Rhino Resource Partners LP Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Rhino Resource (RNO)

Rhino Resource Partners LP (NYSE:RNO)

Q3 2013 Earnings Call

October 31, 2013 11:00 am ET


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 - Chief Operating Officer of Rhino GP LLC and Senior Vice President of Rhino GP LLC

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


David Feaster

Nathan P. Martin - BB&T Capital Markets, Research Division


Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2013 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, Erica, 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 operation and results for the quarter.

Representing the Partnership today are Dave Zatezalo, Chairman of the Board of Directors; Chris Walton, President and Chief Executive 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, risk 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 2 p.m. until Thursday, November 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 66872119.

The webcast will also be archived on the Partnership's website for 1 year. With that, I'll turn the call over to our Chairman, Dave Zatezalo. Dave?

David G. Zatezalo

Thank you, Scott. I'd like to thank those of you who are participating in the Rhino Resource Partners Third Quarter 2013 Earnings Call.

Before the I turn the call over to Chris to discuss Rhino's results, I wanted to take a moment to express my gratitude to the employees and board members of Rhino who have made my tenure as President and CEO of Rhino a rewarding and satisfying experience. I'm proud of the outstanding safety and operating record that Rhino has established during this time, and I'm confident that Chris will continue to advance Rhino's safety and operational performance.

I'd also like to thank Mark Zand, who has provided counsel and insight to me in his previous role of Chairman of Rhino during the past 3 years. And I look forward to my new role as Chairman, as well as the opportunity to continue to work with Chris and Mark as we continue to grow the Partnership. My workload may decline, but I will still be an active participant in the Partnership.

I'll now turn the call over to Chris Walton, President, Chief Executive Officer of Rhino, to discuss Q3 results. Chris?

Christopher I. Walton

Thank you, Dave. We've posted a presentation on our website, and I'll be referring to various pages of the presentation throughout my comments.

As shown on Slide 4 of the presentation, our revenue results showed an improvement over the 2013 second quarter. We also had lower operating costs and improved realizations company-wide, and in particular, in Central Appalachia.

In addition, we benefited from reduced losses of Rhino Eastern due to improved cost and the transition to the Eagle #3 mine. We also received a contribution from our Utica Shale oil and gas investment, which totals about $1.6 million of revenue in the quarter.

The development of Pennyrile mine continues to progress on schedule, and we were pleased to place 1.265 million of our common units during the quarter, as we used the proceeds from the offering to reduce our debt, which provide further liquidity to develop Pennyrile and our Utica Shale oil and gas investment.

On October 21, we announced a cash distribution of $0.445 per common unit or $1.78 per unit on an annualized basis, with no distribution being paid on our subordinated units.

Our coal operations, we continue to focus on safety while controlling operating cost. As shown on Slide 5 of the presentation, our per ton costs remained relatively flat year-to-year and decreased quarter-to-quarter despite lower production levels. Our portion of the losses at Rhino Eastern joint venture were significantly lower in the second quarter of 2013 as we expect further improvements as we transition to the Eagle #3 mine.

We are fully sold-out in 2014 at our Hopedale and Castle Valley operations. We are seeing some spot activity in Central App in both the met and steam coal and are in discussions now to place our 2014 met coal tonnage.

Our growth capital outlays continue to be in the Utica Shale and on the Pennyrile mine development.

As detailed on Slide 6 of our presentation, our Utica acreage has grown to approximately 7,300 acres at the end of Q3. In the Utica, we had a total of 14 gross wells spudded during the third quarter of 2013.

Our diversification into oil and gas continues to fundamentally change the complexion of the company, which is evidenced by over $3 million of cash flow that the Utica Shale joint venture investment has delivered so far this year.

As you can see on Slide 7 of our presentation, our oil and gas revenue from Utica continue to grow, and we expect cash flow from this investment to grow significantly as more wells are drilled and takeaway capacity continues to be developed in the region.

The development of Pennyrile property in Western Kentucky is accelerating, and the project continues to be on schedule with production on target for mid-2014.

Slides 8 and 9 of our presentation include photos of Pennyrile that show the development of the mine. The slope construction's progressing well, and the air shaft construction continues to advance according to plan.

