Rhino Resource Partners LP Management Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Rhino Resource (RNO)

Rhino Resource Partners LP (NYSE:RNO)

Q1 2014 Earnings Call

May 01, 2014 11:00 am ET

Executives

Scott Morris -

Christopher I. Walton - Chief Executive Officer of Rhino Gp Llc and 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 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

Paul S. Forward - Stifel, Nicolaus & Company, Incorporated, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2014 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, Estevan, and 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.

Participating in the call today are Chris Walton, Rhino's President and Chief Executive Officer; Rick Boone, Senior Vice President and Chief Financial 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 these 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 be available on our website for one year.

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

Christopher I. Walton

Thanks, Scott. I'd like to thank those of you who are participating in Rhino Resource Partners First Quarter 2014 Earnings Call. We've posted the presentation on our website, and I will be referring to various pages of the presentation throughout my comments. There are several themes I want to cover in the presentation today.

The first is that Rhino is in great financial shape. We ended the quarter with almost no debt. We compete in an industry that is cyclically depressed, and many of our competitors are struggling with huge debt loads. And the second is that we expect coal prices to rebound, and we believe Rhino is a great way to acquire a rebound in the market. We believe prices will rebound because natural gas inventories are very low, and we expect gas prices to spike later this year. Higher gas prices will be needed to reduce utility gas burn in order to get storage fill.

Coal inventories are also at historically low levels, and we believe utilities are acting as if coal will be available to displace reduced natural gas burn. The question is, at what price?

Coal prices are near or below the cost of production in Central Appalachia. When buyers do come back into the market, we do not believe there will be significant amounts of coal available at the current prices. This means prices will have to rise if there is to be a supply to meet the demand.

We believe Rhino is a good way to play a rebound in the coal market for several reasons. The first is, we are starting up the Pennyrile mine in the Illinois Basin, and it will provide us with growth. We will begin to see significant cash flow from Pennyrile, beginning in 2015. We view Pennyrile as a significant source of cash flow growth and it doesn't require much improvement in the market for us to increase its production and significantly expand its cash flows.

We are a good way to play a rebound in the market because we have a high distribution yield and an excellent capacity to continue paying it. We expect to cover most, if not all, the common distribution from existing operations at current depressed levels before getting any significant contribution from Pennyrile.

We are good way to play the rebound because we have a lot of upside in our CAPP operations. We have modeled in basically no income from CAPP in 2014.

We are a good way to play a rebound because we have almost no debt on our balance sheet, because of huge sustaining power, while many of our competitors are in a race against the clock. They're locked out of the capital markets and have to hope for rebounds just to survive.

Finally, we are showing that we can make money in the energy business, as demonstrated by the Utica investment, which was a huge success for the company. We have financial flexibility to seek out other energy investments.

These are the points covered in the first several slides of the presentation. So I'll skip to Slide 8, where we talk about Pennyrile.

Pennyrile is our Illinois Basin greenfield project that is about to go into production. We have some photos of the mine on Slides 8 and 9.

Slide 10 shows why we believe there is building growth at Pennyrile. Starting in 2015, we expect to show cash contribution from the mine of a little more than $7 million per year on our initial 800,000-ton contract. We believe we will be able to double this product level. And if we do this at the price of our initial contract, this will result in about $20 million in cash flow from the mine, because the higher utilization will lower the unit cost.

We don't think expanding the mine to this level is a stretch; but before seriously thinking about expanding it, we have to get the mine up and running gold.

On Slide 10, when we show what we think the mine will produce, if we get a $5 price bump on the incremental sales, that will bring the cash flow up to the mid-$20 millions.

Finally, we believe Pennyrile will ultimately be able to support a 3-section mine and, we show the cash flow for that case, will be in the mid- $30 million range.

While we view Pennyrile as growth, we view CAPP as potential upside. In Slides 11 and 12, we talk about CAPP. We have been disciplined, and have tried to avoid selling below cost, we are projecting essentially no income from CAPP in 2014.

