Hallador Energy Company — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; fourth-quarter figures are noted where relevant. Hallador primarily mines and sells steam coal in the Illinois Basin through Sunrise Coal. It also holds a 50% interest in Sunrise Energy, an oil and gas exploration venture.
Financial performance and condition
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $247.7 million | $244.2 million |
| Operating income (loss) | ($6.0 million) | $3.1 million |
| Net loss | ($3.8 million); ($0.12) per share | ($6.2 million); ($0.20) per share |
| Cash from operations | $48.0 million | $52.6 million |
| Capital expenditures | $28.1 million | $20.7 million |
| Bank debt at year-end | $111.7 million gross | $137.7 million gross |
- Coal sales were $243.9 million, compared with $242.1 million. Hallador sold 6.17 million tons at an average $39.51 per ton, versus 5.97 million tons at $40.56 per ton in 2020.
- Coal operating cost averaged $32.16 per ton, up from $31.07. Coal margin declined to $7.35 per ton from $9.49; management attributed cost pressure to the nearing end of the Ace mine reserve, supply-chain premiums, workforce expansion and challenging mining conditions.
- FY2021 cash from operations decreased by $4.6 million. Management cited lower operating margin, partly offset by working-capital changes, including a $17.0 million inventory reduction.
- Year-end cash and cash equivalents were $2.5 million, with an additional $3.3 million restricted. Revolver availability was $33.4 million; total liquidity, including cash and cash equivalents, was $35.9 million. The filing separately cites $33.4 million as liquidity in its MD&A.
- Reported bank debt was reduced by $26.0 million net during 2021. The credit facility included a $31.2 million term loan and an $80.5 million revolver balance; scheduled debt payments were $25.7 million in 2022 and $86.0 million in 2023.
- At year-end, leverage was 2.34x against a 3.00x limit and debt-service coverage was 1.11x against a 1.05x minimum. A March 2022 amendment provided temporary covenant relief, including waiver of the March 2022 debt-service coverage test.
Material changes and unusual items
- Although operating results were weaker, net loss narrowed from 2020, partly reflecting a $10.0 million gain from forgiveness of the PPP loan. The SBA approved forgiveness of the full $10.0 million in July 2021; the company disclosed that the loan file remains subject to possible government review.
- FY2021 included a $1.6 million impairment related to Prosperity mine wash-plant and rail assets. A $3.5 million reduction in the asset-retirement-obligation estimate reflected revised closure timing and inflation assumptions.
- Fourth-quarter 2021 net loss was $7.7 million, compared with a $4.7 million loss in fourth-quarter 2020. Management cited temporary efficiency losses from onboarding workers and lower coal yield while mining farther from the slope. It expected elevated costs in Q1 2022.
- Coal reserves at the Oaktown Mining Complex were estimated at 71.4 million tons at year-end 2021, down from 80.2 million tons a year earlier. Hallador reported no mineral resources.
Outlook, risks and contingencies
- Management expected 2022 coal pricing of approximately $40 per ton and full-year mine operating costs of $29–$31 per ton, while cautioning that Q1 costs would be elevated. It planned to increase production to approximately 7 million clean tons annually from 2022.
- At year-end, contracted coal volumes were 6.8 million tons for 2022 at an estimated $39.81 per ton and 5.3 million tons for 2023 at $43.10 per ton. Management said all 2022 coal and electricity supply was priced and anticipated benefiting from higher coal and electricity prices in 2023.
- In February 2022, Hallador agreed to acquire Hoosier Energy’s 1-gigawatt Merom Generating Station in exchange for assuming specified decommissioning costs and environmental responsibilities. The transaction, subject to approvals, was scheduled to close in mid-July 2022 and included a 3.5-year power purchase agreement. Management expected little contribution to 2022 profit and said it believed Hallador Power could double company EBITDA starting in 2023; this is forward-looking and not assured.
- Management disclosed that covenant pressure and lower-than-expected EBITDA raised substantial doubt about the company’s ability to continue as a going concern within one year. It concluded that the March 2022 credit amendment alleviated that doubt.
- Significant risks include customer concentration (five customers generated 95% of 2021 revenue), coal demand and price volatility, competition from gas and renewables, environmental and mine-safety regulation, permitting and reclamation obligations, surety-bond availability, inflation and supply disruptions, and execution and financing risks around Merom.
- The filing reported no material litigation. The independent auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The audit identified asset retirement obligations as a critical audit matter.
Important facts for investors to verify
- Whether Merom closed on schedule, what liabilities and operating costs Hallador assumed, and whether the acquired plant and power agreements deliver the projected earnings and cash flow.
- Whether production reaches the targeted 7 million tons and unit costs move into management’s stated 2022 range.
- Whether coal contract repricing and the 2023 market environment support the expected improvement in realized prices and margins.
- Whether covenant compliance and liquidity remain adequate after the temporary relief period, given debt maturities and capital spending needs.
- Whether customer concentration, coal reserves, mine reclamation estimates and surety-bond requirements change materially.