HALLADOR ENERGY CO quarterly report, Q1 FY2019

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Business context and reporting period

Hallador Energy Company’s unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the same 2018 quarter. Its principal business is producing steam coal at mines in western Indiana; Hourglass Sands, a developing Colorado frac-sand business, is also consolidated. The interim statements received an independent accountant’s review, not an audit.

Key financial results and liquidity

  • Revenue: $89.3 million, up 33.6% year over year. Coal sales were $85.2 million, up 27.6%; other income was $4.1 million versus $0.1 million.
  • Profit: Net income was $7.0 million, compared with $2.1 million; diluted EPS was $0.23 versus $0.07. Income before taxes was $7.0 million, and the reported income tax benefit was $0.04 million.
  • Cash flow: Operating cash flow was $20.8 million, compared with $13.2 million. Capital expenditures were $8.8 million. Cash, cash equivalents and restricted cash totaled $13.3 million at quarter-end, down from $20.1 million at year-end 2018.
  • Coal economics: Tons sold rose to 2.13 million from 1.71 million. Average realized price was $40.02 per ton versus $39.13; operating cost was $29.24 per ton versus $27.32. Company-reported coal margin was $10.78 per ton versus $11.80.
  • Debt and liquidity: Gross bank debt was $168.5 million ($161.6 million net of unamortized issuance costs), down from $188.5 million gross at December 31, 2018. The company reported $77 million of additional borrowing capacity and $88 million of total liquidity. It reported leverage of 2.12 against a 3.75 maximum and debt-service coverage of 2.29 against a 1.25 minimum.
  • Balance sheet: Total assets were $507.2 million, total liabilities $242.0 million, and stockholders’ equity $261.1 million at March 31, 2019. Restricted cash of $4.7 million is held for future workers’ compensation claims.

Material changes versus the prior period

  • Higher sales volumes lifted coal sales and operating cash flow. Management attributed part of the cash-flow improvement to a smaller increase in coal inventory than in Q1 2018.
  • Other income included a $2.5 million gain from selling overriding royalty interests in Wyoming oil properties. The sale proceeds are also reported in investing cash flows.
  • Interest expense rose to $4.6 million from $2.7 million, including $1.0 million of expense from the change in estimated fair value of interest-rate swaps. Management also cited higher borrowing costs following the May 2018 credit-agreement amendment.
  • SG&A declined to $3.0 million from $3.9 million; Q1 2018 included $1.5 million of accelerated stock-unit vesting following the former chairman’s death. DD&A increased to $11.7 million from $10.8 million, partly due to higher production and Carlisle assets returning to depreciation.
  • Hallador repaid $20.0 million of bank debt during the quarter and paid $1.2 million in dividends.

Guidance, management commentary and risks

  • Management targeted 8.2 million tons of coal sales in 2019 and estimated average price of $40 per ton. It reported 25.3 million tons contracted for 2019–2022, or 79% of targeted volume; customer options and force majeure can affect contracted tonnage.
  • Management expected 2019 mine operating costs of $29–$30 per ton, said higher production could reduce costs, and projected $23 million of remaining-2019 capital expenditures, mostly maintenance. It expected remaining-year operating cash flow to fund maintenance capex, debt service and the dividend.
  • Management reported Carlisle production ramp-up and cost improvement. It also cited growth in customers, from 9 in 3 states during 2017 to 17 in 8 states by Q1 2019, and projected 2019 sales growth.
  • The Indiana Utility Regulatory Commission rejected Vectren’s proposed gas-generation facility on April 24, 2019, while approving $95 million of environmental upgrades at Culley Unit 1. Management viewed the decision as supportive of coal generation economics; future utility decisions and policy remain relevant to demand.
  • Key exposures include coal-market and customer demand changes, variable-rate debt and swap valuations, mine reserve and impairment estimates, reclamation obligations, and self-insurance. Reclamation surety bonds totaled $26 million; recorded asset retirement obligations were $14.8 million. Management reported no impairment for Bulldog Mine assets, but said changed estimates could lead to future impairment.
  • The company adopted lease accounting on January 1, 2019, recording a $0.5 million right-of-use asset and lease liability; management said adoption did not affect income or cash flow. Hourglass reported a $0.25 million quarterly net loss on $0.06 million revenue.
  • Subsequent event: a $0.04-per-share dividend was declared April 15, payable May 17, 2019. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.

Important facts for investors to verify

  1. Confirm contracted coal volumes, customer options and expected realized prices against actual deliveries and renewals.
  2. Track Carlisle’s production ramp, per-ton costs, maintenance needs and whether higher volume improves margins.
  3. Reconcile reported earnings and operating cash flow with nonrecurring royalty-sale income, inventory movements and swap fair-value changes.
  4. Monitor debt repayments, borrowing capacity, interest costs and compliance as leverage covenant limits tighten over time.
  5. Assess utility-retirement decisions, coal demand concentration, reserve assumptions, reclamation funding and Hourglass’s progress toward commercial profitability.