In slide 12, we have put together an illustrative example that we think demonstrates the upside from rebounded CAPP. We asked ourselves, if prices got back to halfway between where they are now and where they were at our contract highs in the last up cycle, and if we sold what we are capable of producing from our currently operating mines, how much cash flow would we produce? The answer on Slide 12 is based on those assumptions our CAAP operations and Elk Horn could hypothetically produce $72 million in cash flow.

The same exercise for Rhino Eastern presumes we produce $27 million, our share would be half of that. I realize, this is just a hypothetical exercise, but it's not pie in the sky. We are in a cyclical industry, and when the prices rise or fall, they don't typically stop at equilibrium. They tend to overshoot. Prices overshoot on the downside with a shut-off supply, as we are now seeing. It can just as easily overshoot on the way up, if supplies need to be brought out.

Slide 13 provides a summary of what the growth of Pennyrile and the potential upside of CAAP could contribute to the cash flow for the company. It's a large number, well in excess of $100 million, and does not include our Hopedale or Rhino Western operations.

The next several slides go over the Q1 results of our coal operations. But I'm going to highlight just a few points because the big story in the quarter is that we've booked a huge gain from the sale of our Utica properties, and we are getting ready to start producing coal at Pennyrile.

I will say, we continue to focus on safety, and we feel we did well in this in this area in the first quarter. In Q1 of 2014, Rhino had no loss time accidents. We also had fewer accidents and reportable accidents compared to Q1 of 2013. And our violations-per-inspector day also remains well below the national average for coal mines.

I think the numbers show we did a good job of controlling operating costs. But the one area that deserves some explanation is Hopedale. The development of the 7 scene at Hopedale is important to us because it gives us access to an additional 9 million tons of estimated reserves. As we advanced into the 7 scene, we encountered thin coal. We believe we are past this area and expect the cost to significantly improve. So the sale volumes were also down at Hopedale, due to interruptions in our rail service.

In the first quarter, we had to cancel many production shifts, due to not being able to move our coal by rail. We have stuck to the basics by stressing safety, controlling our costs of existing operations, developing a new mine on time and within budget, and selling assets when it makes sense to do so.

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

Richard A. Boone

Thanks, Chris, and good morning to everyone. Thanks for joining our call this morning. In the first quarter, Rhino received approximately $179 million of additional cash proceeds from the sale of our Utica Shale properties, we expect to receive an additional $5 million in queue, too, from this transaction, subject to ongoing legal tittle work related to specific properties.

In addition to the cash provided from our Utica sale, cash provided by our operating activities was $11.9 million for the quarter, despite operating in the continuing extremely difficult coal market.

We eliminated, substantially, all of our debt on a revolving credit facility during the quarter, which provides us with significant financial flexibility and positions Rhino well for opportunistic growth.

Looking at our results of operations, total revenue for the quarter was $59.9 million, and coal revenues were $51.2 million. Both were down from Q1 of 2013 and down sequentially from Q4 in 2013.

Our revenues continued to be impacted by the weak coal markets. Other revenues for the quarter were slightly higher at $8.7 million, compared to $7.1 million in 2013.

In the first quarter, Rhino's net income was $131.9 million, excluding the gain from the Utica sale, our net income was adversely impacted by the weakness we experienced in the coal markets. We continued to manage our cost effectively, which helped us to offset the decrease in revenues. Adjusted EBITDA for the quarter was $144.6 million. Overall, coal revenues per ton decreased quarter-over-quarter, as we continued to see a significant decrease in the price at metallurgical coal from our Central Appalachia operations during the current quarter, compared to the prior year.

In addition to the decrease in net coal prices, we also had a long-term, above-market steam coal contract in Central Appalachia that expired in Q1, that adversely affected our revenues per ton. These negative price impacts were partially offset by favorable pricing in our Northern Appalachia and Rhino Western operations. On a per-ton basis, coal revenues in the first quarter of 2014 were $60.53 compared to $67 in the same period of 2013, a decrease of $6.47 per ton.

