. At Rhino Eastern joint venture, year-over-year coal revenues per ton decreased $74.31 to $121.30 while the cost of operations per ton rose by $28.12 to $148.34. Year-over-year sales volumes decreased by 20,000 tons to 51,000, while year over year production volumes fell by 69,000 tons to 37,000 tons.

Again, with the sharp reduction in production, we continue to work diligently to limit our unit cost. The Eagle #3 mine begin production in the third quarter of 2012 and while that mine is expected to have a capacity of 490,000 tons per year, activities have been severely curtailed due to limited contracted sales and the low spot prices. In the first quarter, we recorded our portion of the non-cash inventory value charges $1.2 million that reflects the current market value of Rhino Eastern’s met coal inventory.

Finally, our well site preparation business in the Utica Shale area continues to perform well. We’ve completed the contraction of our fourth drill pad and we expect to pay some pad construction to accelerate as drilling in the region increases.

With that, I will now turn the call over to our CFO, Senior Vice President, Rick Boone for a review of the financials. Rick?

Richard A. Boone

Thanks, Chris and good morning to all those on the call this morning. As Dave mentioned at the beginning of our coal, Rhino continued to deliver positive cash flow for the quarter despite offering an extremely weak market conditions. Cash provided by operating activities was $10.6 million for the quarter. Looking at our results of operations, total revenue for the quarter was $74.7 million and coal revenues totaled $67.4 million, both were down from the first quarter of 2012, which can be attributed to the current market conditions. Other revenues for the quarter were $7.3 million compared to $12.3 million in 2012. Elk Horn’s royalty revenue was lower due to lessees being market challenged and we experienced a drop off in our other ancillary business activities. We incurred a net loss for the quarter of $0.2 million compared to net income of $9 million for the first quarter of 2012.

While our net income was adversely impacted by weakness in the coal markets, other factors negatively affected our results as well. We had a $1 billion non-cash charge due to the loss of a continuous miner in Central App resulting from the roof collapse and a $0.9 million cost impact at Rhino Eastern joint venture that represents our portion of the non-cash write down of inventory value.

In total, we had one time non-cash charges of $1.9 million that affected our bond line results. Adjusted EBITDA for the quarter was $13.1 million, which was lower compared to Q1 of 2012 due to the decline in net income. Again, the $10.5 million gain from the sell of the Utica royalty will occur in Q2 of 2013.

Overall, coal revenues per ton increased quarter-over-quarter as we sold fewer low priced tons from our Sands Hill operation. On a per ton basis, coal revenues in the first quarter of 2013 were $67 per ton compared to $65.11 in the same period of 2012, an increase of $1.89 per ton.

Cost of operations per ton was $54.50 in the first quarter of 2013 compared to $53.41 in the first quarter of 2012. The increase in cost of operations per ton was primarily due to cost incurred in Central App to develop a Remining 3 surface mine for high-wall mining along with increased cost at our Castle Valley mine due to the sequence of mining where we performed more higher cost advance mining in Q1 of 2013 compared to the lower cost retreat mining that was experienced in Q1 of 2012.

Rhino had actual maintenance capital expenditures of $1.7 million for the quarter, while expansion capital expenditures were approximately $4.4 million, consisting primarily of our continuing investment in the Utica Shale. We continue to maintain a low debt-to-EBITDA ratio as we finished the quarter at a ratio of 2.08. In April, we took a proactive step to amend our $300 million credit facility, allowing a maximum leverage ratio of 3.75 through March 31 of 2015. We took this proactive step to amend the credit facility to assure the necessary liquidity to develop the Pennyrile operation in the advent that weak coal markets do not improve.

In addition, we expanded our joint venture basket from $25 million to $40 million. We did this due to the uncertainty surrounding the Patriot bankruptcy.

Rhino continues to have sufficient liquidity through the credit facility to amply operate the business, fund our capital expenditures and pay distributions. At March 31, 2013, Rhino had total availability of $52 million, which include cash of $0.7 million and available credit under our facility of $51.3 million.

The combination of the credit facility amendment in the $10.5 million received from the Utica Royalty sale reducing our debt and increasing our EBITDA for the upcoming quarter. We are now forecasting our availability and the credit facility to be in excess of $100 million. As noted in our earnings release, we are reaffirming our guidance for 2013, which reflects our view that revenue from our Utica Shale will significantly ramp up for the remainder of 2013.

