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Executives

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

Christopher I. Walton - Chief Executive Officer of Rhino GP LLC and President of Rhino GP LLC

David G. Zatezalo - Chairman of The Board of Rhino Gp LLC and Member of Compensation Committee

Analysts

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

Mark A. Levin - BB&T Capital Markets, Research Division

Rhino Resource Partners LP (RNO) Q4 2013 Earnings Call February 27, 2014 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth 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, Rick Boone, Senior Vice President and Chief Financial Officer. Please go ahead.

Richard A. Boone

Thank you, Len. Good morning, everyone. 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.

Joining me in the call today are Chris Walton, Rhino's President and Chief Executive Officer; and David Zatezalo, Rhino's Chairman, who will be available during the question-and-answer session. Before I turn the call over to Chris, I want to make a few general reminders.

Our call today may contain certain forward-looking statements that are subject to a variety of risks, uncertainties and assumptions, which are described more fully from time to time in the Partnership's filings with the SEC. We refer you to those sources for additional information.

Forward-looking statements are based on management's current expectations and assumptions, and actual outcomes and results may differ materially due to various factors. 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.

A replay of this call will be available, and instructions for accessing the replay are included in today's earnings release. The webcast of today's call will also be archived on our website for one year.

With that, I'll turn the call over to our President and CEO, Chris Walton.

Christopher I. Walton

Thank you, Rick. Good morning, everyone. I would like to thank those of you who are participating in the Rhino Resource Partners fourth quarter 2013 earnings call.

On January 21, we announced a cash distribution of $0.445 per common unit or $1.78 per unit on an annualized basis, no distribution being paid to subordinated units. We are pleased to announce we have entered into a binding letter of intent to sell our oil and gas properties in the Utica Shale to Gulfport Energy Corporation for a purchase price of approximately $185 million. The sale of our Utica property is extremely significant for Rhino. This allows us to eliminate the company's debt and will give us tremendous financial flexibility.

In the coal sector, many producers are burdened with high levels of debt. The Utica sale eliminates that concern for us and gives us the flexibility to look for opportunities to expand in both coal and other energy assets.

Our first priority is the startup of Pennyrile mine in the Illinois Basin, which remains on schedule to begin production in a few months. The combination of Pennyrile, Hopedale and Castle Valley will provide a diversified and predictable base of earnings and cash flow for the company.

We expect an eventual recovery in both the met coal market and Central Appalachian thermal markets, which will provide us with significant upside. The benefit of transitioning Rhino to a diversified energy company has been demonstrated with the announcement of the sale of our Utica properties to Gulfport.

In addition to the sale, we recently received an $8.4 million distribution for our Utica investment, which will positively impact income the first quarter of 2014. Our goal has been to create value for the unitholders in the energy sector, and this investment has been a great success in doing so.

With the recently announced agreement to sell our Utica properties, we will provide full year 2014 guidance in the next few weeks. We also plan to provide a detailed analysis of our mining operations at an analyst day, which we plan to hold in the same timeframe. We have posted a presentation on our website and I will be referring to various pages of the presentation throughout my remaining comments.

The Pennyrile mine in the Illinois Basin remains on schedule to begin production in a few months. We expect Pennyrile to add to our portfolio of stable long-term cash providers. The combination of Pennyrile and the predictable cash flow from the Hopedale and Castle Valley operations provides a diversified and predictable base of earnings and cash flow for the company. We've cut back our Central App operations and are focused on our lower cost-operations.

At our coal operations, we continue to focus on safety while maintaining a constant emphasis on controlling operating costs. As shown on Slide 5 of the presentation, our per ton cost decreased sequentially as costs in Central App decreased year-to-year despite fewer tons produced. We do experience higher costs in Northern Appalachia and our Western operations due to adverse mining conditions. We remain fully sold out in 2014 at our Hopedale operation, and Castle Valley is also essentially sold out in 2014.

We are seeing an increase in spot activity in Central App in both coal (sic) [met coal] and steam coal, and we are taking advantage of those opportunities when the prices are acceptable. We continue to make cost improvements at Rhino Eastern as we completed the transition to the Eagle #3 mine. The development of the Pennyrile property in Western Kentucky is accelerating, and the project continues to be on schedule with production on target for mid-2014.

On Slide 7 and 8 of our presentation, we have included photos of Pennyrile, which show the ongoing development of this mine. The slope development continues to progress well as the slope has been driven to initially intersect with the coal seam. The air shaft construction is complete to the coal seam and the insulation and the ventilation fan has been completed. Construction continues on the prep plant and river dock loadout.