In addition to our initial 800,000-ton contract, we are in discussion regarding test burns, which lead to additional sales. We anticipate this project will generate long-term, stable and predictable cash flows similar to our Hopedale and Castle Valley operations once this is in full production.

In Northern App, unit prices improved and overall cost declined as Hopedale remains fully contracted through 2014, while volumes declined at Sands Hill.

Our Rhino Western operations experienced higher unit costs due to the sequence of mining in our Castle Valley mine.

During the third quarter of 2013, the mine was primarily advancing the sections, which was higher cost compared to the lower cost retreat mining that was performed in the 3 months that ended in Q3 of 2012.

Our sales volumes decreased in Central App operations, and our revenues were also lowered by depressed met coal prices. However, we continued our efforts to reduce cost as reflected in the year-over-year reduction in unit costs.

In Northern App, our year-over-year coal revenue per ton increased $4.92 to $60.14. Our cost of operations cost per ton rose by $4.21 to $43.88, primarily due to reduced volumes of Sands Hill that have lowered sale prices and, to a lesser extent, the higher roof support cost at Hopedale.

Sales volume was 296,000 tons versus 483,000 tons in the prior year and 314,000 tons in the prior quarter. This year-over-year decline was primarily due to the contract expirations at Sands Hill, where we reduced our production to align with committed sales. While we have continued to see sales inquirers at Sands Hill, prices have not been sufficient to justify increase in our production. Our limestone sales in the Northern App are relatively flat for the quarter.

In our Western region, coal reserves per ton in the quarter increased to $40.17 versus $35.15 in the prior year and $40.24 in the prior quarter. The year-over-year increase was due to our higher volume of lower-priced spot sales in the Q3 of 2012.

Cost of operations was $31.83 versus $22.45 in the prior year and $32.85 in the prior quarter. Costs were higher year-over-year due to the sequence of mining discussed earlier for Castle Valley.

Sales volume was 241,000 tons versus 302,000 tons in the prior year and 235,000 tons in the prior quarter. While taking advantage of inquiries for spot sales of coal from Castle Valley, we are essentially sold out for 2014.

In Central App, coal reserves per ton were $82.05 versus $89.78 in the prior year and $80.42 in the prior quarter. Metallurgical coal revenues per ton were $82.21 versus $113.23 in the prior year and $88.87 in the prior quarter.

Steam revenues were $81.96 per ton versus $81.02 in the prior year and $75.72 in the prior quarter. The quarter-over-quarter improvement was primarily due to the sales of less low-quality middling steam coal. Cost of operations per ton in the quarter were $64.53 versus $75.21 in the prior year and $70.56 in the prior quarter. The quarter-over-quarter improvement was primarily due to better mining conditions of both our underground and surface mines.

Sales volume was 391,000 tons in the quarter versus 519,000 tons in the prior year and 363,000 tons in the prior quarter. We have maintained our inventories at low levels, and we continue to focus on our unit cost.

In addition, we continue to make limited spot met sales and steam sales of both Tug River and Rob Fork complexes, while working on placing our 2014 met coal tonnage.

Quarterly results from our Elk Horn coal leasing operations were slightly higher year-over-year, as our leases mine -- lessees mine more coal in the third quarter compared to the prior year.

At our Rhino Eastern joint venture, coal revenues per ton were $110.11 versus $175.72 in the prior year and $106.71 in the prior quarter. Cost of operations per ton was $115.18 versus $119.26 in the prior year and $146.92 in the prior quarter.

Sales volumes were 62,000 tons versus 93,000 tons in the prior year and 72,000 tons in the prior quarter. Despite reduced production, we've worked diligently to limit our unit costs, as displayed in our significant sequential drop in cost per ton in the third quarter.

We continue to make good progress in developing the Eagle #3 mine, and we expect mining at Eagle #1 to be completed by the end of 2013, which should help to reduce cost for Rhino Eastern going forward.

Eagle #3 is expected to have a capacity of 490,000 tons per year, but activity has been severely curtailed due to limited contracted sales and low spot prices.

With that, I'll now turn the call over to our CFO and Senior Vice President, Rick Boone, who will review the financials. Rick?

Richard A. Boone

Thank you, Chris, and I want to say good morning to everyone on the call, and to also thank you for joining in today.

Rhino continued to deliver positive cash flow for the quarter despite operating in extremely weak market conditions.

