Hallador Energy Company — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone Q4 filing; quarterly figures below are unaudited. Hallador primarily mines and sells thermal coal from Indiana operations through Sunrise Coal. It also holds interests in gas exploration and the developing Hourglass frac-sand business.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $293.6 million | $271.6 million |
| Coal sales | $291.8 million | $268.2 million |
| Income before taxes | $3.5 million | $13.9 million |
| Net income | $7.6 million | $33.1 million |
| Diluted EPS | $0.25 | $1.08 |
| Cash from operations | $51.6 million | $65.8 million |
| Capital expenditures | $35.1 million | $28.6 million |
- FY2018 coal volume sold was 7.365 million tons, up from 6.574 million. Average realized price fell to $39.62 per ton from $40.80; average operating cost rose to $29.18 per ton from $28.92. Reported coal margin declined to $10.43 per ton from $11.87.
- Q4 2018 revenue was $89.7 million, including $89.0 million of coal sales; net income was $2.6 million. Q4 2017 revenue was $69.3 million and net income was $21.4 million, including a large deferred-tax benefit.
- 2018 net income included a $4.1 million income-tax benefit despite $3.5 million of pretax income. 2017 included a $16.4 million deferred-tax benefit from the Tax Cuts and Jobs Act; therefore, reported net-income comparisons are materially affected by tax items.
- At year-end, cash and cash equivalents were $15.5 million, restricted cash $4.6 million, and current assets $85.0 million versus current liabilities of $51.8 million. The company reported total liquidity of $80 million, including $62 million of additional borrowing capacity.
- Bank debt was $188.5 million gross, approximately $181.0 million net of unamortized financing costs, versus $202.0 million gross in 2017. The credit facility matures in May 2022. The year-end debt-service coverage ratio was 2.12 and leverage ratio 2.55, within required limits.
- Asset retirement obligations were $14.6 million, backed by $26 million of surety bonds. Shareholders’ equity was $254.9 million; total assets were $515.5 million.
Material changes versus 2017
- Revenue increased about 8%, supported by higher sales volume, while lower average coal pricing and higher operating costs per ton reduced unit economics.
- Cash from operations fell by $14.2 million. Management cited inventory growth of $6.4 million and a $5.8 million increase in prepaid expenses, among other working-capital movements.
- Production restarted at Carlisle in July 2018, and the Princeton rail loop began shipping in May; it shipped 828,000 tons during the year. Hallador served 17 power plants in eight states, compared with nine plants in three states in 2017.
- Four customers accounted for 82% of 2018 revenue, down from five customers accounting for 92% in 2017. The company expects the share represented by customers individually contributing at least 10% of coal sales to fall to 70% in 2019.
- Interest expense rose to $16.3 million from $12.4 million, including a $2.2 million adverse change in the estimated fair value of interest-rate swaps and higher borrowing costs after the May 2018 credit-agreement amendment.
- Hallador sold its Savoy Energy interest for $8 million gross proceeds, applying net proceeds to bank debt and recording a $0.5 million loss. It invested in Hourglass Sands, which reported $0.3 million revenue and a $1.2 million net loss in 2018.
Outlook, risks, and unusual items
- Management budgeted 2019 capital expenditures of $31 million, including $22 million for maintenance, and expected operating cash flow to cover maintenance capex, debt service, and the dividend. It expected coal operating costs of $28–$30 per ton and SG&A of about $10 million in 2019.
- For 2019–2022, the company targeted 32.2 million tons and reported 25.2 million tons contracted, or 78%. The 2019 target was 8.2 million tons, with 7.9 million contracted at an estimated $40 per ton. Contract volumes remain subject to customer options and force majeure provisions.
- Management identified customer concentration, contract renewals and price reopeners, coal demand and pricing, competing fuels, transportation, operating disruptions, permitting, environmental and mine-safety regulation, reclamation costs, and access to financing and surety bonds as significant risks.
- In February 2018, Hallador and a related-party investor each invested $4 million in Hourglass; the related-party investment is presented as a redeemable noncontrolling interest. In January 2019, Hallador declared a $0.04-per-share dividend and sold oil-property royalty interests for $2.5 million.
- No impairment was recorded for Carlisle’s $107 million carrying value or Bulldog assets at year-end. Management cautioned that changes in projected future cash flows or other estimates could lead to significant impairment charges.
- The independent auditor issued unqualified opinions on the 2018 financial statements and internal controls. Management also concluded disclosure controls and internal controls over financial reporting were effective.
Important facts for investors to verify
- Whether contracted 2019–2022 volumes and estimated prices are realized, considering customer options, price reopeners, and contract terms.
- Whether customer diversification improves as expected, given that four customers generated 82% of 2018 revenue.
- Whether Carlisle achieves expected cost reductions and whether coal margins recover after the 2018 decline in margin per ton.
- Whether operating cash flow supports the 2019 capital plan, debt service, and dividend while maintaining covenant compliance and liquidity.
- Whether environmental permits, reclamation obligations, and surety-bond availability affect production, costs, or financing.
- Whether Hourglass can scale commercial operations and generate revenue sufficient to offset its development-stage losses.