Hallador Energy Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Hallador produces steam coal from mines in western Indiana. Dollar amounts below are in millions unless noted; interim financial statements are unaudited and were reviewed, not audited.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $74.5 | $65.8 | $202.3 | $210.2 |
| Coal sales | $73.9 | $65.4 | $199.3 | $207.4 |
| Income before taxes | $3.9 | $5.1 | $12.7 | $19.2 |
| Net income | $3.9 | $4.3 | $11.7 | $16.3 |
| Diluted EPS | $0.13 | $0.14 | $0.38 | $0.54 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $47.4 | $43.7 |
- Q3 coal sales volume was 1.786 million tons at an average $41.38 per ton, versus 1.485 million tons at $44.01 per ton a year earlier. Nine-month volume rose to 4.889 million tons from 4.578 million, while average price declined to $40.76 from $45.31.
- Q3 operating cost averaged $30.43 per ton, down from $31.61. Nine-month cost averaged $28.25 per ton versus $31.04. Management attributed lower costs to production scheduling and additional haulage equipment; Oaktown production increased approximately 13% year over year.
- Q3 total revenue increased about 13%, but net income declined about 9%. For the first nine months, revenue fell about 4% and net income fell about 28%.
- SG&A rose $4.0 million year over year for the first nine months, primarily due to a $3.8 million stock bonus awarded to three executives. Stock-based compensation was $6.4 million, compared with $1.8 million in the prior-year period.
Financial position, debt and liquidity
- At September 30, cash and cash equivalents were $9.4 million, restricted cash $3.4 million, certificates of deposit $2.7 million, and current assets $74.0 million. Current liabilities were $53.0 million.
- Gross bank debt was approximately $211 million ($80 million term loan and $131 million revolver); net carrying debt was approximately $207.2 million after deferred issuance costs. Gross debt was approximately $238.6 million at December 31, 2016. The company reported $69 million of additional borrowing capacity and $83 million of total liquidity.
- Hallador reported compliance with its maximum leverage ratio covenant (2.42 versus a 4.25 maximum) and debt service coverage ratio (2.19 versus a 1.25 minimum). The credit facility matures in August 2019. The reported interest rate was 4.74%; management anticipated a reduction in the applicable spread in November 2017.
- Nine-month investing cash use was $16.2 million, including $21.3 million of cash capital expenditures; financing cash use was $31.5 million, including $27.9 million of debt repayments and $3.7 million of dividends. Cash declined $0.4 million to $9.4 million. MD&A reports total nine-month capital expenditures of $24.6 million, including $3.3 million of equipment acquired using prior-period prepayments.
Outlook, material developments and risks
- Management projected 2017 contracted coal sales of 6.4–6.5 million tons and expected 2018 sales volumes to be similar or potentially higher. The Princeton Rail Loop was expected to begin operating in spring 2018, expanding access to Norfolk Southern and customers in Indiana and the Southeast.
- For the next three months, the company budgeted $10 million of capital expenditures, including $6.5 million for maintenance, and expected operating cash flow to cover maintenance capital spending, debt service and the dividend. Oaktown costs were expected to range from $27 to $29 per ton for the rest of 2017.
- Coal contracts include firm unpriced commitments, with 8–13 million tons described as committed but unpriced through 2024. Pricing and customer volume flexibility remain important considerations.
- The Carlisle Mine remained in hot idle status. Its assets had a $112 million net carrying value, and no impairment was recorded; management cautioned that lower future cash-flow estimates could result in significant impairment. The Bulldog Mine assets carried at $15 million; a post-quarter land transaction for $4.9 million was to be treated as financing because of an eight-year repurchase right. The mine permit remained subject to required fee and bond submission.
- Hallador reported $25 million of reclamation surety bonds and self-insured underground mining equipment with historical cost of approximately $256 million. A $1.25 million customer reimbursement for 2012 MSHA-related costs was received in Q2; expected 2013 reimbursable costs of $2–$2.7 million were to be submitted in Q4, but recognition depends on customer acceptance.
- The estimated effective tax rate for the first nine months was 8%; management expected a similar rate for the balance of 2017, absent changes in expected results. A $0.04-per-share dividend was declared in October, payable November 17, 2017.
Most important facts for investors to verify
- Whether the Princeton Rail Loop opens on schedule and delivers the expected volume and customer-access benefits.
- Progress on pricing the committed unpriced tons, contract renewals, realized coal prices and customer volume options.
- Debt covenant headroom, borrowing availability, debt repayment capacity and the planned interest-rate spread change.
- Operating performance and costs at Oaktown, plus whether Carlisle or Bulldog asset values require impairment.
- Customer approval and timing of MSHA reimbursements, and the impact of executive stock awards and outstanding RSUs on expenses and dilution.