Cash provided by operating activities was $11.1 million for the quarter, and we also had an inflow of approximately $15 million in cash received from our offering of Rhino units in the quarter.

We used the proceeds from our offering to lower our debt which provided further liquidity to fund our target expansion projects of developing the Pennyrile mine and continuing to develop our Utica Shale oil and gas investment.

Slide 11 of our presentation provides the details of our debt reduction in Q3.

Looking at the results of our operations, total revenue for the quarter was $71.1 million, and coal revenues totaled $59.6 million. Both were down from Q3 of 2012 but were up sequentially from Q2 of 2013. Our revenues continued to be impacted by the weak coal markets. Other revenues for the quarter were $11.5 million compared to $9.7 million in 2012, primarily due to increased revenue from our Utica Shale investment that contributed $1.6 million during the quarter.

Net income for the quarter was $2.9 million compared to $8.9 million for the third quarter of 2012. Our net income was adversely impacted by weakness in the coal markets, but we continue to manage our cost effectively, which helped to offset the decrease in revenues. This decline in net income led to adjusted EBITDA for the quarter of $15.7 million. Overall, coal revenues per ton remained relatively flat quarter-over-quarter.

We continue to see a significant decrease in the price of metallurgical coal from our Central Appalachia operations in the current quarter compared to the prior year, but this is mostly offset by favorable price comparisons in our Northern App and Rhino Western operations.

On a per-ton basis, coal revenues in the third quarter of 2013 were $64.18 compared to $64.33 in the same period of 2012, a decrease of $0.15 per ton. When comparing third quarter of 2013 to the second quarter of 2013, we saw our coal revenues per ton increase by $1.71 per ton, primarily due to increased or improved pricing in the steam coal in our Northern and Central Appalachia segments.

Cost of operations per ton was $54.31 in the third quarter of 2013 compared to $53.19 in the third quarter of 2012. The increase in cost of operations per ton year-to-year was primarily due to increased costs at our Castle Valley mine due to the sequence of mining that Chris discussed earlier, along with lower production volumes at Sands Hill and higher roof support cost at Hopedale.

Sequentially, our cost of operations per ton decreased by $2.34 per ton from the second quarter of 2013, primarily in Central Appalachia as we experienced more favorable mining conditions in our surface and underground mines in this segment.

Rhino had actual maintenance capital expenditures of $5.3 million for the quarter, while expansion capital expenditures were approximately $11.9 million, consisting primarily of our continuing investment in the Utica Shale and the initial development of the Pennyrile complex.

We continue to maintain a low debt-to-EBITDA ratio as we finish the third quarter at a ratio of approximately 2.1:1.

At September 30, 2013 Rhino had total availability of $95.3 million, which included cash of $1.1 million and available credit under our credit facility of $94.2 million. Rhino's low leverage is driving ample availability under our credit facility, which provides sufficient liquidity to operate the business, fund capital expenditures and pay distributions.

As noted in our earnings release and detailed in Slide 12 of our presentation, we have narrowed the range of our guidance for 2013 since we have 3 quarters of actual results completed.

We plan to provide full-year 2014 guidance when we announce our 2013 fourth quarter results, as we have done in the past.

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

Christopher I. Walton

Thank you, Rick. To summarize, we're excited about the Pennyrile project in Western Kentucky and the long-term contribution that it will bring to Rhino. We also believe the anticipated cash flow from our Utica investment will have a significant impact on the company.

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 has produced -- positioned Rhino as a strong, diversified energy company.

On behalf of the board and the 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 Instructions] And your first question comes from the line of David Feaster with Raymond James.

David Feaster

So you saw substantially better cost in Central App this quarter, and you mentioned that it's the result of better mining conditions in the region. How are mining conditions looking for the next couple of quarters? Do you think you can keep cost down at these levels, or are they going to -- should we expect them to kind of ramp back up to where you've seen them in the past few quarters?

Christopher I. Walton

No. We think our mining conditions will stay just about as they are, and costs should be maintained at about the same level.

David Feaster

Okay, that's great. You also noted having -- you got 5% of 146,000 gross acres, committed to growing to 154,000. What's your estimate for the cost of this increase? At about 10,000-acre, which is kind of what you're seeing some recent deals at about $4 million? Is that in the ballpark or...

