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RNO > SEC Filings for RNO > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for RHINO RESOURCE PARTNERS LP

Form 10-Q for RHINO RESOURCE PARTNERS LP


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context clearly indicates otherwise, references in this report to "we," "our," "us" or similar terms refer to Rhino Resource Partners LP and its subsidiaries. References to our "general partner" refer to Rhino GP LLC, the general partner of Rhino Resource Partners LP. The following discussion of the historical financial condition and results of operations should be read in conjunction with the historical audited consolidated financial statements and accompanying notes of our Annual Report on Form 10-K for the year ended December 31, 2012 and the section "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2012 included in this Annual Report on Form 10-K.

In addition, this discussion includes forward looking statements that are subject to risks and uncertainties that may result in actual results differing from statements we make. See the section "Cautionary Note Regarding Forward Looking Statements". In addition, factors that could cause actual results to differ include those risks and uncertainties discussed in Part I, Item 1A. "Risk Factors" also included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

We are a diversified energy limited partnership formed in Delaware that is focused on coal, oil and natural gas and related energy infrastructure. We produce, process and sell high quality coal of various steam and metallurgical grades. We market our steam coal primarily to electric utility companies as fuel for their steam powered generators. Customers for our metallurgical coal are primarily steel and coke producers who use our coal to produce coke, which is used as a raw material in the steel manufacturing process. In addition to operating coal properties, we manage and lease coal properties and collect royalties from those management and leasing activities. Our diversified energy portfolio also includes investments in oil and natural gas mineral rights in the Utica Shale and Cana Woodford regions. We receive our proportionate share (5%) of revenue from any hydrocarbons produced and sold by the operator on our Utica Shale acreage and we receive royalty revenue from any hydrocarbons produced and sold by operators on our Cana Woodford acreage. In addition, we have expanded our business to include infrastructure support services, including the formation of Razorback, a service company to provide drill pad construction for operators in the Utica Shale, as well as other joint venture investments to provide for the transportation of hydrocarbons and drilling support services in the Utica Shale region. In December 2012, we also invested in a joint venture that will provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the U.S.

We have a geographically diverse asset base with coal reserves located in Central Appalachia, Northern Appalachia, the Illinois Basin and the Western Bituminous region and oil and natural gas investments in the Utica Shale regions of eastern Ohio and the Cana Woodford region in western Oklahoma. As of December 31, 2012, we controlled an estimated 463.7


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million tons of proven and probable coal reserves, consisting of an estimated 442.8 million tons of steam coal and an estimated 20.9 million tons of metallurgical coal. In addition, as of December 31, 2012, we controlled an estimated 417.4 million tons of non-reserve coal deposits. As of December 31, 2012, Rhino Eastern LLC, a joint venture in which we have a 51% membership interest and for which we serve as manager, controlled an estimated 43.1 million tons of proven and probable coal reserves at the Rhino Eastern mining complex located in Central Appalachia, consisting entirely of premium mid-vol and low-vol metallurgical coal, and an estimated 17.9 million tons of non-reserve coal deposits. As of September 30, 2013, we operated eight mines, including four underground and four surface mines, located in Kentucky, Ohio, West Virginia and Utah. Our Rhino Eastern joint venture operates two underground mines in West Virginia. In addition, we have one underground mine in Colorado that has been temporarily idled. The number of mines that we operate may vary from time to time depending on a number of factors, including the demand for and price of coal, depletion of economically recoverable reserves and availability of experienced labor. Our oil and natural gas investments as of September 30, 2013 consisted of a 5% net interest in a portfolio of oil and natural gas leases in the Utica Shale that encompassed 146,000 total gross acres, or 7,300 net acres, as well as approximately 1,900 net mineral acres that we own in the Cana Woodford region.

Our principal business strategy is to safely, efficiently and profitably produce, sell and lease both steam and metallurgical coal from our diverse asset base in order to maintain and, over time, increase our quarterly cash distributions. In addition, we intend to continue to expand and diversify our operations through strategic acquisitions, including the acquisition of long-term, cash generating natural resource assets, such as our oil and natural gas investments in the Utica Shale and Cana Woodford regions. We believe that such assets will allow us to grow our cash available for distribution and enhance stability of our cash flow.