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

David G. Zatezalo

Thank you, Rick. Just to summarize, we’re excited about the Pennyrile project in western Kentucky and the income that we expect the Utica operations to bring to Rhino. We continue to focus on maximizing our cash flow and managing our debt. Our diversity in the Utica Shale and our focus on efficiently operating our coal business will position Rhino to be an even stronger participant in the coal market once the downturn reverses.

On behalf of the board, management and employees at Rhino Resource Partners, I thank you for your participation today. Operator, please open the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from the line of Praveen Narra of Raymond James. Please go ahead.

Praveen Narra – Raymond James

Good morning, guys.

David G. Zatezalo

Good morning, Praveen, how are you?

Praveen Narra – Raymond James

I’m doing all right. You guys talked about increased sales interest particularly from Western and Northern App. Are you seeing customers looking to lock in longer term contracts at these levels and, I guess, just more generally, what are you guys seeing as far as customer stockpiles and when this starts to push the pricing higher?

Richard A. Boone

Praveen, customers stockpile seemed to be generally reduced, I think that’s especially true in the steam market side. I think there has been, I believe it was AP announced recently that they are actually burning more coal than they are buying at this point in time in getting their stockpiles down. Current business, we have not seen a lot of interest in term business out of the western operations. We’ve seen spotty replacement sale type deals. There is pretty fair discussion on replacement term business in the Northern App area and that region appears to be much healthier than others.

Praveen Narra – Raymond James

Okay, very good. And just turning to Utica, you mentioned that takeaway capacity should start helping Utica cash flows in the coming months. Is that a Q2 or is that more of a second half of the year type positive cash flow event?

David G. Zatezalo

Both, really, Q2 we have increased from three to nine producing wells as of today and they’re producing very well. That should continue on through the year as that capacity and the pipeline hookups get in gear. Mark West being the primary gas plant operator in that area has moved along very well in their expansion plans and they’ve actually brought a lot of new facilities online and continue to go into their next phase to fully develop that. So, it is affecting Q2 and I think it will only continue to grow through the year.

Praveen Narra – Raymond James

Okay. And do you think that this will be enough to turn minority interest positive for the year or …

David G. Zatezalo

I do.

Praveen Narra – Raymond James

Okay. And then last question, on the credit facility you mentioned that you increased the JV investment allowance. Do you guys expect to buy out the remainder of the Patriot assets or is that if it needs to be done?

David G. Zatezalo

We don't necessarily expect to buy out the remainder. What we do expect is that as the metallurgical market improves, we will have the desire to expand those facilities somewhat and that may require some additional capital on our part. We don’t think we're going to have to buy out Patriot and actually have no desire to.

Praveen Narra – Raymond James

Okay. Perfect. Thank you, guys, very much.

David G. Zatezalo

Thank you, Praveen.

Operator

Thank you for your questions. (Operator Instructions) Next questions comes from the line of Paul Forward at Stifel. Your line is open, please go ahead.

Paul Forward – Stifel Financial Corp.

Good morning.

David G. Zatezalo

Good morning, Paul. How are you today?

Paul Forward – Stifel Financial Corp.

Not too bad. I just wanted to ask about the 2014-2015, the table that you gave on commitments to customers. And I guess you'd have to say the thing that stands out is out of Central Appalachia 2014 commitments are -- only 184,000 tons and there's nothing in 2015. I was just wondering if you could talk about kind of how you expect that book to get filled up as we move along in 2013, and what do you see as the risk of Central App volumes, especially on the thermal side, the Central App volumes being just overall quite a bit lower in ‘14, if you’re not able to find customers for all of your capacity in the region.

David G. Zatezalo

Okay. Well, I can – well, I mean, typically the met business, we don't contract out more than beyond this year. Secondly, on the thermal side in Central App, Paul I mean there’s no particular secret to as market has been extremely soft. And while we see little bits of improved activity in spot markets, it's nothing that we’re going to book into 2014. Personally, I think that later in the year will be a better time to try to solidify some 2014 business from cap. The cap business right now is at prices that are not attractive to us and they’re not at the kind of price that we will sell into.

So until such times as prices improve, which would hopefully be this year, we probably won't do any long-term forward deals. I mean, overall as a company we’re 50% sold for 2014. But it is actually lowest in cap. You are correct on that.

