Hallador Energy Company — Q2 2022 Form 10-Q
Business context and period. Hallador produces steam coal from mines in western Indiana, primarily for domestic utility customers. This unaudited report covers the quarter and six months ended June 30, 2022; financial amounts below are in U.S. dollars. Management cautions that interim results are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $65.9 million | $55.6 million | $124.8 million | $102.3 million |
| Operating loss | $0.8 million | $0.4 million | $9.5 million | $1.3 million |
| Net loss | $3.4 million | $3.0 million | $13.5 million | $4.0 million |
| Loss per share, basic and diluted | $0.11 | $0.10 | $0.44 | $0.13 |
| Cash provided by operating activities | Not separately stated for the quarter | Not separately stated for the quarter | $0.3 million | $12.9 million |
- Q2 coal sales were $64.2 million; 1.595 million tons were sold at an average $40.23 per ton. Reported coal operating cost was $31.83 per ton, yielding a coal margin of $8.39 per ton, versus $8.72 in Q2 2021 and $1.86 in Q1 2022. Q2 production was 1.762 million tons.
- For the first half, coal margin was $5.37 per ton versus $9.39 a year earlier; management attributed lower-than-expected adjusted EBITDA to elevated costs, workforce integration, supply constraints and vendor price increases.
- At June 30, cash and cash equivalents were $8.9 million and restricted cash was $3.5 million. Total liquidity was $9.0 million, including only $0.1 million of additional borrowing capacity, net of letters of credit.
- Gross bank debt was $130.7 million ($126.8 million net of issuance costs), compared with $111.7 million gross at December 31, 2021. The June 30 leverage ratio was 3.27x against a 6.00x covenant limit. The revolver matures in September 2023; term-loan amortization ends in March 2023. The bank facility carried LIBOR plus 4.0% at quarter-end, after interest-rate swaps matured in May.
- First-half capital expenditures were $22.9 million, versus $10.8 million in 2021. Cash increased by $6.5 million during the six months, supported by $28.4 million of financing cash flow, including debt borrowing and convertible-note proceeds.
Material changes and outlook
- Revenue rose year over year, but first-half net loss widened and operating cash flow fell substantially. Higher coal prices and volumes were more than offset in the first half by higher operating costs and capital investment.
- Management said Q2 margins improved by more than $6 per ton from Q1 and expected further margin expansion from higher-priced contracts. It forecast average prices above $49 per ton for remaining 2022 shipments and above $58 per ton for 2023. Its contract schedule showed 4.0 million tons for Q3–Q4 2022 at an estimated $49 per ton and 6.7 million tons for 2023 at an estimated $58 per ton; later-year contracted tons were unpriced or partly priced.
- Management reported adding 2.2 million tons of contracts priced above $125 per ton for delivery from the second half of 2022 through 2025, while cautioning that transport logistics could delay deliveries. It projected adjusted EBITDA, a non-GAAP measure, above $160 million in 2023, compared with its stated historical level of about $50 million annually.
- Management expected production costs to rise to $34–$35 per ton in Q4 2022 and about $36 per ton through 2023 as new, higher-cost Prosperity and Freelandville production ramps up. It forecast 2022 shipments of 6.5–7.0 million tons and remaining-year capital expenditures of $15 million, plus $11 million of scheduled long-term debt payments.
- The company planned to acquire the 1-GW Merom Generating Station, subject to regulatory and financial approvals, in exchange for assuming certain decommissioning costs and environmental responsibilities. The contemplated transaction includes a 3.5-year power purchase agreement.
Risks, contingencies and unusual items
- The filing disclosed substantial doubt about the company’s ability to continue as a going concern, driven by a March covenant violation and projected future covenant risk from lower-than-expected adjusted EBITDA. An August 5, 2022 credit amendment modified covenant requirements; management said it alleviated the substantial doubt and expected future compliance. This is a post-quarter development, not a June 30 balance-sheet condition.
- Hallador issued $10 million of convertible notes in May, including $9 million to related parties, and those notes converted into approximately 2.2 million common shares in June. After quarter-end, it issued another $19 million of convertible notes, including related-party notes; these carry 8% interest and may create further dilution if converted.
- Coal contract tonnage can be adjusted for force majeure or customer options. Management’s outlook depends on production improvements, higher realized prices and successful deliveries; it noted no assurance that plans or the Merom transaction would proceed as expected.
- Surety bonds totaling $23.4 million support reclamation obligations. The company self-insures underground mining equipment. Coal inventory included net realizable value adjustments of $5.7 million at June 30, up from $3.8 million at year-end.
Important facts for investors to verify
- Whether the August covenant amendment provides sufficient headroom and whether the company meets subsequent leverage and debt-service tests.
- Whether forecast contract prices and delivery volumes are realized, including the effect of transport constraints, customer options and force majeure.
- Whether production ramps as planned while costs rise at the new mines, and whether projected margins and adjusted EBITDA materialize.
- Liquidity needs against capital spending, debt maturities and scheduled payments, including the terms and potential dilution of convertible notes.
- Merom approval and closing status, including the value and scope of assumed decommissioning and environmental responsibilities.