Rhino Resource Partners LP Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Rhino Resource (RNO)

Rhino Resource Partners LP (NYSE:RNO)

Q2 2012 Earnings Call

August 02, 2012 10:00 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

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


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


Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2012 Rhino Resource Partners Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Morris, Vice President of Investor Relations. Please go ahead.

Scott Morris

Thank you, Pam, 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.

Representing the partnership today are Dave Zatezalo, President and Chief Executive Officer; and Rick Boone, Senior Vice President and Chief Financial Officer. We also have our Chief Operating Officer, Chris Walton, with us for the call today, and he will be available during the question-and-answer session.

Before I turn the call over to Dave, I will 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 those resources 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 express written consent of the partnership is prohibited.

A replay of this call will be available from today at 1 p.m. until Thursday, August 9, 2012, 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 96456997. The webcast will also be archived on the partnership's website for one 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 each of you who are participating in Rhino Resource Partners' Second Quarter 2012 Earnings Call. First, I'm pleased to say that our continued focus on safety resulted in an outstanding safety performance in the first 6 months of 2012. Our reportable accident frequency rate has dropped to 2.94 in the 6 months of 2012 from 3.52 last year. We've also experienced a 29% improvement in compliance with MSHA inspections during 2012 compared to last year. I'd like to congratulate all of our employees and continue to urge everyone to make the workplace safe as possible, which we consider an important goal for us as a company and our duty as responsible management.

While the continued downturn in both the steam and met coal markets has presented us with challenges, our operating results were satisfactory in the quarter as we had a record EBITDA of $25 million, due in part to a $6.9 million income gain from leasing of our own Utica Shale acreage.

On July 23, we announced the cash distribution of $0.445 per common unit or $1.78 per unit on an annualized basis with no subordinated distribution being paid this quarter.

Due to the softness of the current coal markets, we believe suspending the distribution on the subordinated units, which require reducing the distribution on the common units to the minimal quarterly amount, is a very positive step for the long-term health and liquidity of the company.

As we begin the process of contracting our 2013 metallurgical coal, we expect to complete this by the end of 2012. We have been concerned about both the depth and the severity of this market downturn. With this uncertainty, we and our Board of Directors determined that the prudent course is to conserve our cash by eliminating the subordinated distribution.

This is quite a strong show of support from our sponsor, Wexford Capital, whose investment fund holds substantially all of our subordinated units. We will continue to evaluate the outlook for Rhino and the appropriate level of distributions, while taking the necessary steps to support the long-term health and success of the partnership.

Our strategy as we work through this difficult period in the coal markets is to maximize cash flow and to work to reduce our bank debt. At the same time, we are continuing to diversify into other businesses, including liquid hydrocarbons and oil services activity, in order to provide other sources of income. In fact, our new services company, Razorback, has completed construction during July of its first drill pad in the Utica Shale and has commenced work already on its second.

Turning to Rhino's coal operations, in Northern App, we continue to fulfill our contract customer orders at both Hopedale and Sands Hill while maintaining our focus on cost control and efficiency. In addition, we have seen a pickup from a steam coal customer that had previously delayed shipments in Northern App and Central App.

Our Castle Valley operation in Utah continues to be a bright spot as we achieved our first 100,000-ton plus sales month in this location during June.

We have resumed operations at our Central App locations after idling in June to reduce our inventory levels. Rhino Eastern continued -- we saw lower production costs along with continued strong sales.

In Central App, we reduced our inventories by about 75,000 tons in June as we idled our operations and we continue to operate our CAPP locations on reduced shifts and hours to lower the inventory further.

As mentioned in our June operating update, there were some pickup in met sales activity during the quarter, with 30,000 tons being sold on a spot basis as a low quality met coal product. However, this market -- the met market continues to be very soft. Our new Tug Fork preparation plant is operating on a limited schedule. And once market conditions improve and the plant operates at full capacity, we expect significant cost savings and increased production flexibility from this operation.

Our highwall miner also continues to operate on a limited schedule and is capable of producing a rate of 240,000 tons of met coal per year, even though it's currently producing just a fraction of that amount.

The Remining 3 surface mine commenced production in April, and this mine is capable of producing at 375,000 tons per year at full capacity.

Results from our Elk Horn Coal leasing operations continue to be impacted as our lessees produced and sold less coal in the quarter due to market conditions.

In Northern App, our Hopedale location remains fully contracted through 2014 for its steam coal. Our cost of operations at Hopedale were impacted by geology issues as mining occurred in thinner coal areas towards the fringe of the reserve. As mining activity is moving back towards the center of the reserve, this situation is self-correcting.

