HALLADOR ENERGY CO quarterly report, Q2 FY2020

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Hallador Energy Company — Q2 2020 Form 10-Q

Business and period. Hallador produces steam coal at mines in western Indiana, primarily for domestic utility customers. This unaudited report covers the three and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019. Financial amounts below are in millions unless noted.

Financial performance and position

  • Q2 revenue: $52.1, down from $72.3 in Q2 2019. Coal sales were $50.5 versus $71.1. Q2 tons sold fell to 1.244 million from 1.807 million; average price rose to $40.57 per ton from $39.35.
  • Q2 earnings: Net income was $0.254, compared with a $3.344 loss in Q2 2019; diluted EPS was $0.01 versus $(0.11). The quarter included a $1.231 equity-method income contribution from Sunrise Energy and a $0.618 deferred tax benefit.
  • Six-month results: Revenue was $114.6 versus $161.6 in 2019. Net loss was $3.406, compared with net income of $3.656; diluted EPS was $(0.11) versus $0.12. Adjusted EBITDA, a non-GAAP measure, was $27.1 versus $41.7 for the six months and $13.2 versus $16.4 for Q2.
  • Costs and margins: Q2 coal operating cost was $28.94 per ton versus $29.84 a year earlier; disclosed coal margin was $11.63 per ton versus $9.52. For the first half, management reported coal operating margin of $10.13 per ton versus $10.20, while total coal operating margin dollars declined $12.1. First-half all-mine operating cost averaged $30.45 per ton versus $29.51.
  • Cash flow and investment: First-half operating cash flow was $17.2 versus $23.7. Capital expenditures were $10.0 versus $18.3. Cash, cash equivalents and restricted cash totaled $11.9 at June 30, including $7.4 unrestricted cash and $4.5 restricted for workers’ compensation claims. Coal inventory rose to $42.0 from $28.3 at year-end.
  • Debt and liquidity: Gross bank debt was $161.1 at June 30, down about $19 from year-end; net bank debt after issuance costs was $153.8. The company also recorded a $10.0 PPP loan. Reported liquidity was $52.6, comprising $45.3 of additional borrowing capacity and cash and cash equivalents. The leverage ratio was 2.97 against a 4.00 maximum; debt-service coverage was 1.34 against a 1.05 minimum.
  • Balance sheet: Total assets were $411.7 versus $425.6 at year-end; stockholders’ equity was $187.5 versus $191.5. Current assets were $80.6 and current liabilities $71.6.

Material changes, outlook and risks

  • COVID-19 and operations: Management attributed shipment delays and lower demand to the pandemic; sales from March through Q2 were reported as 30% below expectations. First-half tons sold were 2.77 million versus 3.94 million. Operations continued as an essential supplier, but the company warned that further disruption could affect production, customers, suppliers, liquidity and results.
  • Management outlook: Hallador expected shipments to improve and inventories to decline in the second half of 2020. It expected Oaktown operating costs of $29–$30 per ton, about $10 million of remaining-2020 capital expenditures (approximately $5 million maintenance), and $6 million of remaining-2020 SG&A. Management cited contracted volumes of 3.7 million tons for Q3–Q4 2020, 5.2 million for 2021 and 5.3 million for 2022, subject to customer options and other contract terms.
  • Credit amendment and dividend: The April 2020 credit amendment increased covenant flexibility but capped 2020 capital expenditures at $30 million and suspended dividends until leverage falls below 2.0x. The company paid $1.2 million of dividends in the first half, before/around the suspension.
  • PPP loan: The $10 million loan was used for payroll and utilities and is recorded as current and long-term debt. Management expected a portion might be forgiven after SBA review, but stated forgiveness was not assured. The filing discusses possible repayment, penalties, audit, and reputational risks if eligibility or certifications are challenged.
  • Mine closures and impairments: Carlisle was permanently closed in 2020; $1.1 million of exit and disposal costs were recorded in the first half, including $0.6 million in Q2. No material long-lived-asset impairment was recorded in Q2. The filing reports prior-year impairments of $65.7 million for Carlisle, $9.2 million for Bulldog reserves and $2.9 million for Hourglass Sands.
  • Other notable risk: Nasdaq notified Hallador of a minimum-bid-price deficiency after its share price remained below $1 for 30 consecutive business days. The filing stated the company had until December 28, 2020 to regain compliance, subject to possible additional time and Nasdaq requirements.
  • Other disclosures: Surety bonds for reclamation totaled $27 million. Management reported effective disclosure controls and no material change in internal control over financial reporting. The independent accountant performed a review, not an audit, and reported no material modifications needed to the interim statements.

Investor verification priorities

  1. Track whether customer shipments recovered in the second half of 2020 and whether the $42.0 million coal inventory was reduced as management expected.
  2. Verify liquidity, covenant headroom, debt repayments and the effect of the suspended dividend and capital-spending limit.
  3. Monitor PPP loan forgiveness, repayment obligations and any SBA review or related developments.
  4. Assess whether Oaktown costs, capital expenditures and contracted volumes met management’s stated expectations.
  5. Check progress on Nasdaq’s minimum-bid-price requirement and any subsequent listing actions.
  6. Review future impairment, mine-closure and reclamation disclosures, along with COVID-19 effects on demand, production and counterparties.