Cost of operations was $54.82 in the first quarter of 2014 compared to $54.44 in the first quarter of 2013. The slight increase in cost of operations per ton year-to-year was primarily due to the increased costs at our Hopedale mining operation that Chris discussed earlier. The increase in cost at Hopedale was primarily offset by a decreased cost in the Central Appalachia operations.

Rhino had actual maintenance capital expenditures of $1.4 million for the quarter, while expansion capital expenditures were approximately $26.7 million, which consisted primarily of the ongoing development of Pennyrile.

With our low debt level, we finished the quarter with an EBITDA-to-debt ratio of approximately 0.04:1. At March 31, 2014, Rhino had total availability of $172.9 million, which included cash of $1.1 million and available credit under our facility of $171.8 million. We have ample availability under our credit facility to operate the business, fund our capital requirements and pay distributions. Our liquidity will allow us to make selective acquisitions in energy-related assets, where we or our sponsor have expertise.

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

Christopher I. Walton

Thank you. Rick. To summarize, we believe Rhino is a great way to play a rebound in the coal market. We have an exceptionally strong balance sheet. We've built in growth from Pennyrile. We have substantial upside from CAPP. We have the financial flexibility to expand into other energy areas. We have the financial strength to survive in an industry where many companies are faced with crushing debt levels.

On behalf of the Board and employees of Rhino Resource Partners, I thank you for your participation today.

Operator, please open the call for the 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

Chris, nice slide on the upside potential at higher volumes for Pennyrile. Curious what you think it'll take in -- is it basically going to take the test burns to be successful by your customers in order to spur eventual contracts to get beyond the 800,000 tons?

Christopher I. Walton

Yes. Definitely will.

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

And you say -- when do you think those will begin, now that you're in the early stages of starting production, is that something -- you'll start doing test burns as early as the second quarter?

Christopher I. Walton

It'll probably be July. We want to make sure we've got everything going well.

Scott Morris

And we have 2 schedules already, Jim.

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

Okay. That's good to know. You guys also obviously, Rick, you're pretty hulk happy with the balance sheet, I suspect, where it is right now.

Richard A. Boone

Happy.

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

Curious, if you guys have given more thought now that you've had a little bit of time to contemplate this and get the deal closed, kind of how you think about your newfound available liquidity in terms of future growth potential beyond Pennyrile, any thoughts you guys have gathered, since the last quarter we spoke?

Richard A. Boone

Well, we certainly have potential, both internally or looking external to the company to grow. We will stay in the energy space, but we do have other reserve basis that we could develop at a future date, given the fact that we could get a sales contract in place.

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

Nothing definitive at this point, is that fair?

Richard A. Boone

That's correct, nothing definitive at this point, Jim.

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

And Chris or Dave, on the Central App costs, which have come down quite a bit this quarter, just curious about the sustainability of that going forward, how much of that is just improvements you've made versus lower pricing or just maybe how that -- how do you think about costs there?

Christopher I. Walton

I think the costs are somewhat sustainable at that level. It would not surprise me in an up market to see those costs go up 5% to 8%, Jim. But they're sustainable through this down period in the market. We have rationalized our fleets, we have unfortunately had to rationalize our employees. We -- I think we've done an excellent job there of keeping those costs in control, and doing whatever we could. It is obviously going to be more expensive in an up market for nothing else more simple than your severance taxes and your lease rates and all that stuff go up, but it is -- I think it's sustainable at this market in an up market, I think it would go up about 7%.

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

High class problem.

Christopher I. Walton

Yes.

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

If and when that happens. All right then, last one for me. Just -- you mentioned in the press release, the possibility of reinstating the subordinated distributions at some point, just maybe a little bit of thought around, what kind of milestones you would need to see, obviously, the cash flows is part of that, but is it a market direction and feel for things? Or is it taking some additional organic or M&A growth? Or just -- what would get you to the point that you actually finally get to that stage?

David G. Zatezalo

Very simple, good cash flow off of Pennyrile, I mean, we feel that we have -- we can sustain the comment based on where we're at today. The sale of the Utica certainly gives us a sizeable war chest, but to reinstate the subordinates, we want to see some positive cash flows out of Pennyrile, and we feel that, that will cover them.

