Increasing cash flow from its Utica shale investment is providing the Lexington, Ky.-based company with additional liquidity to construct the Pennyrile underground steam coal mine in McLean County, Ky. Pennyrile, also known as Riveredge, is on target to begin producing coal in mid-2014, David Zatezalo told analysts in early August in his final earnings call as president and CEO of Rhino.

Zatezalo retired as president on August 20 and was succeeded by Christopher Walton, the company’s former senior vice president and chief operating officer. Zatezalo expects to retire as CEO by October 18, but plans to continue with the company in a role that requires a reduced commitment.

Rhino earned a $5.9 million profit in the second quarter, down from net income of $13 million in the year-ago period. Rhino sold 912,000 tons of coal in the April-June time frame compared with 1.1 million tons in the second quarter of 2012.

“We’re excited about the Pennyrile project in western Kentucky and the income and growth expected from the Utica investment,” Zatezalo said.

Earlier this year, Rhino signed a contract with a regional electric utility to supply 800,000 tons annually from Pennyrile through 2017. The deal includes a contract reopener for 2018-2020.

Although Rhino is not satisfied with current prices for metallurgical coal, it nonetheless intends to increase production at the Rhino Eastern complex in West Virginia it co-owns with Patriot Coal Co., according to Zatezalo.

“However, in this market it’s questionable to me as to how far you want to take volume up given that the market is actually pretty weak,” he said.

Like other producers of Central Appalachian coal, Rhino is concerned about the future of the struggling coal basin. “We have some operations attractive in a lower-price market and some operations not attractive,” Zatezalo said.

Because 2014 is “really in flux,” he declined to provide any guidance to analysts about Rhino’s anticipated central Appalachian sales for next year. “I share your concerns about central App in 2014. I think every operator out there does.”

He added, “I don’t think central App goes to zero, but Central Appalachia could be fairly negatively impacted.”

Rhino has extensive central App holdings but is not entirely dependent on the region. “We value our central App properties, but if the price is not there it will not put Rhino on its knees,” Zatezalo said.

Zatezalo said Rhino has some opportunities to dispose of its non-productive assets but had not pulled the trigger on any transactions by September. “I think our success in selling those is primarily a function of how people see the forward market. We need some money to fund our Utica expansion and to fund Pennyrile. We will not give any of our assets away.”

Rhino is not aggressively pursuing a sale of its idled assets, “but our aggressiveness really depends on our need to fund Pennyrile and Utica until it becomes cash positive,” he continued. “Utica is several million dollars away from being cash positive and Pennyrile will be a drain until it comes into production next year.”