In addition to our initial 800,000 ton contract, we have agreed to test burns which should lead to additional sales. We will give more detailed presentation of the earnings outlook for Pennyrile, along with the rest of our operations, at our analyst presentation in the next few weeks.

In Northern Appalachia, unit price has improved and overall cost declined, as Hopedale remained fully contracted through 2014 while volumes declined at Sands Hill. In Northern App, our year-over-year coal revenues per ton increased $4.63 to $59.96 (sic) [$59.56] while cost of operations costs per ton rose by $4.31 to $43.50, primarily due to related -- excuse me, reduced volumes at Sands Hill that have lower sale prices and higher costs at Hopedale due to adverse mining conditions.

Sales volume was 266,000 tons versus 468,000 tons in prior year and 296,000 tons in the prior quarter. The year-over-year decline was primarily due to 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, the price has not been sufficient to justify increasing production.

Our limestone sales in Northern App were relatively flat for the quarter. At Rhino Western, our operations experienced higher unit costs due to the sequence of mining in our Castle Valley mine. During the fourth quarter of 2013, the mine was primarily advancing the sections which drove costs higher compared to lower-cost retreat mining that was performed in the 3 months ended December 31, 2012.

In our Western region, coal revenues per ton in the quarter increased to $40.59 versus $39.94 in the prior year and $40.17 in the prior quarter. Cost of operations were $33.91 versus $28.53 in the prior year and $31.83 in the prior quarter. Costs were higher year-over-year due to the sequence of mining discussed earlier for Castle Valley. Sales volume was 228,000 tons versus 242,000 tons in the prior year and 241,000 tons in the prior quarter. While taking advantage of the inquiries for spot sales of coal from Castle Valley, we are essentially sold out in 2014.

In Central App, our sales volumes decreased and our revenues were lower by depressed met coal prices. However, we continued our efforts to reduce costs as reflected in year-over-year reduction in unit costs.

In Central App, coal reserves (sic) [revenues] per ton were $82.81 versus $92.22 in the prior year and $82.05 in the prior quarter. Metallurgical coal revenues per ton were $81.42 versus $124.49 in the prior year and $82.21 in the prior quarter. Steam revenues were $83.92 per ton versus $80.90 in the prior year and $81.96 in the prior quarter.

The quarter-over-quarter improvement was primarily due to the sale of less low-quality steam coal. Cost of operations per ton in the quarter was $61.47 versus $61.56 (sic) [$67.56] in the prior year and $64.53 in the prior quarter. Sales volumes were 333,000 tons in the quarter versus 472,000 tons in the prior year and 391,000 tons in the prior quarter.

Rhino has maintained its inventories at low levels and continues to focus on unit costs. In addition, we continue to make limited spot met sales and steam sales at both the Tug River and Rob Fork complexes.

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

At our Rhino Eastern joint venture, coal revenues per ton were $109.54 versus $185.20 in the prior year and $110.11 in the prior quarter. Cost of operations per ton was $98.06 versus $155.67 in the prior year and $115.18 in the prior quarter. Sales volumes were 65,000 tons versus 33,000 tons in the prior year and 62,000 tons in the prior quarter.

Eagle #1 mine has ceased production and operations have totally shifted to lower-cost Eagle #3 mine, which should help reduce costs at 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 will now turn the call over to our CFO and Senior Vice President, Rick Boone, for a review of the financials. Rick?

Richard A. Boone

Thanks, Chris. And again, good morning and thanks for joining in our call today. Before I begin my comments, please note that the financial information for the 2012 period have been restated. Figures that I will refer to in my comments today are the restated numbers. Please refer to our earnings release for more details on the restatement for 2012 prior period.

In the fourth quarter, Rhino continued to deliver positive cash flow despite the continuing weak coal market [ph]. Cash provided by operating activities was $11.5 million for the quarter, which was sufficient to cover our distribution and maintenance capital expenditures.

Our total debt increased during the quarter [ph] primarily due to our expansion project, including the development of Pennyrile mine, which we expect to provide long-term cash flows in the future. Slide 10 in our presentation provides details of the change in our debt balance during Q4.

Looking at our results of operations, total revenue for the quarter was $65.2 million and coal revenues totaled $52.7 million. Both were down from Q4 of '12 and down sequentially from Q3 of '13.

