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RNO > SEC Filings for RNO > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for RHINO RESOURCE PARTNERS LP

Form 10-Q for RHINO RESOURCE PARTNERS LP


6-Aug-2014

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, 2013 and the section "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2013 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, 2013.

Overview

We are a diversified energy limited partnership formed in Delaware that is focused on coal and energy related assets and activities, including energy infrastructure investments. 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 Cana Woodford region of western Oklahoma. 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. We have also invested in a joint venture that provides 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 Cana Woodford region in western Oklahoma. As of December 31, 2013, we controlled an estimated 457.7 million tons of proven and probable coal reserves, consisting of an estimated 438.0 million tons of steam coal and an estimated 19.7 million tons of metallurgical coal. In addition, as of December 31, 2013, we controlled an estimated 277.0


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million tons of non-reserve coal deposits. As of December 31, 2013, Rhino Eastern LLC, a joint venture in which we have a 51% membership interest and for which we serve as manager, controlled an estimated 43.9 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 18.8 million tons of non-reserve coal deposits. As of June 30, 2014, we operated nine mines, including four underground and five surface mines, located in Kentucky, Ohio, West Virginia and Utah. Our Rhino Eastern joint venture operates one underground mine in West Virginia. 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 June 30, 2014 consisted of 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 Cana Woodford region. 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 six months ended June 30, 2014, we generated revenues of approximately $55.9 million and $115.8 million, respectively. For the three months ended June 30, 2014 we generated a net loss of approximately $6.9 million and for the six months ended June 30, 2014 we generated net income of approximately $118.7 million, consisting primarily of the approximate $121.7 million gain from the sale of our Utica Shale oil and natural gas assets. Excluding results from the Rhino Eastern joint venture, for the three months ended June 30, 2014, we produced approximately 0.9 million tons of coal and sold approximately 0.8 million tons of coal and for the six months ended June 30, 2014 we produced approximately 1.7 million tons of coal and sold approximately 1.6 million. For the three and six months ended June 30, 2014, approximately 87% and 85%, respectively, of tons sold were sold pursuant to supply contracts. Additionally, the Rhino Eastern joint venture produced and sold approximately 0.1 million tons of premium mid-vol metallurgical coal for the three and six months ended June 30, 2014.


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Recent Developments

Utica Shale Oil and Natural Gas Investment Sale

We and an affiliate of Wexford participated with Gulfport Energy ("Gulfport"), a publicly traded company, to acquire interests in a portfolio of oil and natural gas leases in the Utica Shale. 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 December 31, 2013, our Utica Shale position consisted of our 5% net interest in a total portfolio of approximately 152,300 gross acres, or approximately 7,615 net acres, for a total purchase price of approximately $31.1 million. In addition, per the joint operating agreement among us, Gulfport and an affiliate of Wexford Capital, we funded our proportionate share of drilling costs to Gulfport for wells drilled on our acreage. As of December 31, 2013, we funded approximately $23.3 million of drilling costs. We received approximately $5.6 million of revenue from this investment for the year ended December 31, 2013.

In March 2014, we completed a purchase and sale agreement (the "Purchase Agreement") with Gulfport to sell our oil and natural gas properties in the Utica Shale region for approximately $184.0 million (the "Purchase Price"). The Purchase Agreement was effective as of January 1, 2014 and the Purchase Price was adjusted for any unsettled expenditures made and/or proceeds received from our portion of the Utica Shale properties prior to the effective date. At the closing of the Purchase Agreement, we were immediately due approximately $179.0 million, net of any adjustments described above, and the remaining approximately $5.0 million was scheduled to be paid within approximately 90 days of March 20, 2014, subject to ongoing legal title work related to specific properties. The remaining $5.0 million to be paid per the Purchase agreement has not been finalized due to ongoing legal review. We recorded a gain of approximately $121.7 million during the six months ended June 30, 2014 related to this sale. The sale of our investment in the Utica Shale allowed us to eliminate substantially all of our debt, providing us with significant financial flexibility. The elimination of our debt provides us the capability to opportunistically expand our operations and increase our cash flow through the development of existing coal reserves or the potential acquisition of MLP qualifying assets.

