Hallador Energy Company — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Hallador primarily mines thermal coal in Indiana through Sunrise Coal, with additional equity-method interests in Michigan oil and gas producer Savoy Energy (45%) and Sunrise Energy (50%). The Carlisle underground mine is the principal source of coal revenue and earnings.
Financial and operating results
| Metric | 2013 | 2012 |
|---|---|---|
| Coal sales | $137.4 million | $131.4 million |
| Total revenue and other income | $153.9 million | $141.3 million |
| Income before taxes | $30.8 million | $34.5 million |
| Net income | $23.2 million | $23.8 million |
| Diluted EPS | $0.80 | $0.83 |
| Cash from operations | $27.2 million | $37.0 million |
| Capital expenditures | $31.4 million | $26.2 million |
Coal volume rose 6% to 3.188 million tons, while average realized price fell to $43.11 per ton from $43.70. Average operating cost increased to $29.14 per ton from $26.53, reducing coal margin to $13.97 per ton from $17.17. Operating costs rose to $92.9 million from $79.7 million. The filing attributes weaker mine economics mainly to difficult Carlisle mining conditions and lower wash-plant recovery.
Fourth quarter: Hallador sold 757,000 tons for coal sales of $34.3 million, at an average $45.32 per ton. Operating costs were $23.9 million, or $31.62 per ton, and reported coal margin was $10.4 million, or $13.70 per ton. Basic and diluted EPS were both $0.16, versus $0.18 and $0.17, respectively, in Q4 2012. Management said Q4 2013 had the company’s highest production cost to date, reflecting exceptionally low recovery, weather-related lost days and operational issues.
Liquidity, debt and capital allocation
Year-end cash was $16.2 million, down from $21.9 million. Current assets were $39.4 million and current liabilities $10.4 million. Bank debt was $16.0 million, compared with $11.4 million a year earlier. The company had a $165 million secured revolving facility; the filing states that current covenants limited borrowing capacity to $126 million and that approximately $110 million was available. The facility is subject to leverage covenants and other restrictions.
Operating cash flow did not cover 2013 investing outflows: investing activities used $34.0 million, including $31.4 million of coal-property capex and $2.8 million for the Ohio River terminal. Financing activities provided $1.1 million. Hallador paid $3.5 million in dividends in 2013 and adopted a regular quarterly dividend policy, paying three quarterly dividends of $0.04 per share during the year. No material off-balance-sheet arrangements were reported.
Changes, outlook and material items
- Coal sales increased, but higher costs and lower per-ton margins offset volume growth; net income and diluted EPS declined modestly year over year.
- Production costs increased amid poor Carlisle mining and wash recovery. Management expected 2014 costs to decline as recovery improved, targeting $28.50 per ton; January 2014 costs were reported below that target, and January wash recovery was 68.6%.
- 2014 contracted coal deliveries totaled 3.504 million tons at an average $42.72 per ton. Management forecast approximately $49.8 million of coal margin using estimated 2014 cost of $28.50 per ton. The 2014 capex budget was approximately $15 million, expected to be funded from operating cash flow.
- Ace-in-the-Hole surface mine began shipping in August 2013 and reached production stage in October. It is intended to supply low-sulfur coal for blending and direct sales; its expected maximum capacity is 500,000 tons annually. Hallador had invested $22 million in the project by year-end.
- Bulldog and War Eagle are undeveloped reserves. Management expected Bulldog’s permit in Q4 2014; mine development is contingent on sales commitments and would require an estimated $150 million at full capacity. War Eagle permitting was expected to be filed in late 2014; estimated full-capacity development cost was also $150 million.
- The Ohio River terminal was acquired in May 2013 for approximately $2.8 million. It handled third-party commodities, but Hallador did not expect revenue from the asset until 2015; 2013 property G&A was about $0.5 million.
- Unusual noncash income included a $4.3 million reversal of a liability recorded in 2006 relating to a terminated coal contract. Other income included $3.7 million of MSHA reimbursements and $1.2 million of coal storage fees. The company recognized $7.3 million of 2013 revenue under bill-and-hold storage arrangements; it reported that the relevant receivables had been collected by year-end.
- Hallador’s 45%-owned Savoy reported 2013 net income of $12.9 million (100% basis), versus $4.5 million in 2012. Savoy engaged an adviser to market its Michigan oil properties, and Hallador described possible monetization as an opportunity, not a completed transaction.
Risks and contingencies
Coal demand and operating economics are exposed to environmental regulation of power plants, potential emissions limits, fuel switching to natural gas, and possible retirement of coal-fired plants. The filing discusses multiple pending or proposed federal rules and litigation, with outcomes and financial effects uncertain. Mining also faces extensive permitting, reclamation, safety and environmental requirements; permit reviews may be delayed, challenged or become more costly. Reserve estimates depend on geological, recovery, price, cost and regulatory assumptions and may differ from actual results.
Customer concentration is significant: four customers accounted for 94% of 2013 coal sales. Carlisle recovery, mining conditions and operating performance are key near-term sensitivities. Hallador’s bank facility is secured and covenant-restricted, and future development of undeveloped mines would require substantial capital. The filing reported no material legal proceedings and stated that existing mine-safety violations and penalties had not been material. The financial statements received an unqualified audit opinion; auditors did not attest to internal-control effectiveness under the applicable smaller-company rules.
Investor verification priorities
- Track Carlisle wash recovery, production volumes and cost per ton against management’s 2014 assumptions.
- Reconcile operating cash generation, planned capex, dividends and available revolver capacity, including covenant limits.
- Review customer contract coverage, concentration, pricing and the timing of deferred deliveries and MSHA reimbursements.
- Confirm Ace’s production, contracted volumes and ability to support blending economics; assess whether new mine development receives sales commitments and permits.
- Monitor regulatory and permitting developments affecting coal-fired customer plants, mine operations and reclamation obligations.
- Verify progress and terms, if any, in the proposed marketing or monetization of Savoy’s oil properties; do not treat a potential sale as completed.