Christopher I. Walton

Yes. And that should be pretty well in the ballpark.

David Feaster

Okay, and that's going to happen in 2014?

David G. Zatezalo

David, it's continuing to happen. It's an ongoing process. Keep adding incremental acreage as it becomes available.

David Feaster

Okay. Could you give us some detail on the increases in your CapEx budget for both coal and oil and gas as well? Has Pennyrile expenditures come a little sooner than you expected?

Christopher I. Walton

David, the Pennyrile is slightly ahead of our original projections. The project, overall, is coming along very well, and we have made some commitments a little earlier than the original plan. It's not extremely out of line from our original estimates. On the oil and gas side, there was -- we're up to 7 rigs now drilling in the field, and it is slightly ahead of our projections. But again, not totally out of line with what we expected.

David Feaster

Okay. So you guys are in discussions to place 2014 met tonnage right now. Can you talk a little bit about how these discussions are going, and thoughts on your year-over-year pricing for your met tonnage?

David G. Zatezalo

Yes. This is Dave Zatezalo, David. The discussions are going pretty well. We had a couple in the last week that have given us pretty good indications and commitments. We have several that haven't. We expect to be flat as far as pricing year-on-year, relative to met sales. People are being very slow to commit, and I think that's because they're studying things pretty hard right now, thanks to the steel market being what it is. But all in all, we expect the coal business side to be relatively flat on pricing going into 2014.

David Feaster

Okay. Last question for me. How should we think about the results in the JV going forward? Now that you're in Eagle #3, Eagle #1 should be falling off. Assuming a flat pricing environment, how much lower should cost be, and can you turn a profit in the JV?

David G. Zatezalo

The answer to that is yes. We can turn a profit finishing off Eagle #1, and I want you to understand that Eagle #1 finishes probably next week. Eagle #1 has historically been a high-cost mine for us there because of configuration problems and some other issues and maintaining too much area. Eagle #1 will be essentially a tunnel through the hill in the future. Eagle #3, we have been very pleased with the start-up. The group there has done a wonderful job bringing that mine in line exactly with expectations. The costs there are much lower than Eagle #1, and we expect to be able to make money on a lower pricing environment for that coal. If we just had Eagle #3 by itself this past quarter, we would have done very well there. Eagle #1 has been a problem mine, but we had to get Eagle #3 developed to a certain point, and I think we're in pretty good shape there, actually.

David Feaster

Okay, very good. Last question for me. Could you remind us on Pennyrile how much you -- suppose you start kind of in the middle of next year, kind of your production expected next year, and when can you get up to the full production rate of 2.4 million tons a year?

Christopher I. Walton

Well, next year, we have 800,000 tons contracted, and we will get started in the middle of the summer. We have...

David G. Zatezalo

I have to correct that a little bit. We have agreements to start shipping coal in July. We expect that our commitments from next year from Pennyrile, I think, are in the order of 175,000 tons.

Christopher I. Walton

Yes, that's correct, Dave.

David G. Zatezalo

So it's 800,000 tons per year thereafter that's already committed. We think that we will be maybe 2 years getting that up to full speed. A lot of it depends on market reception, Dave. But we expect that we will be scratching coal in May for shipments beginning in July.

David Feaster

Okay, so 175,000 is probably a good estimate for next year's production?

David G. Zatezalo

Yes, sir.


Your next question comes from the line of Nathan Martin with BB&T Capital Markets.

Nathan P. Martin - BB&T Capital Markets, Research Division

Just as a follow-up, I guess, to the previous question. And you mentioned that next year, you expect the pricing of the met sales to be pretty much flat year-over-year. I was wondering if you could just give us your ideas on where you think the domestic met coal sediment price might go.

Christopher I. Walton

Nobody else wants this? I think it's going to be almost flat all the way across the board. I think that low vols are going to be in the low vols, and mid-vols will be in the mid- to upper-90s. High-vols, unless it's a real special high-vol, is probably going to be about $10 off of that. And I mean, it's very difficult to say. I'll say that the business that we've got so far has been decidedly flat. But it hasn't been down, so...


We have no further questions. I will now turn the call back over to Scott Morris for any closing remarks.

Scott Morris

We'd like to thank everyone for participating in the call today, and we will speak with you again next quarter. Thank you.


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

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