Credit Facility

In March 2014, we entered into a second 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. This second amendment permitted us to sell certain assets per an agreement with Gulfport, as described above in the sale of the Utica Shale investment, which previously constituted a portion of the collateral of the administrative agent and lenders under the amended and restated senior secured credit facility. This second amendment also reduces the borrowing capacity under the amended and restated senior secured credit facility to a maximum of $200 million and alters the maximum leverage ratio to 3.5 from January 1, 2014 through September 30, 2015. The maximum leverage ratio decreases to 3.25 from October 1, 2015 through December 31, 2015 and then decreases to 3.0 after December 31, 2015. In addition, the


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second amendment adjusts the maximum investments (other than directly by us) in hydrocarbons, hydrocarbon interests and assets and activities related to hydrocarbons, in each case, excluding coal, in an aggregate amount not to exceed $50 million. All other terms of the amended and restated senior secured credit facility were not affected by the second amendment. Due to the second amendment, we recorded a non-cash charge of approximately $1.1 million to write-off a portion of our unamortized debt issuance costs since the second amendment reduced the borrowing capacity under the amended and restated senior secured credit facility.

Other Oil and Natural Gas Activities

In January 2014, we received approximately $8.4 million of net proceeds from the sale by Blackhawk Midstream LLC ("Blackhawk") of its equity interest in two entities, Ohio Gathering Company, LLC and Ohio Condensate Company, LLC, to Summit Midstream Partners, LLC. As part of the joint operating agreement for the Utica Shale investment discussed above, we had the right to approximately 5% of the proceeds of the sale by Blackhawk.

Follow-on Offering

In September 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.

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 and Patriot successfully exited bankruptcy in December 2013.

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 were subsequently required to pay an additional $2.0 million related to this acquisition after certain conditions were met, of which $1.6 million was paid in the third quarter of 2012 and the remaining $0.4 million was paid in the fourth quarter of 2013. The $2.0 million in total payments was recorded in Property, plant and equipment. An additional $1.0 million in potential payments has not yet been recorded because the conditions requiring payment of this amount had not occurred as of June 30, 2014.

As of December 31, 2013, the coal leases and property were estimated to contain approximately 32.6 million tons of proven and probable coal reserves that are contiguous to the Green River. The property is fully permitted and provides the Partnership with access to Illinois


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Basin coal that is adjacent to a navigable waterway, which could allow for exports to non-U.S. customers. We have completed the initial construction of a new underground mining operation on this property. Production began in late May 2014 and the first barge shipments of coal departed from this facility in early July 2014.

Other Investments

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.

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. We recorded our proportionate portion of the operating loss for the three and six months ended June 30, 2014 of approximately $77,000 and approximately $118,000, respectively. During the six months ended June 30, 2014, we contributed additional capital based upon our ownership share to the Muskie joint venture in the amount of $0.2 million. In addition, during the year ended December 31, 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 June 30, 2014.

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 six months ended June 30, 2014 and 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 of two drill pads during the six months ended June 30, 2014, in addition to the construction and upgrade of eleven drill pads during 2013. Two impoundments for fracking water were also constructed during 2013 and Razorback has constructed several access roads for operators in the Utica Shale region.

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


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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 June 30, 2014, we had commitments under sales contracts to deliver annually scheduled base quantities of coal as follows:

Year         Tons (in thousands)   Number of customers
2014 Q3-Q4                 1,899           21
   2015                    2,171            5
   2016                    1,400            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.

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 is described below. Our Central Appalachia segment consists of four mining complexes: Tug River, Rob Fork and Deane, which as of June 30, 2014, together included one active underground mine, 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 June 30, 2014. Our Sands Hill mining complex, located in southern Ohio, included two surface mines, a preparation plant and a river terminal as of June 30, 2014. Our Rhino Western segment includes one underground mine in the Western Bituminous region at 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 June 30, 2014, this complex was comprised of one underground mine and a preparation plant and loadout facility (owned by our Rhino Eastern joint venture partner). Our new underground mine on our Pennyrile property in western Kentucky began production late in the second quarter of 2014 and did not have any initial sales in this quarter. The operating results from this new mine have been included in our Other category for segment reporting purposes since they are initially immaterial.