For the three and nine months ended September 30, 2013, we generated revenues of approximately $71.1 million and approximately $212.7 million, respectively, and net income of approximately $2.9 million and approximately $8.6 million, respectively. Excluding results from the Rhino Eastern joint venture, for the three and nine months ended September 30, 2013, we produced approximately 0.9 million tons and approximately 2.8 million tons of coal, respectively, and sold approximately 0.9 million tons and approximately 2.8 million tons of coal, respectively. For the three and nine months ended September 30, 2013, approximately 90% and 89%, respectively, of tons sold were sold pursuant to supply contracts. Additionally, the Rhino Eastern joint venture produced approximately 0.1 million tons of premium mid-vol metallurgical coal for each of the three and nine months ended September 30, 2013. The Rhino Eastern joint venture also sold approximately 0.1 million tons and approximately 0.2 million tons of coal for the three and nine months ended September 30, 2013, respectively.


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Recent Developments

Follow-on Offering

On September 13, 2013, we completed a public offering of 1,265,000 common units, representing limited partner interests in us, at a price of $12.30 per common unit. Of the common units issued, 165,000 units were issued in connection with the exercise of the underwriters' option to purchase additional units. Net proceeds from the offering were approximately $14.6 million, after deducting underwriting discounts and estimated offering expenses of approximately $1.0 million. We used the net proceeds from this offering, and a related capital contribution by our general partner of approximately $0.3 million, to repay approximately $14.9 million of outstanding indebtedness under our credit facility.

Credit Facility

In April 2013, we entered into an amendment of our amended and restated senior secured credit facility with PNC Bank, N.A., as administrative agent, and a group of lenders, which are parties thereto. The amendment provided for an increase in the maximum allowed investments in coal-related entities outside of our current organization (i.e. joint ventures) under the amended and restated senior secured credit facility from $25 million to $40 million. The amendment also increased the maximum leverage ratio allowed under the amended and restated senior secured credit facility and also altered the pricing grid to include applicable interest rates for borrowings, letter of credit fees and commitment fees on unused borrowings based upon the new maximum leverage ratio. The amendment increased the maximum leverage ratio of the amended and restated senior secured credit facility to 3.75 from April 1, 2013 through March 31, 2015, then steps the maximum leverage ratio down to its previous level of 3.0 by December 31, 2015. All other terms of the amended and restated senior secured credit facility were not affected by the amendment.

Patriot Coal Corporation Bankruptcy

We have a 51% equity interest in the Rhino Eastern joint venture, with Patriot Coal Corporation ("Patriot") owning the remaining membership interest. On July 9, 2012, Patriot filed for Chapter 11 bankruptcy protection. While the long term impact of the Patriot bankruptcy filing on the Rhino Eastern joint venture remains uncertain at this point, normal operations have continued at the Rhino Eastern joint venture and thus far the bankruptcy filing has not had a material negative effect on Rhino Eastern. On October 9, 2013, Patriot announced that it had achieved several major milestones toward a successful emergence from bankruptcy, possibly by 2013 year-end.

Acquisition of Coal Property

In May 2012, we completed the purchase of certain rights to coal leases and surface property located in Daviess and McLean counties in western Kentucky for approximately $1.5 million. In addition, we could potentially be required to pay an additional $3.0 million related to this acquisition if certain conditions are met. Of that amount, $2.0 million was initially recorded in in Property, plant and equipment and Accrued expenses related to this acquisition since this additional amount related to the purchase of these assets was probable and estimable. As of


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September 30, 2013, we have paid $1.6 million of the $2.0 million. The remaining $1.0 million in potential payments has not been recorded because the conditions requiring payment of this amount are currently not probable.

The coal leases and property are estimated to contain approximately 32 million tons of proven and probable coal reserves that are contiguous to the Green River. The property is fully permitted and provides us with access to Illinois Basin coal that is adjacent to a navigable waterway, which could allow for exports to non-U.S. customers. Initial development of this property has commenced and initial production and sales from our new mine on this property, referred to as the Riveredge mine, is expected to occur in mid-2014.