Sands Hill experienced higher costs as the equipment issue with Shovel [ph] was not resolved until the middle of the quarter. However, our limestone sales continued to be strong in the quarter due to the high demand for limestone products. We also continue the processing of permitting a 7 seam reserve that will be accessed from the existing portal and infrastructure at Hopedale.

The Castle Valley mine performed very well during the quarter as a customer who curtailed shipments earlier in the year due to a generator fire resumed normal deliveries during Q2.

Our McClane Canyon mine in Colorado, we had reduced staffing there and placed this operation on a care and maintenance schedule, pending market improvement.

Rhino Eastern continued its strong performance in the quarter as our improvements in safety and regulatory compliance continued to keep cost of operations low as our cost per ton was below $120 in the quarter.

The new Eagle #3 mine is prepared for production pending final regulatory approval. Eagle #3 will replace and expand on Eagle #1 production, which will deplete in late Q1 of 2013.

While the long-term impact of the Patriot Coal bankruptcy filing on our joint venture is still uncertain at this point, we have continued normal production operations at the joint venture, and we are hopeful that the bankruptcy filing will not have a material negative impact on Rhino Eastern.

Turning to our non-coal activities during the quarter, we did receive $6.9 million from the lease of our own acreage in Utica, and we continue to see royalty income from our Cana Woodford investment. Our new drill pad construction company, Razorback, has completed construction of its first pad and has commenced work on its second.

Despite the weakness in the coal markets, we are reaffirming our guidance for 2012. We are in a solid position for 2013, with committed steam sales of about 3.5 million tons, which represents around 80% of our expected steam production. We expect to complete our met coal contracting before the end of 2012 and consequently, we are not providing guidance for 2013 at this time, but we will do so once our met coal contracts are finalized.

With that, I'll turn the call over to our Chief Financial Officer and Senior Vice President, Rick Boone, for a review of the financial statements. Rick?

Richard A. Boone

Thank you, Dave, and good morning, everyone. As in prior quarters, we are reporting the results of our operations in 4 business segments and that other category we defined on previous calls and in our SEC filings. My comments on the financial results will be limited to the total company. However, our press release provides detail by business segment, which you can refer to at your leisure.

Now moving to the results of our operations. Total revenue for the quarter was $90 million, including the $6.9 million lease bonus, and was basically flat with the 2011 comparable quarter. Coal revenues totaled $72.2 million, down from $83.8 million in the second quarter of 2011, due to the weakness in the met and steam markets.

As Rhino continues to diversify its revenue streams, other revenues as a percentage of total revenue, have increased quarter-over-quarter from 6.1% in 2011 to 19.8% in 2012, and on a year-to-date basis, from 5.3% to 17.5%. This percentage of other revenues has increased in 2012 in part due to coal sales declining but more importantly, due to Rhino's efforts to diversify its revenue streams.

Net income for the quarter totaled $13 million which was up $3.6 million versus net income of $9.4 million for the second quarter of 2011.

Adjusted EBITDA was $25 million in the second quarter compared to $19.4 million in the same period of 2011, an improvement of $5.6 million.

Overall, coal revenues per ton decreased quarter-over-quarter, as we experienced lower sales at our CAPP operations, resulting in a higher mix of lower-priced steam coal from our non-CAPP steam operations.

On a per ton basis, coal revenues in the second quarter of 2012 were $64.74 compared to $69.70 in the same period of 2011, a decrease of $4.96 per ton.

Cost of operations per ton was $54 in the second quarter of 2012, compared to $56.07 in the second quarter of 2011. The decrease in cost of operations per ton was due to a higher mix of lower cost tons from our Castle Valley operations, along with a furlough of operations in our Central Appalachia operations segment during June 2012.

Rhino had actual maintenance capital expenditures of $6.7 million during the quarter. Expansion capital expenditures were $10.2 million for the period, consisting primarily of the remaining costs to complete the Tug River preparation plant.

Rhino has sufficient liquidity through its revolving credit facility to amply operate the business, fund its capital requirements and pay distributions. At June 30, 2012, Rhino had total availability of $75.7 million, which includes cash of $0.8 million and available credit under our facility of $74.9 million.

During Q2 of 2012, Rhino successfully negotiated lower collateral agreements with its major surety underwriters, which will lower its letters of credit by $3.6 million, adding to our future cash availability under the credit facility.

As mentioned earlier, we are reaffirming our guidance for 2012 and it's remaining unchanged, and we will issue our 2013 guidance once our met coal contracts have been settled.

