Hallador Energy Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Amounts below are in millions of dollars unless noted.
Business context
Hallador produces steam coal from Indiana mines through Sunrise Coal and also holds equity-method interests in Savoy Energy and Sunrise Energy. The 2014 acquisition of Vectren Fuels expanded its mining operations; 2015 results include those acquired mines for the full period, while 2014 comparisons include them only from August 29, 2014. Hallador reported 29.1 million shares outstanding as of November 5, 2015.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Coal sales | $81.3 | $64.8 | $273.7 | $133.9 |
| Total revenue and other income | $82.0 | $66.3 | $275.3 | $140.5 |
| Income (loss) before taxes | $5.8 | $(7.2) | $26.1 | $1.0 |
| Net income (loss) | $5.1 | $(5.8) | $19.6 | $0.8 |
| Diluted EPS | $0.17 | $(0.20) | $0.65 | $0.03 |
| Cash from operations | Not separately provided for the quarter | $76.6 | $20.7 |
- Q3 coal shipments were 1.791 million tons at an average $45.41 per ton, versus 1.500 million tons at $43.18 in Q3 2014. Coal operating costs averaged $31.82 per ton versus $35.06; coal margin was $13.59 per ton versus $8.12.
- For the first nine months, shipments were 6.015 million tons at $45.51 per ton; operating costs averaged $31.82 per ton versus $32.56 in 2014. SG&A was 3.4% of coal revenue versus 5.4%.
- Interest expense was $5.2 million in Q3 and $14.0 million for nine months, including swap fair-value changes of $1.3 million and $1.9 million, respectively. Nine-month 2014 results included $8.9 million of Vectren transaction costs.
- Cash and cash equivalents were $19.5 million at September 30, 2015, up from $13.5 million at December 31, 2014. Current assets were $77.0 million and current liabilities $55.2 million, implying working capital of about $21.9 million.
- Debt totaled approximately $266.0 million ($26.3 million current and $239.8 million long term), down from $306.3 million at year-end 2014. Nine-month capital expenditures were $27.1 million, debt payments $40.3 million, and dividends $3.6 million.
Changes, outlook, and risks
- Management attributed customer contract changes to mild weather and an oversupply of low-priced natural gas, which left customers overbought for 2015. Production was shifted toward Oaktown and away from Carlisle; Oaktown was expected to account for more than 90% of production for the next couple of years. A July reduction in force affected 175 employees.
- Management reported Oaktown Q3 cash costs of $28.13 per ton and targeted $27 per ton in 2016, citing a planned shift to higher-recovery coal. It expected annual SG&A of $12 million and annual costs related to Prosperity and Carlisle of $7.5 million. Fourth-quarter 2015 maintenance capital spending was budgeted at $4.5 million, expected to be funded by operating cash flow.
- Management estimated 2015 sales prices of $45.29 per ton for Q4, sales volumes of 6.5 million tons in 2016 and 7.5 million tons in 2017, and a 2015 effective tax rate of about 25%. These are management estimates, not guarantees.
- Coal contracts include firm unpriced tonnage, with approximately 12–18 million tons committed but unpriced through 2024; contract pricing mechanisms and some modifications were still being finalized.
- The credit facility permits a $250 million revolver and $175 million term loan. Maximum borrowing at quarter-end was stated as $311 million because of covenants. The filing gives both a 2.58x computed leverage ratio and a 3.50x “current” leverage ratio; the distinction is not clearly explained. Interest pricing varies with leverage, and swaps capped the effective rate at no more than 5% on $275 million of borrowings. The facility matures in August 2019 and is secured by substantially all Sunrise assets.
- Carlisle assets had a $177 million carrying value and no impairment was recorded. The assessment assumed natural-gas prices rise in late 2016, Carlisle production increases in 2017, and the mine returns to its normal 3 million tons annual capacity in 2019. If those assumptions or future cash-flow estimates weaken, a significant impairment could result.
- Savoy reported a nine-month 2015 net loss of $0.3 million, compared with income of $12.7 million in 2014; management cited falling oil prices. Hallador’s equity income from Savoy shifted to a loss.
- Coal reserves, future production, contract pricing, customer demand, natural-gas prices, mine recovery, and covenant compliance are material uncertainties. Hallador self-insures underground mining equipment with historical cost of approximately $250 million.
Important facts to verify
- Reconcile the disclosed 2.58x and 3.50x leverage ratios, and confirm available borrowing capacity and covenant headroom.
- Track execution of the production shift, cost-reduction targets, and expected 2016–2017 shipment volumes.
- Assess the status and pricing terms of unpriced coal commitments and any contract modifications still being finalized.
- Test Carlisle’s impairment assumptions against actual gas prices, production levels, and updated cash-flow forecasts.
- Confirm the amount and timing of expected MSHA-related customer reimbursements; the filing says more than $3 million was expected for 2012 costs but records revenue only after customer acceptance.