Oil and Gas Investments

We and an affiliate of Wexford Capital have participated with Gulfport Energy Corporation ("Gulfport"), a publicly traded company, to acquire interests in a portfolio of oil and natural gas leases in the Utica Shale. As of September 30, 2013, we have completed the acquisition of interests in a portfolio of leases in the Utica Shale region of eastern Ohio for a total purchase price of approximately $25.0 million. Gulfport is actively drilling in the Utica Shale acreage and our 2013 projected expansion capital expenditures include an estimated $21 million to $24 million for our oil and natural gas investments, primarily for drilling costs related to our Utica Shale acreage.

Our initial position in the Utica Shale consisted of a 10.8% net interest in approximately 80,000 gross acres. During the third quarter of 2012, we completed an exchange of our initial 10.8% position for a pro rata interest in 125,000 gross acres under lease by Gulfport and an affiliate of Wexford Capital. Also during the third quarter of 2012, our position was adjusted to a 5% net interest in the 125,000 gross acres, or approximately 6,250 net acres. As of September 30, 2013, our Utica Shale position consisted of our 5% net interest in a total portfolio of approximately 146,000 gross acres, or approximately 7,300 net acres. In addition, per the joint operating agreement among us, Gulfport and an affiliate of Wexford Capital, we have funded our proportionate share of drilling costs to Gulfport for wells being drilled on our acreage. As of September 30, 2013 and December 31, 2012, we have funded approximately $15.4 million and $5.3 million, respectively, of drilling costs that are included in Coal properties and oil and natural gas properties in our unaudited condensed consolidated statements of financial position. We recognized approximately $1.6 million and approximately $3.1 million of revenue, respectively, on our Utica Shale investment during the three and nine months ended September 30, 2013.

In March 2012, we completed an out-lease agreement with a third party for approximately 1,232 acres we own in the Utica Shale region of Harrison County Ohio. The lease agreement is for an initial five year term with an optional three year renewal period and conveys rights to the lessee to perform drilling and operating activities for producing oil, natural gas or other hydrocarbons. As part of the lease agreement, the third party agreed to pay us the sum of $6,000 per acre as a lease bonus, of which $0.5 million was paid at the signing of the lease agreement. An additional $6.9 million was paid in the second quarter of 2012 totaling approximately $7.4 million of lease bonus payments for approximately 1,232 acres. In addition, the lease agreement stipulated that the third party would pay us a 20% royalty based upon the gross proceeds received from the sale of oil and/or natural gas recovered from the leased property.


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In April 2013, we completed an agreement with a third party to sell the 20% royalty interest for approximately $10.5 million on the 1,232 acres in the Utica Shale. The sale of the royalty interest resulted in a gain of approximately $10.5 million since we had no cost basis associated with the royalty interest.

In September 2013, we completed an agreement with a third party to sell the oil and natural gas mineral rights for approximately 57 acres we own in the Utica Shale region in Harrison County, Ohio for approximately $0.6 million. The sale of this acreage resulted in a gain of approximately $0.6 million since we had no cost basis associated with this property.

We have invested in certain oil and natural gas mineral rights in the Cana Woodford region of western Oklahoma for a total purchase price of approximately $8.1 million. Our investment includes approximately 1,900 net mineral acres that we own in the Cana Woodford region which provide monthly royalty revenue to Rhino.

Other Investments

In December 2012, we made an initial investment of approximately $2.0 million in a new joint venture, Muskie Proppant LLC ("Muskie"), with affiliates of Wexford Capital. Muskie was formed to provide sand for fracking operations to drillers in the Utica Shale region and other oil and natural gas basins in the U.S. As Muskie is still undergoing operational development, we recorded our proportionate portion of the operating loss for the three and nine months ended September 30, 2013 of approximately $68,000 and $200,000, respectively. During the nine months ended September 30, 2013, we contributed additional capital based upon our ownership share to the Muskie joint venture in the amount of $0.5 million. In addition, during the three months ended September 30, 2013, the Partnership provided a loan based upon its ownership share to Muskie in the amount of $0.2 million that remained outstanding as of September 30, 2013.