Our revenues continue to be impacted by the weak coal markets we are operating in. Other revenues for the quarter were $12.6 million compared to $7.7 million in 2012, primarily due to increased revenue from our Utica Shale investment that contributed $2.5 [ph] million during the quarter.

Net income for the quarter was $0.8 million compared to $8.7 million for the fourth quarter of '12. Our net income was adversely impacted by weakness in the coal market, but we continued to manage our costs effectively, which helped to offset the decrease. This decline in net income led to adjusted EBITDA for the quarter of $16.1 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 was mostly offset by favorable price comparisons in our Northern Appalachia and Rhino Western operations.

On a per-ton basis, coal revenues in the fourth quarter of 2013 were $63.69 compared to $66.74 in same period of '12, a decrease of $3.05 per ton.

Cost of operations per ton was $53.40 per ton in the fourth quarter of '13 compared to $57.71 (sic) [$51.71] in the fourth quarter of '12. The increase in cost of operations per ton year-to-year was primarily due to the increased costs in our Castle Valley mine due to the sequence of mining Chris discussed earlier, along with lower production volumes at Sands Hill and higher operating costs at Hopedale. Sequentially, our cost of operations per ton were relatively flat as we experienced more favorable mining conditions at our surface and underground mines in Central Appalachia.

During the fourth quarter, Rhino had actual maintenance capital expenditures of $2.8 million while expansion capital expenditures were $17.4 million.

We continue to maintain a relatively low debt-to-EBITDA ratio compared to our industry peers, and we finished the quarter at an EBITDA-to-debt ratio of approximately 2.6:1.

At December 31, 2013, Rhino had total availability of $56.5 million, which included $0.4 million in cash and available credit under our facility of $56.1 million. Rhino continues to have ample availability under our credit facility, providing us liquidity to operate the business, fund capital expenditures and pay distributions.

With that, I'm going to turn it back -- the call back over to Chris for his closing remarks.

Christopher I. Walton

Thank you, Rick. To summarize, we are very excited about Rhino and its prospects for growth in the future. The sale of our Utica Shale investment will provide us with financial flexibility to expand and refocus the business in the future. We are excited about the Pennyrile project in Western Kentucky and the long-term contribution it will bring to Rhino.

We saw [ph] our diversity as a coal producer in multiple U.S. coal basins as a strength. We believe there are significant met coal opportunities that will provide us with substantial upside when the market turns. Our focus on efficiently operating our coal business has helped us through different -- difficult market conditions.

Finally, in an industry where many companies are facing crushing debt burdens, we will be debt-free. This will give us the financial strength to pursue growth opportunities in both coal and in other energy businesses.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jim Rollyson with Raymond James.

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

I guess first question is what made you guys finally decide to sell the Utica? Was it just that Gulfport made you guys an offer you couldn't refuse? Or just maybe a little thought around that topic.

David G. Zatezalo

Jim, this is David Zatezalo. I'll take this question. We had been receiving some offers and some interest in the property for some time. We simply thought that the Gulfport offer was a very serious offer. Rockport [ph] offered us [indiscernible] didn't think it would be worth a deal to be accepting [ph], so we didn't accept that.

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

Well it's good to see you held out for meaningfully higher than the 10,000 initial.

David G. Zatezalo

Yes, sir.

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

And I don't know, Dave or Rick, would you think about this an impact on the business going forward? I know you're not giving guidance yet today, but just how do we think about how much EBITDA comes out of the equation for this? Ultimately, how does this -- do you think this impacts distributable cash flows assuming all you do is pay off debt to start with?

David G. Zatezalo

Well, Jim, when we think about Gulfport, and we're still reworking our numbers, and that's why we couldn't do guidance today, because we actually have to put some reports together, I mean. We also save a fair bit of money in interest, but we will continue to grow this business, as we have in the past. We will seek opportunities for [indiscernible] eligible assets. Our first order of business, however, has to be in finally closing this sale and getting that wrapped up. So that's our immediate focus and we will be back to you with guidance. To be completely debt-free is very attractive to us, and it gives us staying power. I think a lot of people would be into that [ph].

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

Clearly. And when you think about that, once you get past closing and you think about your newfound financial flexibility, do you think about, in the future, developing other Pennyrile-type projects out there? Would you invest in oil and gas again? I mean, how do you think longer-term? Is this just continue to do this type of projects like you're doing with Pennyrile or how are you thinking about that?

