Hallador Energy Company — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Hallador produces steam coal in western Indiana; its newly formed Hourglass Sands subsidiary is developing a Colorado frac-sand business. Interim financial statements are unaudited and were reviewed by the independent accountant, not audited.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $57.2 million | $64.3 million | $124.1 million | $127.9 million |
| Coal sales | $56.9 million | $62.8 million | $123.7 million | $125.4 million |
| Net income (loss) | $(23,000) | $389,000 | $2.1 million | $7.8 million |
| Operating cash flow | Not separately provided | Not separately provided | $15.9 million | $24.0 million |
| Capital expenditures | Not separately provided | Not separately provided | $19.7 million | $11.9 million |
- Q2 coal sales were 1.477 million tons at $38.54 per ton, versus 1.548 million tons at $40.59 per ton a year earlier. Coal-mine operating cost was $26.28 per ton, compared with $28.47; disclosed margin was $12.26 per ton, versus $12.11.
- For the first half, coal sales were 3.184 million tons at $38.85 per ton, compared with 3.103 million tons at $40.41. Operating cost averaged $26.84 per ton versus $27.00.
- At June 30, cash and cash equivalents were $10.2 million, restricted cash $4.2 million, and total liquidity $74 million, including $61 million of additional borrowing capacity. Current assets were $92.6 million; current liabilities were $47.5 million.
- Bank debt was $201 million gross ($21.7 million current and $170.4 million long-term, net of debt issuance costs). Total liabilities were $268.1 million. The company reported $251.3 million of stockholders’ equity, plus $4.0 million of redeemable noncontrolling interests.
Changes and notable items
- Compared with the first half of 2017, total revenue fell $3.8 million and net income fell $5.7 million. Management attributed lower realized coal prices to contract mix and reported lower MSHA reimbursements; the prior-year period also included higher equity income and reimbursements.
- Q2 sales volume was lower partly because of railroad transportation issues. Management expected to recover the delayed tons in the second half.
- Operating cash flow declined $8.1 million year over year, while capital expenditures increased $7.8 million. Coal inventory rose from $12.8 million at year-end 2017 to $34.4 million, as the company prepared for higher second-half shipments and the Carlisle reopening.
- On May 21, Hallador amended and extended its credit facility to May 2022: a $147 million term loan and $120 million revolver. The amendment changed the borrower to Hallador, reduced debt-service requirements, and permitted Hourglass investment. The company reported compliance with its leverage and debt-service coverage covenants at June 30 (2.64 and 2.28, respectively).
- Hallador sold its 30.6% Savoy Energy interest for $8 million; net proceeds of $7.5 million were applied to bank debt as required. The sale generated a $538,000 loss. A $4 million investment in Hourglass was matched by a $4 million investment from an affiliated Yorktown company, recorded as redeemable noncontrolling interest.
Outlook, risks and contingencies
- Management raised 2018 sales guidance to 7.0 million tons, all reported as contracted, at a targeted average price of about $40 per ton. It expected 3.8 million tons to ship in the second half at an average price of about $40.50 per ton, citing lower-priced first-half contract deliveries.
- For 2019, the filing shows a 7.0-million-ton target, 5.2 million tons contracted (74%), and an estimated price of $41 per ton. Across 2018–2022, 20.6 million tons were contracted, representing 59% of forecast sales.
- Management expected the next six months’ $16 million capital budget to include $6 million of maintenance capex and said expected operating cash flow would fund maintenance capex, debt service, and the dividend. Oaktown costs were expected to rise to $28–$30 per ton for the rest of 2018; Prosperity mine idling costs were estimated at $0.7 million.
- Carlisle production restarted in July; management expected 325,000–350,000 tons in the second half. The Princeton Rail Loop began customer deliveries in May, with 625,000 tons of second-half shipments expected. Hourglass began raw-sand production in June and expected customer shipments in Q4; management did not expect the venture to be profitable in 2018.
- Potential risks include lower future cash-flow estimates causing significant impairment charges at Carlisle (carrying value $108 million) or Bulldog (carrying value $15 million); customer tonnage adjustments and force majeure; railroad disruption; and interest-rate exposure. The facility’s rate ranged from LIBOR plus 3.00% to 4.50%; swaps fixed LIBOR on the original term loan and $53 million of the revolver. The reported rate at June 30 was 6.10%.
- Reclamation obligations were $14.1 million, supported by $26 million of surety bonds. Hallador reported no material off-balance-sheet arrangements other than reclamation surety bonds. A $0.04-per-share dividend was declared after quarter-end, payable August 17, 2018.
Key facts for investors to verify
- Whether second-half shipments, pricing, Carlisle production, and Princeton Loop volumes met management’s expectations, particularly given Q2 rail delays.
- Whether coal inventory declined as expected and operating cash flow covered planned capex, debt service, and dividends.
- Headroom under the credit facility’s progressively tighter leverage covenants and the effect of debt, interest costs, and swap valuations on earnings and liquidity.
- Whether Carlisle and Bulldog mine cash-flow assumptions remain supportable and avoid impairment; also monitor reclamation obligations and surety coverage.
- Hourglass’s customer-shipment timing, funding needs, and path to profitability, alongside the terms and related-party implications of the Yorktown affiliate’s royalty interest.