Operator

[Operator Instructions] Our next question is Paul Forward with Stifel.

Paul S. Forward - Stifel, Nicolaus & Company, Incorporated, Research Division

I wanted to ask about the Central App kind of commitments for '14 and '15. I guess, in the first quarter, you had sold about 350,000 tons and you've got 537,000 committed for the rest of the year in '14 and then really none in '15. Just wanted to go through, if you could, the kind of risk to volumes, the potential that if you don't get a market turnaround, that there would be a volume disappointment or you'd have to be fairly aggressive in cutting back absent a market recovery?

David G. Zatezalo

Paul, this is David Zatezalo. We'll try to handle that. We feel we have cut our Central App operations back to a sustained level, so -- and that's it. We do expect price movement in the future and the future -- I can't see it any better than you. I don't see these prices getting worse if we don't sell a bunch into 2015. Indeed, I expect the opposite to happen, I expect the prices will be up somewhat going into 2015. On the downside, can it be much worse? I don't really think so. I will tell you that, since the time we've put this together, we have taken an additional order for part of the call for 2014 in Central App. We have been generally not taking prices in 2015 out of Central App, because, frankly, we think it has to go up. We need it to go up and I know everybody in the industry does, and I can't see it going down much further. So I think it's relatively low risk, just to hold things tight right now in that market. If that answers your question?

Paul S. Forward - Stifel, Nicolaus & Company, Incorporated, Research Division

Sure. And I guess, looking across, I mean, the big event in 2015, one of the big events is the MATS rules coming in, can you talk about your kind of current or traditional customer base and the kind of closures of plants that you expect in '15 and '16, and how that affects Rhino?

David G. Zatezalo

Yes, I mean, it affects us, as it affects everybody. One of our local contracts with the plant in Kentucky is -- that plant is scheduled to close, that obviously affects that. We've build that in to our modeling going forward. Several of our customers are more industrial in nature and -- or in the metallurgical side. The affect will not be quite as severe. But, yes, we're very concerned about it, I mean, the bad part is that, it affects everybody across the board, and I don't think it affects us greater than anyone else.

Paul S. Forward - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then, I wanted to also ask about, maybe, the great transaction to monetize those Utica assets, but of course, what it does is, it takes out a kind of a long-term growth avenue for you, and what I wanted to ask about was having fixed the balance sheet through that transaction, you talked about having a war chest and the potential for a market recovery at Coal. What is your inclination in 2014 to grow in Coal by acquisition in what is clearly a buyers' market?

David G. Zatezalo

Yes, our inclination is probably the same as everybody -- everybody else's. The assets that are out there today, we're looking very hard at what we consider to be the higher quality assets. And we would certainly -- there are several assets that we would certainly be interested in, in the Coal side. I will tell you that having had success on the Liquid and Gas side, there are assets that we are reviewing in that area as well. I realize that it also takes away a long-term potential gains getting out of the Oil and Gas business, we were in the Utica, but that doesn't mean we can't get back in, just in a slightly different way, perhaps. And then we're not necessarily married to the Utica. So I mean, the sphere -- the entire sphere is really open to us. And certainly, if there are A quality coal assets out there, we are looking at them very hard, which is not to say we're on a bet to company [indiscernible], okay? But oil and gas, we still have some oil and gas ownership and some oil and gas holdings. And we will continue to look at oil and gas assets along with Wexford Capital, and we will take advantage of anything that makes sense in the energy space. So, we don't consider ourselves limited to coal at all. Although we felt that the property prices that -- what we were offered on this, we felt was a very good value for us and gave us the opportunity to do some other things. So I mean, I would not take that as a sign that we're leaving that business. It should be a sign that price got to a really substantial point and we felt it was prudent to go ahead and move it.

Operator

That concludes our question-and-answer session. I'd like to turn the call back over to Scott Morris to conclude the call.

Scott Morris

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

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