Paul Forward – Stifel Financial Corp.

And just curious as far as your working with customers, I mean, an important part of all this is going to be the railroad. I was just wondering if you – if there's been anything recent that you might be able to describe as far as actions by the rails to try to keep coal competitive and hold up volumes in a weak market, whether it's on the export met business or on the domestic thermal business to try to keep coal volumes up and competitive versus natural gas.

David G. Zatezalo

Yes, I’ll comment briefly on that. I mean natural gas I think closed last night at $4.33, which is – I don’t know, we’re up a 100% plus in a year. So that happens to be a number I look at before I go to bed at night, because it actually worries me. But it’s recovered nicely. I’d still like to see as a gas producer, I’d like to see it be higher. as a coal guy, I would. The railroads, I will decline to be specific, however, I will tell you that the railroads have certainly come to the table to try to do a part to make things more competitive for coal. And we appreciate the rails, the rail groups trying to work with us and with other producers, because they’re certainly trying to do their part.

They have businesses to run to, but in those areas where we have been able to receive some latitude, I think we will and we have in some cases. But it’s very difficult for them as well, because it actually costs a lot of money to build and maintain a railroad. But we see some activity continuing fall in the cap area. It’s creeping up, grudgingly one little step at a time. And I feel pretty good that we’ll be able to do some deals, but it may not be until later in the year. I mean, it may not be until the natural gas actually goes up before we hire. And the railroads have actually responded, I think very favorably to this cycle. Naturally, I’d like to see them respond more favorably that they’re not doing nothing; I’ll put it that way.

Paul Forward – Stifel Financial Corp.

Okay, that’s good. And I guess I would just recommend don’t check natural gas prices before you try to go to sleep tonight, because they’re…

David G. Zatezalo

They’re going down today.

Paul Forward – Stifel Financial Corp.

Yeah, they’re down about $0.23 or so. So I’m sorry and you probably now not going to have a very good sleep tonight, Dave, so…

David G. Zatezalo

Yeah. I’ll be tossing and turning again all night.

Paul Forward – Stifel Financial Corp.

Well, I guess over on the oil and gas business, you’ve still got the adjusted EBITDA guidance range of $10 million to $20 million for this year, which suggests obviously that as you build out of Utica, it gets better as the year goes along. I just wondered if you might think about, there’s no 2014 guidance in there. But if you think about anticipating 2014, and that Utica business, what sort of – as you get into, say the fourth quarter of 2013, what kind of quarterly run rate do you expect to exit 2013 with from the oil and gas segment? And if you can kind of talk a little bit about what 2014 is going to look like relative to 2013, I mean a lot of things have to happen and there’s commodity price risk at everything. But how do you anticipate the outlook in ‘14 from that business is going to look relative to this year’s guidance?

David G. Zatezalo

Well, there’s a lot of grand year’s assumptions in there. Paul, I don’t want to be purposely evasive, but it all really depends on infrastructure. I mean the Utica Shale area has been infrastructure constrained more so than pricing constrained. I mean, the wells are very economic, they’re very good values. It really depends on the infrastructure. My own personal feeling is, it’s about the fourth quarter, we’re going to be doing very well and it’s only going to get stronger into 2014, and I’ll go on and hesitate to give you a number on that.

I’ll just tell you that as for our ‘13 guidance, we are very satisfied that we are well on target, and I think we go into ‘14 much stronger. I mean, we should be in a lot of wells producing, provided the infrastructure comes up to speed as fast as it’s projected to do. And I mean, so far I think Mark West has delivered very well on what they’ve undertaken to do. And assuming that that continues, that will be something that we’ll address in the future guidance. But it is not something that, I think I can state very accurately. I don’t think that there’s much commodity price risk in that. I think the entire thing is, can you get the volumes through the system.

Paul Forward – Stifel Financial Corp.

Okay, well…

David G. Zatezalo

That makes any sense to you?

Paul Forward – Stifel Financial Corp.

Yeah, absolutely. Thanks a lot. That’s all I’ve got.

David G. Zatezalo

Okay. Thank you, Paul.

Operator

Thank you for your question. I would now like to turn the call over to Scott Morris to conclude the call.

Scott Morris

Thank you, Karen. We’d like to thank everyone for their participation today and we will speak to you again, next quarter. Thank you.

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