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Beginning with 2013 year-end reporting, we had included a reportable business segment for our oil and natural gas activities since the total assets for these operations met the quantitative threshold for separate segment reporting. The Oil and Natural Gas segment included our Utica Shale activities, which were sold during the first quarter of 2014 as described earlier, as well as our Cana Woodford activities, the Razorback drill pad construction operations and the Muskie joint venture to provide sand for fracking operations. Prior to 2013, our oil and natural gas activities were included in our Other category for segment reporting purposes. Since the majority of our oil and natural gas activities were in the Utica Shale and the Utica Shale financial results are now included in discontinued operations due to their sale, the segment data for our remaining oil and natural gas activities has been included in the Other category for segment reporting purposes for 2014 and the 2013 comparable periods since they are not material for separate segment reporting. Our Other category is comprised of our ancillary businesses and our remaining oil and natural gas activities, as well as the initial operating results of our new Pennyrile mine as discussed above.

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.

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.


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Summary



The following table sets forth certain information regarding our revenues,
operating expenses, other income and expenses, and operational data for the
three and six months ended June 30, 2014 and 2013:



                                               Three months ended          Six months ended
                                                    June 30,                   June 30,
                                               2014          2013          2014         2013
                                                              (in millions)
Statement of Operations Data:
Total revenues                              $     55.9    $     65.6    $    115.8    $  140.1
Costs and expenses:
Cost of operations (exclusive of
depreciation, depletion and amortization
shown separately below)                           46.5          51.5          92.9       106.2
Freight and handling costs                         0.4           0.3           0.7         0.6
Depreciation, depletion and amortization           8.9           9.9          18.2        20.0
Selling, general and administrative
(exclusive of depreciation, depletion
and amortization shown separately above)           4.7           5.0          10.2        10.5
(Gain) on sale/disposal of assets-net             (0.2 )       (10.6 )        (0.9 )      (9.7 )
(Loss)/Income from operations                     (4.4 )         9.5          (5.3 )      12.5
Interest and other (expense)/income:
Interest expense                                  (0.8 )        (1.9 )        (4.0 )      (3.8 )
Interest income                                    0.3             -           0.3           -
Equity in net (loss) of unconsolidated
affiliates                                        (1.9 )        (2.1 )        (2.8 )      (3.4 )
Total interest and other (expense)
income                                            (2.4 )        (4.0 )        (6.5 )      (7.2 )
Net (loss) from continuing operations             (6.8 )         5.5         (11.8 )       5.3
Net (loss)/income from discontinued
operations                                        (0.1 )         0.4         130.5         0.4
Net (loss)/income                           $     (6.9 )  $      5.9    $    118.7    $    5.7

Other Financial Data
Adjusted EBITDA from continuing
operations                                  $      3.1    $     17.5    $     10.8    $   30.5
Net (loss)/income from discontinued
operations                                        (0.1 )         0.4         130.5         0.4
DD&A included in net (loss)/income from
discontinued operations                              -           0.7             -         0.8
Total Adjusted EBITDA                       $      3.0    $     18.6    $    141.3    $   31.7

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Summary. For the three months ended June 30, 2014, our total revenues decreased to $55.9 million from $65.6 million for the three months ended June 30, 2013, which is a 14.8% decrease. We sold 0.8 million tons of coal for the three months ended June 30, 2014, which is a 13.1% decrease compared to the tons of coal sold for the three months ended June 30, 2013. This


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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 have worked to decrease their coal stockpiles, but the utilities remain slow to replenish their coal inventories as natural gas prices remain relatively low and the summer weather temperatures have initially been below normal, which has resulted in a smaller demand for steam coal for electricity generation. We believe the weak demand in the met coal markets was primarily driven by a decrease in world-wide steel production due to ongoing economic weakness in China and Europe.

Net loss from continuing operations and Adjusted EBITDA from continuing operations decreased for the three months ended June 30, 2014 from the three months ended June 30, 2013. We generated a net loss from continuing operations of approximately $6.8 million for the three months ended June 30, 2014 compared to net income from continuing operations of approximately $5.5 million for the three months ended June 30, 2013 as reductions in costs were offset by lower coal revenues. For the three months ended June 30, 2013, our net income was positively impacted by $10.5 million from the sale of our 20% royalty interest in our Utica Shale property. Net loss from continuing operations for the three months ended June 30, 2014 was negatively impacted period to period due to a $1.8 million net loss from our Rhino Eastern joint venture compared to net loss of $2.1 million for the three months ended June 30, 2013, which represents our . . .

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