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

David G. Zatezalo

Thank you, Rick. To summarize, we continue to focus on our goals of maximizing our cash flow and reducing our bank debt during the ongoing market downturn. We believe that focusing on these areas will position Rhino to be an even stronger participant in the market once the downturn reverses.

On behalf of the Board of Directors, management and employees of Rhino Resource Partners, I'd like to thank you for your participation today. Operator, please open the call to questions.

Question-and-Answer Session


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

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

Just wanted to ask about Central Appalachia, the costs went up to about $76 a ton in the second quarter, just wondering if you could talk a little bit about how much of an impact the idling had on those costs and how you think that number trends in the second half of the year with at least a partial recovery of what you'd idled?

David G. Zatezalo

I think the number -- this is Dave Zatezalo, Paul. I think the number completely reverses when we're in a position where we could fully utilize the assets. I mean, we have several operations there that although some of them weren't even completely idled, you still have cost of maintenance and compliance at those operations, within some cases, half of the amount of production coming out of them, as what we saw in January. We have eliminated 114 people during the year. We have cut back on overtime and those sorts of things, but we still have a very high fixed overhead. And I think it's proper to maintain the capacity, but I don't think in this market today, it's proper to run it. Unfortunately, we have assets and capacity that we're maintaining that just aren't there. So they're dilutive to our earnings. The actual mine operating cost has been good. It has been pretty solid. And it's my belief that when we're able to crank this back up in a better market, that our cost will return to normal level. We have not seen anything strange in the way of costs other than the fact that we just have a smaller divisor, so to speak.

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

Right. Well, I guess looking at the shipment numbers, they were just a couple of hundred thousand tons or 204,000 tons in the first half. Seeing where you are committed to customers and then also seeing the just ongoing weakness in the met markets, can you talk a little bit about where you'd see the met volumes in the second half of the year compared to the first half, just as you see it right now?

David G. Zatezalo

As I see it right now, I think they're going to be virtually the same. I mean, all that we have provided guidance on and have forecasted on ourselves are firm commitments. We have seen, in recent weeks, a slight uptick in the interest. We have not seen that uptick be at acceptable pricing to where we would bring capacity back. So I -- our assumptions are that we're going to be at relatively the same volumes for the second half. Obviously, the market can change that assumption. But so far, we are taking what we consider to be a rather conservative approach that things really don't change all that materially in the second half of the year.

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

And can you talk a little bit, if you've got some availability, you have some coal that you could deliver if the price is right? Can you talk a little bit about where pricing is these days for high-vol A, high-vol B type coals?

David G. Zatezalo

Yes. I can give you an opinion. I mean, the spot prices on high-vol As are regarded as being in the high $80s to low $90s. The contract prices for the high-vol As are probably just slightly north of $100. We are more in pursuit of any business that we consider to be acceptable. Obviously, tons that we have on hand on an incremental basis, we would sell those to move them, but it's not the kind of pricing that we would bring back or add any additional capacity at this time for. So I think it really needs to be in the low $100s at least for us to be in serious pursuit of running additional capacity.

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

Great. And just maybe lastly on Rhino Eastern, can you go through it again? I think you might have mentioned the timing, but can you go through again the timing of that depletion of Eagle #1? And then can you talk about this permit issues that you're, I guess, that you're waiting on, on the decision to get Eagle #3 started and whether there -- can you talk about whatever CapEx remaining there might be on the -- on getting Eagle #3 going?

David G. Zatezalo

Yes. Eagle #1 will deplete in about March of 2013. The capital for Eagle #3 has been spent. The face-up is installed. We are ready to commence mining coal. There is an issue, it's not actually an environmental issue. There's an issue that has come up with MSHA because of the existence of an old mine that overlays part of this reserve relative to the water from that mine and dealing with that hazard. I think we have that resolved and should be in a position -- Chris Walton is shaking his head at me, Paul. We should be in a position, we believe, to be starting that operation next week. And the forward capital on it is actually very little, I would say, less than $250,000 of work that remains there, and that's just as we develop. That work is really done. We had planned to start that in June, but it has dragged through July and it looks like it's going to start in August. But we have plenty of time to get that operation up and running. Most of the heavy -- the heavy lifting has all basically been done on that job.


[Operator Instructions] And with no further questions in queue, I'd like to turn the call back over to Mr. Dave Zatezalo for closing remarks.

Scott Morris

This is Scott Morris with Rhino. We appreciate everyone's participation today, and we will speak with everyone next quarter. Thank you.


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

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