Hallador Energy Company — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; the supplied text does not provide a separate fourth-quarter income statement. Hallador’s principal business is underground coal mining in Indiana through Sunrise Coal, with equity-method investments in Michigan oil and gas producer Savoy Energy and Sunrise Energy.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Coal sales | $138.0 million | $129.0 million |
| Total reported revenue and other income | $157.4 million | $129.2 million |
| Income before taxes | $56.7 million | $36.6 million |
| Net income | $35.8 million | $22.4 million |
| Diluted earnings per share | $1.25 | $0.78 |
| Cash from operating activities | $60.7 million | $45.5 million |
| Cash and cash equivalents at year-end | $37.5 million | $10.3 million |
- Coal sales volume rose to 3.307 million tons from 3.050 million; average realized price declined to $41.71 per ton from $42.31. Operating costs averaged $23.31 per ton versus $23.69.
- Net income increased about 60%. Results included a $10.653 million gain on the sale of North Dakota oil and gas lease interests and $1.9 million of MSHA reimbursements recognized in 2011. The gain is non-recurring; management expected operating cash flow to be lower in 2012 partly for that reason.
- Coal-property capital expenditures were $33.0 million. Hallador also spent about $9 million on land for Allerton, repaid $10 million of bank debt, and paid $3.5 million in dividends.
- Year-end bank debt was $17.5 million, all classified as current and due December 2012; the $30 million revolving facility was undrawn. The credit agreement is secured by substantially all Sunrise assets and includes financial covenants and distribution restrictions.
- Current assets were $48.9 million and current liabilities $33.1 million. Management said it did not anticipate near-term liquidity issues and expected to negotiate a new loan agreement before year-end 2012.
- No operating margin is separately stated in the filing. The effective income tax rate was approximately 37–39% in 2011 and 2010; management forecast 32–36% for 2012.
Material changes and business developments
- Carlisle produced about 3.3 million tons. Assigned recoverable reserves were 46 million tons at year-end, down from 46.7 million at the start of the year; additions of 2.6 million tons replaced about 80% of production.
- Hallador reported 32.3 million tons of recoverable, unassigned Allerton reserves in Illinois, including 15.8 million proven and 16 million probable (figures as presented in the filing). Permitting began in 2011; management anticipated formal applications in Q2 2012 and, if approvals proceeded smoothly, a permit in the first half of 2013. Development depends on demonstrated demand and sales commitments.
- Hallador sold a 90% working interest in its North Dakota lease acreage to Chesapeake for $13.2 million, retaining a 10% working interest and an approximately 3% average overriding royalty interest. About $1.5 million of the sale gain was recognized in Q4 following post-closing work.
- Equity income from Savoy rose to $5.5 million from $1.0 million; equity income from Sunrise Energy was $0.9 million. Savoy’s reported 2011 net income of $12.1 million is for the entire partnership, not Hallador’s 45% share.
Outlook, risks and unusual items
- Hallador expected 2012 coal prices under existing contracts to average about $42.35 per ton, operating costs of $24–25 per ton, and Carlisle maintenance capital expenditures of $10–12 million. Management described near-term coal markets as weak, citing mild weather, low natural-gas prices, high coal inventories, and utility purchasing delays.
- Only about 37% of expected 2014 production was contracted, and no contracts extended beyond 2014. The company had contracts for 2.9 million tons in each of 2012 and 2013 and 1.1 million in 2014. Price reopening provisions affect 900,000 tons in each of 2013 and 2014; the filing’s table uses the lower price option for those tons.
- Three customers accounted for at least 90% of sales in both years. Hallador said two customers had rising stockpiles; it had an oral agreement to store 300,000 tons for one customer from summer 2012 to summer 2013, with ownership risks and rewards passing to that customer. Discussions with another customer remained unresolved.
- Key risks include coal-to-gas fuel switching, environmental and mine-safety regulation, permitting delays, commodity and customer concentration, reserve-estimate uncertainty, and the need to refinance or replace debt maturing in December 2012. The company also reported that it had dropped property insurance on underground mining equipment with historical cost of about $93 million.
- The IRS planned examinations of 2009–2010 federal returns and Indiana planned examinations of 2008–2010 state returns. Management expected no material adjustment. No material legal proceedings were reported. The financial statements received an unqualified audit opinion; management reported effective disclosure controls and internal control, without auditor attestation of internal control.
Important facts for investors to verify
- Contract price-reopening terms, uncontracted volumes, and the outcome of discussions about customer inventory and coal storage.
- December 2012 debt maturity, covenant compliance, and the terms and availability of replacement financing.
- Allerton permit progress, market commitments, required development capital, and the basis and reconciliation of disclosed reserve figures.
- Whether forecast 2012 costs, production, capital spending, taxes, and cash generation were achieved, and the effect of the non-recurring 2011 gain.
- Customer concentration, exposure to natural-gas prices and emissions rules, and any uninsured equipment losses.
- Collection and accounting treatment of the remaining 2010 MSHA reimbursement request and the results of the announced tax audits.