HALLADOR ENERGY CO quarterly report, Q3 FY2022

Hallador Energy Company — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. Hallador produces steam coal in Indiana; its subsidiary Hourglass had ceased operations in 2020.

Financial results and position

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$85.1 million	$79.8 million	$209.9 million	$182.2 million
Operating income (loss)	$5.4 million	$(1.4) million	$(4.1) million	$(2.7) million
Net income (loss)	$1.6 million	$8.0 million	$(11.9) million	$4.0 million
Basic and diluted EPS	$0.05	$0.26	$(0.38)	$0.13

Revenue and coal economics: Q3 coal sales were $83.6 million on 1.705 million tons sold, at an average $49.01 per ton. Operating cost was $37.46 per ton, yielding management-reported coal margin of $11.55 per ton. For the first nine months, the average selling price was $43.77 per ton, cost was $36.15, and margin was $7.62 per ton.
Cash flow: Nine-month operating cash flow was $13.9 million, versus $37.0 million in 2021. Capital expenditures were $38.3 million, versus $18.1 million. Cash, cash equivalents, and restricted cash totaled $10.5 million at September 30; unrestricted cash was $7.0 million.
Debt and liquidity: Bank debt was $113.7 million gross ($110.2 million net of issuance costs), including $102.7 million drawn on the revolver and $11.0 million of term debt. Total liquidity was $18.6 million, including $11.6 million of additional borrowing capacity. The company reported a 3.50 leverage ratio, within the 4.50 covenant then in effect. It also had $19 million of convertible notes outstanding at quarter-end, bearing 8% interest.
Balance sheet: Current assets were $58.2 million and current liabilities $162.6 million, including $110.2 million of current bank debt. Total assets were $383.4 million; total liabilities were $199.4 million; stockholders’ equity was $184.0 million.

Changes and material developments

Q3 revenue rose about 7% year over year as the average coal price increased from $38.71 to $49.01 per ton, partly offset by lower tons sold. Operating costs per ton rose from $33.15 to $37.46.
Q3 net income was below the prior-year quarter, which included a $10 million gain from forgiveness of the Paycheck Protection Program loan. Nine-month results shifted from net income to a loss; interest expense and higher operating costs contributed, and the prior-year period also included that debt-forgiveness gain.
Bank debt declined $17 million during Q3. During the nine months, the company issued $29 million of convertible notes, of which $10 million was converted into common shares; shares outstanding increased from 30.8 million at year-end 2021 to 33.0 million at September 30, 2022.
Hallador signed contracts for 2.2 million tons at an average price of about $125 per ton, with deliveries extending through 2025. Management said most deliveries would occur in Q4 2022 and 2023. At quarter-end, fixed-price committed contract obligations represented approximately $648 million of expected revenue; contracts with price reopeners represented an estimated $166 million, expected from 2024 onward.
On October 21, 2022, after quarter-end, Hallador closed its acquisition of the 1-GW Merom Generating Station. The deal included a 3.5-year power purchase agreement, an estimated $20 million of assumed decommissioning and environmental obligations, approximately $17 million of coal inventory to be purchased, and $39 million of advance capacity payments to be recorded as deferred revenue. Management reported using $27 million of post-close funds to repay bank debt, bringing bank debt to $87 million on October 22.

Outlook, risks, and contingencies

Management forecast 2023 adjusted EBITDA above $160 million, a non-GAAP estimate, largely driven by higher-priced coal contracts; it also expected coal margins to rise to about $20 per ton from Q1 2023. Management described these as forecasts, not guarantees.
Management expected 2022 shipments of 6.5 million tons and said remaining 2022 tons were expected to average above $49 per ton. Its sales-position table showed 6.7 million contracted tons for 2023 at an estimated average $58 per ton. Contract volumes may change under force majeure or customer options.
To fulfill higher orders, Hallador expanded hiring and production, including opening the Freelandville and Prosperity surface pits. Management expected costs to remain elevated in 2022, with only modest improvement possible in 2023; new pits were expected to be higher-cost and about 8% of 2023 production.
Bank facilities mature in 2023: term-loan amortization ends in March and the revolver matures in September. The company amended covenants multiple times in 2022 for relief from anticipated violations. A 2.50 maximum leverage covenant applies at December 31, 2022, followed by 2.25 from March 2023; minimum debt-service coverage of 1.25 begins December 31, 2022. Management intended to refinance but said it believed operating cash flow could repay the balance when due.
Management cited elevated costs from hiring and training, lower efficiency, supply constraints, and vendor inflation. Other exposures include reclamation and environmental responsibilities, self-insured mining equipment, workers’ compensation claims, and inventory valuation sensitivity. Surety bonds for reclamation totaled $23.4 million. The filing reported no long-lived asset impairment charges in either comparative period.
The company recognized $596,000 of Q3 deferred tax expense and $840,000 for the nine months; the nine-month effective tax rate was approximately negative 8%, affected by percentage depletion and other tax items. Disclosure controls were concluded effective, with no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

Whether the higher-priced coal contracts convert to expected shipments, realized prices, and margins, and whether operating costs ease as forecast.
Post-acquisition Merom cash flows, deferred capacity revenue recognition, purchase-price allocation, and actual decommissioning and environmental costs.
Ability to meet the tighter year-end and 2023 bank covenants, refinance or repay the 2023 maturities, and maintain adequate liquidity.
Potential dilution from the remaining convertible notes and the related-party note issuances; management estimated full conversion could increase shares to about 36.1 million.
Actual 2023 adjusted EBITDA and debt-reduction performance against management’s non-GAAP forecasts, which are subject to operating, market, and execution risks.