David G. Zatezalo

Well, I mean, longer term, anything is open, Jim. Our investment group, which includes expertise we borrow from our sponsor, Wexford Capital, as well as our own as well as what's in the market, we will avail ourselves of what we think the best and most attractive opportunities across the entire space of MLP eligible assets, which is pretty broad. I would expect us in upcoming very short time to have serious discussions about what is the most attractive way to go. As we discussed in the past, Rhino has within it a series of indigenous projects that have varying degrees of attractiveness, and we'll have to balance those against what's available elsewhere. And so, sorry, I can’t give you more definitive answer, but we really haven't had the opportunity yet to digest this and get in for next phase. We do -- we feel we have tremendous staying power, especially in the event that the market does pick up. We also have the availability to go out and do other deals. And obviously, in oil and gas, that is a particular focused effort. But there are a host of other MLP eligible assets out there, too. [indiscernible] I guess I'd tell you that the -- it's really quite open and our focus remains, Jim, on getting this deal wrapped up and closed.

Operator

Your question comes from the line of Mark Levin with BB&T Capital Markets.

Mark A. Levin - BB&T Capital Markets, Research Division

Just a follow-on to Jim's question regarding the EBITDA. I think you guys have guided to a $15 million to $20 million of oil and gas EBITDA for 2013. Just sort of framing this a different way, what percentage of that EBITDA was coming from the Utica assets?

David G. Zatezalo

In 2013? From...

Mark A. Levin - BB&T Capital Markets, Research Division

Yes, you guys have given oil and gas EBITDA guidance of $15 million to $20 million?

David G. Zatezalo

Yes. That included the sale. Our EBITDA from the drilling and exploration and well production would have been probably closer to $10 million.

Mark A. Levin - BB&T Capital Markets, Research Division

Okay. Got it, got it, got it. And then, when you think about maintenance CapEx for coal in 2014 and then how much is left to spend on Pennyrile, how maybe broadly should we think about that?

David G. Zatezalo

You want to answer that, Rick?

Richard A. Boone

Yes. We have forecast that our maintenance CapEx will be approximately $4 a ton, so it's going to be in that range, maybe at the low end of that. And we do have the expansion CapEx to spend to complete the Pennyrile project, and that's going to be probably in the neighborhood of around $15 million to wrap it up.

Mark A. Levin - BB&T Capital Markets, Research Division

To get that up. All right. And then third question really quickly, Cap costs came down materially quarter-over-quarter. Is that -- the level at which you were at in Q4, is that sustainable into 2014?

Richard A. Boone

Yes, Mark, it is. We have scaled back operations. We've gotten a little more efficient. We've had some favorable mining conditions that look like they will continue. So we feel like it's a good example of what we will be doing as we look out through '14.

Mark A. Levin - BB&T Capital Markets, Research Division

Okay, great. And then the final question is I know you guys, your met sort of is sold domestically. That stuff -- the contracts annually, a lot of the market publications had talked about domestic, net contracts being down sort of somewhere in the neighborhood of 15%. Is that a fair characterization of kind of where the market was for domestic met this year?

David G. Zatezalo

It certainly is. It certainly is. the met market, Mark, as you've written about and are well aware, that market is pretty humble right now. That's not to say it always will be. So we're trying to preserve capacity but not spending the money on production of a product that is not worth selling for us.

Mark A. Levin - BB&T Capital Markets, Research Division

Dave, where do you think -- just your best guess in terms of where high-vol A and high-vol B prices are today, short ton FOB mine?

David G. Zatezalo

High-vol A, I would think would be in the very low 90s. High-vol B, I would think would be in the very low 80s, maybe even drifting into the 70s if people were desperate to sell. So...

Mark A. Levin - BB&T Capital Markets, Research Division

And what is the Rhino mix do you think in '14 of A v B?

David G. Zatezalo

I'm sorry?

Mark A. Levin - BB&T Capital Markets, Research Division

What would the mix be? Like how would you characterize, like, your met coal production in 2014 in terms of varying quality as you see it today?

David G. Zatezalo

About half and half on the A and B. And we have recently done some weaker coals, where people want some weaker coals, which I would term as a C market.

Operator

I would now like to turn the call back over to Mr. Rick Boone to conclude the call.

Richard A. Boone

All right. To close the call today, I want to thank each of you for participating in Rhino Resource Partners LP fourth quarter earnings call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great day.

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