Hallador Energy Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Interim financial statements are unaudited. Hallador primarily mines steam coal in western Indiana and also holds equity interests in Michigan oil and gas producer Savoy Energy and Sunrise Energy.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $33.7 million | $31.7 million | $71.5 million | $67.0 million |
| Net income | $6.5 million | $4.8 million | $14.7 million | $11.6 million |
| Diluted EPS | $0.23 | $0.17 | $0.51 | $0.41 |
| Operating cash flow | Not separately stated | Not separately stated | $27.9 million | $23.3 million |
- Six-month coal sales were $66.1 million, down from $66.7 million; volume rose to 1.581 million tons from 1.562 million, while average price fell to $41.81 per ton from $42.68. Q2 volume was 765,000 tons at $42 per ton.
- Coal cost per ton fell to $23.27 for the first half from $24.54, and to $23.42 in Q2 from $25.00. Calculated coal gross margin was approximately 44.3% for the first half versus 42.5% a year earlier; this is coal sales less cost of coal sales, divided by coal sales.
- Six-month total revenue rose about 6.8% and net income about 26.9% year over year. Growth included higher equity income from Savoy and $1.9 million of MSHA-cost reimbursements recorded in Q1; coal sales themselves declined slightly.
- At June 30, cash was $17.5 million and current assets were $30.6 million, against current liabilities of $22.1 million. Bank debt totaled $22.5 million, including $10 million current. The company repaid $5 million of debt in the first half. The stated available revolving credit facility was $30 million.
- Operating cash flow less coal-property and oil-and-gas capital expenditures was approximately $13.7 million. Cash increased $7.3 million during the half, after $3.5 million of dividends and debt repayments.
Changes, outlook, and risks
- Management attributed lower coal costs to improved mining conditions, higher recovery, and its safety-training program. DD&A rose with additions to coal properties; SG&A rose with Allerton reserve work, NASDAQ listing costs, and salary increases. Interest expense declined with lower debt.
- Management expected second-half 2011 coal sales of about 1.6 million tons at $41–$42 per ton, absent spot sales, and coal costs of $23–$25 per ton. It budgeted $10–$13 million of capital expenditures for the remainder of 2011 and said it did not anticipate near-term liquidity issues. It expected a 38% effective tax rate, stable or slightly lower for the rest of 2011.
- Essentially all 2011 production and 85%–90% of 2012 and 2013 production were under contract; only about one-third of 2014 production was contracted, with none beyond 2014. Management’s longer-term coal-market view was positive, anticipating modest U.S. demand growth in 2011 and a stronger recovery in 2012.
- After quarter-end, on July 29, Hallador closed a sale of 90% of its North Dakota lease interest for $12.6 million, recognizing an estimated $9.4 million pretax gain. It retained a 10% working interest and an approximately 3% average overriding royalty interest. It expected a further $1.7 million upon delivery of additional acreage after title work.
- Savoy’s first-half net income increased to $6.9 million from $0.7 million, but management cautioned that drilling outcomes, seismic spending, and oil-price sustainability could make the second half unrepresentative. Savoy does not hedge prices. Hallador also self-insures about $85 million of historical-cost underground mining equipment.
- Hallador recorded $1.9 million of customer reimbursements for MSHA-related costs incurred in 2008–2009; it could not yet estimate possible reimbursements for 2010 and 2011. The bank facility includes financial covenants and distribution restrictions; interest-rate swaps and their fair-value changes affect reported interest expense.
- The filing reports 26 MSHA citations under contest and proposed assessments totaling approximately $80,700 for the six months shown. It reports no 104(b), 104(d), 107(a), or flagrant violations in the monthly table and no notice of a pattern or potential pattern of violations. The company says citations and assessments may be contested and modified.
Important facts for investors to verify
- Whether the post-quarter North Dakota sale’s additional acreage delivery and expected proceeds are completed as planned.
- Progress and cost requirements for the Allerton reserve, including the stated anticipated permit timing and targeted start of mining.
- Coal production, realized prices, costs per ton, and the percentage of future production covered by contracts.
- Pending MSHA reimbursements, the status and outcomes of contested citations, and any changes in safety or self-insurance exposure.
- Savoy drilling results, oil prices, and the effect of its performance on Hallador’s equity income and cash resources.
- Debt-facility covenant compliance, revolver availability, and interest-rate swap expirations in December 2011 and July 2012.