In March 2012, we made an initial investment of approximately $0.1 million in a new joint venture, Timber Wolf Terminals LLC ("Timber Wolf"), with affiliates of Wexford Capital. Timber Wolf was formed to construct and operate a condensate river terminal that will provide barge trans-loading services for parties conducting activities in the Utica Shale region of eastern Ohio. The initial investment was our proportionate minority ownership share to purchase land for the construction site of the condensate river terminal. Timber Wolf had no operating activities during the year ended 2012 or the three and nine months ended September 30, 2013.

In addition, during the second quarter of 2012 we formed Razorback, a services company to provide drill pad construction services in the Utica Shale for drilling operators. Razorback completed the construction and upgrade of eight drill pads during the first nine months of 2013 and is completing the construction of two additional drill pads as of September 30, 2013, in addition to the three drill pads completed during 2012.


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Sale of Triad Operations

In August 2012, we sold the operations and tangible assets of our roof bolt manufacturing company, Triad, to a third party for $0.5 million of cash consideration. As part of the sale, we retained the rights to certain intellectual property and entered into an exclusive license and option to purchase agreement for this intellectual property with the same third party for potential additional cash consideration. We have not recorded any portion of this additional consideration since this amount is contingent upon the third party determining the viability of the related intellectual property to their specifications, which has since expired.

Sale of Mining Assets

In February 2012, the Partnership sold certain non-core mining assets located in Pike County, Kentucky to a third party for approximately $0.6 million. The transaction also extinguished certain liabilities related to the assets sold. In relation to the sale of these assets and extinguishment of liabilities, we recorded a gain of approximately $0.9 million, which was higher than the sales amount due to the extinguishment of the liabilities.

Factors That Impact Our Business

Our results of operations in the near term could be impacted by a number of factors, including (1) adverse weather conditions and natural disasters,
(2) poor mining conditions resulting from geological conditions or the effects of prior mining, (3) equipment problems at mining locations, (4) the availability of transportation for coal shipments or (5) the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives.

On a long-term basis, our results of operations could be impacted by, among other factors, (1) changes in governmental regulation, (2) the availability and prices of competing electricity-generation fuels, (3) our ability to secure or acquire high-quality coal reserves and (4) our ability to find buyers for coal under favorable supply contracts.

We have historically sold a majority of our coal through supply contracts and anticipate that we will continue to do so. As of September 30, 2013, we had commitments under sales contracts to deliver annually scheduled base quantities of coal as follows:

 Year     Tons (in thousands)   Number of customers
2013 Q4           788                   16
 2014            2,663                  12
 2015            1,796                   4
 2016            1,100                   2
 2017            1,100                   2

Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.


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Results of Operations

Segment Information

We conduct business through four reportable business segments: Central Appalachia, Northern Appalachia, Eastern Met and Rhino Western. Additionally, we have an Other category that includes our ancillary businesses and oil and natural gas investments. Our Central Appalachia segment consists of four mining complexes: Tug River, Rob Fork and Deane, which as of September 30, 2013, together included two underground mines, three surface mines and three preparation plants and loadout facilities in eastern Kentucky and southern West Virginia. Additionally, our Central Appalachia segment includes our Elk Horn coal leasing operations. Our Northern Appalachia segment consists of the Hopedale mining complex, the Sands Hill mining complex, the Leesville field and the Springdale field. The Hopedale mining complex, located in northern Ohio, included one underground mine and one preparation plant and loadout facility as of September 30, 2013. Our Sands Hill mining complex, located in southern Ohio, included one surface mine, a preparation plant and a river terminal as of September 30, 2013. Our Rhino Western segment includes our two underground mines in the Western Bituminous region that consist of our McClane Canyon mine in Colorado that has been temporarily idled since the end of 2010, and remained idle at September 30, 2013, and our Castle Valley mining complex in Utah. The Eastern Met segment includes our 51% equity interest in the results of operations of the Rhino Eastern joint venture, which owns the Rhino Eastern mining complex, located in West Virginia, and for which we serve as manager. As of September 30, 2013, this complex was comprised of two underground mines and a preparation plant and loadout facility (owned by our Rhino Eastern joint venture partner). Our Other category includes our ancillary businesses that consist of our limestone operations and various businesses that provide support services such as reclamation, maintenance and transportation, the cost of which is reflected in our cost of operations, as well as our oil and natural gas investments.

