Hallador Energy Company — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2016. Hallador produces steam coal from mines in western Indiana and also holds minority interests in two oil and gas businesses. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue and other income | $68.6 | $95.3 | $144.4 | $193.3 |
| Coal sales | $66.3 | $95.3 | $142.1 | $192.4 |
| Income before tax | $6.2 | $9.3 | $14.1 | $20.3 |
| Net income | $5.9 | $6.9 | $12.0 | $14.4 |
| Diluted EPS | $0.19 | $0.23 | $0.40 | $0.48 |
| Cash provided by operations | Not provided by quarter | Not provided by quarter | $30.4 | $57.8 |
- Q2 coal volume was 1.464 million tons, down from 2.078 million; average price was $45.27 per ton versus $45.87. Operating costs averaged $31.01 per ton versus $32.86, and reported coal margin was $14.26 per ton versus $13.01.
- At June 30, cash and cash equivalents were $16.2 million; current assets were $64.9 million and current liabilities $38.8 million. Working capital was $26.1 million, calculated from reported balances.
- Gross bank debt was $250 million ($117 million term loan and $133 million revolver); balance-sheet debt net of issuance costs was approximately $243.8 million. Additional borrowing capacity was $67 million. The stated borrowing rate was 3.96% at quarter-end.
- Operating cash flow less coal-property capital expenditures was approximately $22.5 million for the first half, before the $18 million Freelandville purchase. Cash increased $0.3 million to $16.2 million.
Changes versus comparable periods
- First-half coal sales fell $50.3 million year over year as tons sold declined to 3.093 million from 4.224 million. Average realized price increased to $45.93 from $45.55 per ton.
- First-half operating costs and expenses declined to $95.2 million from $134.4 million; average operating cost per ton fell to $30.77 from $31.83. Despite lower costs, reduced volume contributed to lower earnings.
- First-half operating cash flow decreased $27.4 million year over year. Interest expense rose to $10.6 million from $8.8 million; it included a $1.7 million net fair-value change in interest-rate swaps in 2016 versus $0.6 million in 2015.
- The effective tax rate was 15% for the first half, versus 29% in 2015.
Outlook, risks and notable items
- Management said customers accelerated contracted shipments in the first half. If additional sales do not materialize in the second half, pretax income and EBITDA could be lower than in the first half.
- Management expected Oaktown costs of $28–$30 per ton for 2016, annual SG&A of about $12 million, and annual costs related to Prosperity and Carlisle of about $9 million. The next-six-month capital expenditure budget was $12 million, including $5 million for maintenance; management expected operating cash flow to cover capex, debt service and dividends. The filing does not provide formal earnings guidance.
- The March 2016 credit amendment reduced the revolver from $250 million to $200 million and added a $30 million annual capex limit. At June 30, the company reported compliance with its 2.93x maximum leverage ratio and 2.20x debt-service coverage ratio, against limits of 4.25x and 1.25x, respectively.
- Hallador paid $18 million for Freelandville reserves and a coal sales agreement. The transaction included 14.2 million tons of reserves and access to another 1.6 million tons of its own leased reserves; the acquired sales agreement covers 1.435 million tons to be delivered ratably in 2017.
- Management found no impairment necessary for Carlisle’s $136 million carrying value, based on assumptions that natural-gas prices rise starting in late 2017, production increases in 2018–2019, and the mine returns to normal capacity of 3.3 million tons annually in 2020. Lower future cash-flow estimates could result in significant impairment charges.
- A change in depreciation estimate for certain underground equipment reduced first-half DD&A by $3.5 million. The company received $1.753 million of MSHA-related customer reimbursement in June and expected approximately the same amount from another customer in Q3, subject to customer acceptance.
- Surety bonds for reclamation totaled $23 million. The filing identifies no other material off-balance-sheet arrangements. The interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Whether second-half shipments and any additional sales offset the first-half decline in coal volume, and how customer shipment timing affects reported earnings and cash flow.
- Compliance with credit-facility covenants, borrowing availability, debt service, and the $30 million annual capex restriction.
- Whether Carlisle’s production and price assumptions remain supportable and whether future impairment testing leads to a charge.
- Collection of the expected MSHA reimbursement and the cash-flow impact of the Freelandville purchase and planned capital spending.
- Coal contract deliveries and pricing, including the filing’s disclosure of 11–16 million tons of committed but unpriced sales through 2024.