Hallador Energy Company — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results. Hallador primarily produces thermal coal from an underground mine in Indiana and also holds equity interests in Savoy Energy and Sunrise Energy.
Financial performance
Amounts below are in millions of dollars except per-share data and per-ton figures.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total reported revenue | $37.1 | $44.6 | $106.2 | $116.2 |
| Coal sales | $36.2 | $34.2 | $98.3 | $100.3 |
| Income before taxes | $9.3 | $19.5 | $28.1 | $43.3 |
| Net income | $6.2 | $12.6 | $18.8 | $27.3 |
| Diluted EPS | $0.22 | $0.44 | $0.65 | $0.95 |
- Q3 coal sales volume was 810,000 tons at $44.63 per ton, versus 805,000 tons at $42.45 a year earlier. Nine-month sales were 2.255 million tons at $43.57 per ton, versus 2.386 million tons at $42.02.
- Coal operating costs averaged $25.61 per ton in Q3 and $25.72 year to date, up from $24.04 and $23.46, respectively. Management attributed higher costs mainly to lower productivity, including reduced operating hours amid weaker customer demand.
- Nine-month operating cash flow was $29.6 million, down from $40.4 million. Capital spending on coal properties was $9.2 million, compared with $17.0 million.
- Cash was $30.2 million at September 30, versus $37.5 million at year-end 2011. Current assets were $43.6 million and current liabilities $21.8 million. Bank debt was $10 million, all current; there was no revolver borrowing under the facility then in place.
- Total liabilities were $65.3 million and stockholders’ equity was $163.3 million at quarter-end.
Changes and notable items
- Nine-month net income fell 31% year over year. Management cited the prior-year $9.1 million gain on sale of undeveloped oil and gas properties as the primary reason for the decline. Q3 2011 reported revenue and income also included that gain.
- Coal sales revenue increased in Q3, reflecting higher average realized prices and slightly higher volume, but nine-month volume declined. Coal exploration costs rose, primarily for the proposed Bulldog mine in Illinois.
- Equity income from Savoy and Sunrise Energy declined year over year. Savoy’s nine-month net income was $6.7 million versus $9.0 million, with increased exploration, dry-hole and impairment costs; Sunrise Energy’s net income was $98,000 versus $1.5 million.
- Financing cash outflow included $18.7 million of dividends, versus $3.5 million in the prior-year period. The company paid special dividends of $0.14 per share in April and $0.50 per share in August 2012.
Outlook, risks and contingencies
- Management expected approximately 760,000 tons of Q4 2012 coal sales at an average $43.60 per ton, with operating costs of $25–$27 per ton for the rest of 2012. It reported contracts for 2.9 million tons in 2013 at an average $40.01 per ton and said 90% of 2013 production was contracted.
- Management said it did not anticipate near-term liquidity issues. Remaining-2012 capital expenditures were budgeted at less than $3 million; future spending was expected to be funded through operating cash flow and the new credit facility.
- On October 18, 2012, Sunrise entered a new five-year, $165 million senior secured revolving credit agreement, replacing the prior facility. Borrowing is subject to leverage-based interest pricing, a maximum leverage ratio of 2.75x, customary covenants and milestones. Closing costs were approximately $1.5 million. The facility is secured by substantially all of Sunrise’s assets and guaranteed by Hallador.
- Coal market outlook remains uncertain: management cited utility inventory levels, natural-gas prices, weather, regulatory uncertainty and possible coal-plant retirements. It noted that higher gas prices could support coal competitiveness, but customer purchasing decisions remained affected by uncertainty.
- The Bulldog mine permit application was filed in June 2012; management said a permit could be received as early as the second half of 2013 if the process proceeded smoothly. Full-scale development depends on demonstrated market demand and would require substantial capital.
- Two customers’ bill-and-hold arrangements accounted for about $14.5 million of recognized revenue on 320,000 tons stored by September 30. The filing states that risks and rewards transferred upon placement in segregated storage and that all September 30 receivables had been collected by October 31.
- Hallador recognized $4.2 million of MSHA reimbursement income in the first nine months for prior costs. It submitted another $4.2 million claim for 2011 costs in October 2012 but will not recognize revenue until customers accept the charges; management expected notification in January or February 2013.
- A land sale in early October generated a subsequent-event gain of approximately $2.75 million. The company self-insures roughly $100 million of underground mining equipment. It reported no material off-balance-sheet arrangements.
Key facts for investors to verify
- Whether stored coal is ultimately taken and paid for under the bill-and-hold agreements, and whether customer stockpiles affect future deliveries.
- Progress on the 2011 MSHA reimbursement claim and timing of any revenue recognition.
- Availability of the new credit facility, compliance with its covenants and milestones, and financing needs for development projects.
- Coal production costs, productivity and contracted volumes and pricing, particularly for 2013 and beyond.
- Permitting, market demand and capital requirements for the Bulldog project, as well as regulatory and coal-plant retirement developments.
- Exposure to oil and gas price and exploration risks through Savoy and Sunrise Energy; Savoy had no oil-price hedges in place.