Business context and reporting period
Hallador Energy Company’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The company produces steam coal from mines in western Indiana and also holds interests in two oil-and-gas entities. Results are compared with the corresponding 2015 periods; dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Third quarter: Total revenue was $65.8 million, down 19.8% from $82.0 million. Coal sales were $65.4 million, down from $81.3 million. Net income was $4.3 million versus $5.1 million, and diluted EPS was $0.14 versus $0.17.
- First nine months: Total revenue was $210.2 million, down from $275.3 million. Net income was $16.3 million versus $19.6 million; diluted EPS was $0.54 versus $0.65. Pretax income was $19.2 million versus $26.1 million.
- Coal operations: Q3 tons sold fell to 1.485 million from 1.791 million; average realized price declined to $44.01 per ton from $45.41. Average operating cost was $31.61 per ton versus $31.82, and reported coal margin was $12.40 per ton versus $13.59. For the first nine months, tons sold were 4.578 million versus 6.015 million, average price was $45.31 versus $45.51, and average operating cost was $31.04 versus $31.82 per ton.
- Cash flow: Operating activities provided $43.7 million in the first nine months, down from $76.6 million. Investing used $29.6 million, including the $18.0 million Freelandville purchase; financing used $17.2 million. Cash declined $3.1 million to $12.8 million.
- Liquidity and debt: Current assets were $63.5 million and current liabilities $43.3 million at September 30. Cash and marketable securities totaled $14.5 million. Bank debt was $238 million gross ($232.6 million net of issuance costs), including $26.6 million current and $206.0 million long-term on the balance sheet. The company reported $72 million of additional borrowing capacity. The facility’s interest rate was 4.03% at quarter-end.
- Other balance-sheet items: Total assets were $540.1 million and stockholders’ equity $222.2 million. Capital expenditures were $11.8 million for the nine months; dividends paid were $3.6 million.
Material changes versus the prior comparable period
- Lower coal volumes were the main reported context for the year-over-year decline in coal sales and revenue. Q3 average selling price also declined, while average operating cost per ton improved modestly.
- Operating cash flow decreased by $32.9 million year over year. The filing notes that 2016 operating cash flow included a nonrecurring $1.8 million Savoy distribution.
- At the beginning of 2016, Hallador changed depreciation for certain underground mining equipment from straight-line to units-of-production. The change reduced DD&A by $6.6 million for the nine months and $3.1 million for Q3.
- The March 2016 credit amendment reduced the revolver commitment from $250 million to $200 million, relaxed the leverage covenant schedule, and established a maximum annual capital-expenditure limit of $30 million.
Outlook, commentary, risks and unusual items
- Management expected fourth-quarter capital expenditures of about $5 million, including $3 million for maintenance. It said cash from operations over the next 12 months should fund capital expenditures, debt service and dividends; this is management’s expectation, not a guarantee.
- Management expected Oaktown cash costs of $28–$30 per ton for the remainder of 2016, annual SG&A of $11 million, and annual costs associated with Prosperity and Carlisle of $10 million. It expected the effective tax rate to remain around 15% for the final quarter of 2016 and 2017.
- Hallador had curtailed Carlisle Mine production. No impairment was recorded, based on assumptions that natural-gas prices would begin rising in late 2017, Carlisle production would increase in 2018–2019, and the mine would return to normal capacity of 3.3 million tons per year in 2020. Carlisle assets had a $134 million carrying value; lower future cash-flow estimates could lead to a potentially significant impairment.
- The amended credit facility requires minimum debt-service coverage of 1.25x. At September 30, the reported maximum leverage ratio was 3.02x and debt-service coverage was 2.06x; Hallador stated it was in compliance. The facility matures in August 2019 and is secured by substantially all Sunrise assets, with Hallador as guarantor.
- Surety bonds for reclamation totaled $24 million. Hallador reported no material off-balance-sheet arrangements other than these bonds.
- Hallador received $1.75 million in June 2016 for reimbursable 2012 MSHA-related costs and expected a similar amount from another customer in Q4; it recognizes such reimbursements only after customer acceptance.
- After quarter-end, on November 3, 2016, an investor acquired a 25% interest in Savoy, reducing Hallador’s ownership from 40% to 30.6%. Savoy distributed $4.4 million, of which Hallador’s $1.8 million share was to be applied to bank debt. The investor was affiliated with a Hallador director.
- The interim financial statements were reviewed, not audited. Management stated that disclosure controls were effective and that no material change to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether coal sales volumes, realized prices and per-ton margins stabilize, and how contracted deliveries and unpriced tons develop.
- Whether operating cash flow can support capex, debt service and dividends, particularly given the decline from 2015 and the nonrecurring Savoy distribution.
- Credit-facility headroom, covenant compliance, borrowing availability and debt-repayment needs through the August 2019 maturity.
- The assumptions underlying Carlisle’s $134 million carrying value and the potential for future impairment.
- Whether expected MSHA reimbursements are accepted and collected, and how the post-quarter Savoy transaction and debt application are reflected in subsequent filings.