Hallador Energy Company — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 12, 2018. Hallador principally mines steam coal in Indiana through Sunrise Coal, serving electric power generators. It also held minority interests in oil and gas businesses.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Coal sales | $268.2 million | $278.9 million |
| Total revenue | $271.6 million | $281.5 million |
| Income before taxes | $13.9 million | $8.5 million |
| Net income | $33.1 million | $12.5 million |
| Diluted EPS | $1.08 | $0.42 |
| Cash from operations | $61.6 million | $60.9 million |
| Capital expenditures | $28.6 million | $19.8 million |
| Bank debt at year-end | $202.0 million | $238.6 million |
- Coal sold rose to 6.574 million tons from 6.317 million; average realized price declined to $40.80/ton from $44.15/ton. Operating cost averaged $28.92/ton versus $30.52/ton, leaving reported coal margin of $11.87/ton versus $13.64/ton.
- Cash and cash equivalents were $12.5 million; current assets were $71.6 million and current liabilities $54.3 million. Hallador reported $69 million of additional borrowing capacity and $85 million of total liquidity.
- Cash from operations covered $11.1 million of maintenance capital expenditures, $36.6 million of debt payments and $4.9 million of dividends. The annual dividend was $0.16 per share.
- Debt was due to mature in August 2019. Contractual maturities were $35 million in 2018 and $167 million in 2019. Year-end leverage and debt-service coverage ratios were 2.40x and 1.90x, respectively, within covenant limits.
Changes versus prior year
- Total revenue fell 3.5%, principally as lower coal prices more than offset higher tonnage. Management attributed the average price decline to contract mix, contract expirations and replacement contracts.
- Operating cost per ton improved, which management linked to higher first-half production and added haulage equipment. Annual production increased 8%.
- Net income included a $16.4 million deferred tax benefit from the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate to 21% beginning in 2018. The total income tax benefit was $19.2 million; therefore, reported net income and EPS are not a straightforward measure of recurring earnings.
- Bank debt declined by $36.6 million. Capital spending increased, including $6.3 million for the Princeton Rail Loop.
Outlook, commentary and material risks
- For 2018, Hallador budgeted $31 million of capital expenditures, including $16 million for maintenance, and expected operating cash flow to fund maintenance spending, debt service and dividends. It forecast Oaktown operating costs of $28–$30 per ton and SG&A of about $11 million.
- 2018 coal sales target was 6.8 million tons, with 6.4 million committed at an estimated $40 per ton. Hallador reported 17.7 million tons committed for 2018–2022, representing 51% of projected sales; contract volume and pricing can be subject to adjustments.
- The Princeton Rail Loop was expected to become operational in spring 2018, expanding access to Norfolk Southern-served markets. Management also reported new contracts with two plants not previously served.
- Hallador expected to complete a sale of its Savoy Energy interest for $8 million, or about $7.5 million net after commissions, in March 2018. A separate $4 million investment in Colorado frac-sand venture Hourglass Sands was made in February 2018; management did not expect it to be profitable in 2018.
- The Carlisle Mine remained idle. Hallador recorded a $16.6 million impairment in 2016 for the mine’s North End and concluded no further impairment was required at year-end 2017; the remaining Carlisle assets had a $110 million carrying value and could face future impairment. The Bulldog property transaction generated $4.9 million but was accounted for as financing because Hallador retained an eight-year repurchase right.
- Key exposures include dependence on a small customer base (five customers generated 92% of 2017 revenue), coal price and demand declines, power-plant retirements and competing fuels, mine permitting and safety regulation, reclamation bonding, transportation disruptions, operating interruptions, reserve-estimate uncertainty, and refinancing/covenant risk. The credit facility is secured by substantially all Sunrise assets.
- The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. The filing reported no legal proceedings.
Investor verification points
- Separate recurring operating performance from the Tax Act deferred-tax benefit and confirm the expected ongoing tax rate and cash-tax implications.
- Review customer concentration, contract repricing/volume flexibility, committed tons and realized prices against the 2018 sales plan.
- Check progress and costs for the Princeton Rail Loop, and whether new market access converts into contracted sales and improved margins.
- Assess the 2019 debt maturity, available borrowing capacity, covenant headroom and refinancing options as leverage limits tighten.
- Monitor Carlisle and Bulldog permits, reserve economics, impairment assumptions, reclamation obligations and surety-bond availability.
- Confirm completion and net proceeds of the Savoy redemption, and evaluate capital needs and execution risk at Hourglass Sands.