Hallador Energy Company — 2019 Form 10-K
Business and period: Annual report for the year ended December 31, 2019. Hallador primarily mines thermal coal in Indiana through Sunrise Coal; it also holds interests in natural gas and frac sand businesses. Figures are in U.S. dollars; financial amounts below are in millions unless noted.
Financial results and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Coal sales | $317.4 | $291.8 |
| Total revenue and other income | $323.5 | $293.6 |
| Net income (loss) | ($59.9) | $7.6 |
| Diluted loss (earnings) per share | ($1.95) | $0.25 |
| Cash from operations | $38.2 | $51.6 |
| Capital expenditures | $35.5 | $35.1 |
- Coal sales volume rose to 8.07 million tons from 7.37 million; average realized price declined to $39.34 per ton from $39.62. Average operating cost increased to $30.69 per ton from $29.18, reducing coal margin to $8.65 per ton from $10.43.
- Fourth-quarter revenue was $78.7 million and net loss was $59.8 million. The quarter included $77.9 million in asset impairment charges; before that charge, quarterly pretax loss was $0.9 million.
- Cash and cash equivalents were $8.8 million at year-end, with an additional $4.5 million of restricted cash. Gross bank debt was $180.2 million; reported net bank debt after unamortized financing costs was $173.6 million. The company reported $35 million of total liquidity, including $26 million of additional borrowing capacity.
- Current assets were $82.4 million and current liabilities $64.8 million. Total assets were $425.6 million, compared with $515.5 million in 2018; the decline largely reflects impairments and asset reductions.
- Year-end leverage and debt-service coverage ratios were 2.62 and 1.84, respectively, within the then-applicable limits of 3.00 and 1.25. Debt maturities total $180.2 million, including $34.9 million in 2020 and $82.8 million in 2023. The facility’s maximum leverage limit steps down to 2.75 in late 2020 and 2.50 from late 2021.
Changes, outlook and material items
- Revenue rose 10% year over year, primarily as sales volume increased, but higher production costs and lower realized price per ton weakened coal margins. Operating cash flow fell by $13.3 million; management cited lower coal operating margins, an $8.3 million year-end inventory increase, and timing-related working-capital movements.
- The company recorded $77.9 million of impairments: $65.7 million for Carlisle, $9.2 million for the Bulldog reserves, and $2.9 million for Hourglass Sands. In February 2020, Hallador decided to permanently close Carlisle, rather than resume operations as previously contemplated. It expects to redeploy approximately $23 million of equipment and parts to Oaktown and incur about $3 million of mine-exit costs in the first half of 2020.
- Management targeted 6.7 million tons of sales for each of 2020 and 2021. The 2020 target was 100% contracted at an estimated $40 per ton; 2021 was 79% contracted at an estimated $40 per ton. The 2022 target was 7.0 million tons, 76% contracted at an estimated $40.50 per ton. Contract quantities may change under customer options and force majeure provisions.
- Management expected 2020 mine operating costs to return to $28–$30 per ton following Carlisle’s closure, set a 2020 capital expenditure budget of $20 million (including $11 million maintenance), and expected SG&A of $12 million. It expected operating cash flow and, if needed, revolver borrowings to fund maintenance capital, debt service and dividends. These are forward-looking estimates, not guarantees.
- Management noted that the company was 100% sold for its 2020 target, but Hoosier Energy announced plans to close Merom Generating Station in 2023; Merom represented about 700,000 tons, or 10% of 2020 sales volume. Four customers accounted for 70% of 2019 revenue, down from 82% in 2018.
- Other notable items include a $2.9 million gain on sale of oil-property royalty interests and a $22.3 million income tax benefit, primarily deferred. The company paid $5.0 million in dividends during 2019; a $0.04-per-share dividend declared in January 2020 was paid in February.
Risks and contingencies
- Key business risks include declining coal demand and prices, substitution by natural gas and renewables, environmental and mine-safety regulation, permitting delays, mining and geological disruptions, transportation constraints, and dependence on a limited number of utility customers and long-term contracts.
- Surety bond availability and terms are a material operating risk: Hallador had $27 million of reclamation surety bonds against $15.8 million of recorded reclamation obligations. The company also self-insures or retains exposure for certain workers’ compensation, health, and mining-equipment risks.
- Debt covenant headroom may tighten as permitted leverage declines. Hallador disclosed that failure to comply could allow lenders to accelerate debt and enforce collateral rights.
- Management identified COVID-19 as a potential risk in early 2020, stating it had not yet materially affected the business but that further impact was uncertain. The filing reported no material legal proceedings. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor facts to verify
- Whether the Carlisle closure delivers the forecast $28–$30 per-ton operating cost range and avoids further material impairment or closure costs.
- Actual sales volumes, realized prices, and customer contract fulfillment, particularly for 2020–2022 and Merom’s planned 2023 closure.
- Liquidity, revolver availability, cash generation, and compliance with the progressively tighter leverage covenant.
- Whether customer concentration, coal-market conditions, and competing fuel prices affect contract renewals, volumes, or pricing.
- Assumptions supporting coal reserve estimates, impairment valuations, reclamation accruals, and the availability and cost of surety bonds.