Evaluating Our Results of Operations

Our management uses a variety of financial measurements to analyze our performance, including (1) Adjusted EBITDA, (2) coal revenues per ton and
(3) cost of operations per ton.

Adjusted EBITDA. The discussion of our results of operations below includes references to, and analysis of, our segments' Adjusted EBITDA results. Adjusted EBITDA represents net income before deducting interest expense, income taxes and depreciation, depletion and amortization, including our proportionate share of these expense items from our Rhino Eastern LLC joint venture, while also excluding certain non-cash and/or non-recurring items. Adjusted EBITDA is used by management primarily as a measure of our segments' operating performance. Adjusted EBITDA should not be considered an alternative to net income, income from operations, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Because not all companies calculate Adjusted EBITDA identically, our calculation may not be comparable to similarly titled measures of other companies. Please read "-Reconciliation of Adjusted EBITDA to Net Income by Segment" for reconciliations of Adjusted EBITDA to net income by segment for each of the periods indicated.


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Coal Revenues Per Ton. Coal revenues per ton represents coal revenues divided by tons of coal sold. Coal revenues per ton is a key indicator of our effectiveness in obtaining favorable prices for our product.

Cost of Operations Per Ton. Cost of operations per ton sold represents the cost of operations (exclusive of depreciation, depletion and amortization) divided by tons of coal sold. Management uses this measurement as a key indicator of the efficiency of operations.

Summary



The following table sets forth certain information regarding our revenues,
operating expenses, other income and expenses, and operational data for the
three and nine months ended September 30, 2013 and 2012:



                                        Three months ended            Nine months ended
                                          September 30,                 September 30,
                                       2013           2012           2013           2012
                                                         (in millions)
Statement of Operations Data:
Total revenues                      $      71.1    $      93.6    $     212.7    $    265.5
Costs and expenses:
Cost of operations (exclusive of
depreciation, depletion and
amortization shown separately
below)                                     50.4           69.4          156.9         186.7
Freight and handling costs                  0.3            1.5            0.9           4.6
Depreciation, depletion and
amortization                               10.5           10.0           31.3          30.9
Selling, general and
administrative (exclusive of
depreciation, depletion and
amortization shown separately
above)                                      4.7            4.7           15.2          15.1
(Gain) on sale/disposal of
assets-net                                 (0.6 )         (1.2 )        (10.3 )        (2.2 )
Income from operations                      5.8            9.2           18.7          30.4
Interest and other income
(expense):
Interest expense                           (2.1 )         (2.1 )         (5.8 )        (5.9 )
Interest income                               -              -              -           0.1
Equity in net (loss)/income of
unconsolidated affiliates                  (0.8 )          1.8           (4.3 )         6.2
Total interest and other
(expense) income                           (2.9 )         (0.3 )        (10.1 )         0.4
Net income                          $       2.9    $       8.9    $       8.6    $     30.8

Other Financial Data
Adjusted EBITDA                     $      15.7    $      21.3    $      47.4    $     68.6


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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Summary. For the three months ended September 30, 2013, our total revenues decreased to $71.1 million from $93.6 million for the three months ended September 30, 2012. We sold 0.9 million tons of coal for the three months ended September 30, 2013, which is an 28.8% decrease compared to the tons of coal sold for the three months ended September 30, 2012. This decrease was the result of continued weak demand in the met and steam coal markets. We believe the weak demand in the steam coal markets was primarily driven by an over-supply of low priced natural gas that increased stockpiles of coal at electric utilities. We believe utilities are still working to decrease their coal stockpiles, which has extended the weakness in the steam coal markets even though natural gas prices have risen from their previous historic lows. We believe the weak demand in the met coal markets was primarily driven by a decrease in world-wide steel production due to economic weakness in China and Europe.

Net income and Adjusted EBITDA decreased for the three months ended September 30, 2013 from the three months ended September 30, 2012. We generated net income of approximately $2.9 million for the three months ended September 30, 2013 compared to net income of approximately $8.9 million for the three months ended September 30, 2012 as reductions in costs were offset by lower coal revenues. Net income for the three months ended September 30, 2013 was negatively impacted period to period due to a $0.8 million net loss from our Rhino Eastern joint venture compared to net income of $1.8 million for the three months ended September 30, 2012, which represents our proportionate share of . . .

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