Hallador Energy Company — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The interim financial statements are unaudited and were reviewed by the independent accountant, not audited. Unless noted otherwise, financial-statement amounts below are in millions of dollars; operating metrics are as reported.
Business context
Hallador primarily mines steam coal in western Indiana through wholly owned Sunrise Coal, and holds 45% of oil-and-gas company Savoy Energy and 50% of Sunrise Energy. The Carlisle mine is its largest contributor to revenue and earnings. The company said more than 90% of its 2014 coal sales were to Indiana customers with scrubbed coal-fired power plants.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Coal sales | $36.130m | $34.149m | $69.146m | $68.144m |
| Total reported revenue and other income | $38.460m | $40.736m | $74.227m | $78.398m |
| Operating costs and expenses | $26.096m | $22.262m | $49.101m | $45.552m |
| Income before income taxes | $3.510m | $11.256m | $8.212m | $18.177m |
| Net income | $3.068m | $8.165m | $6.594m | $13.633m |
| Diluted EPS | $0.10 | $0.28 | $0.22 | $0.47 |
- Q2 coal sales rose about 5.8%, but total reported revenue fell about 5.6%; first-half coal sales rose about 1.5%, while total reported revenue fell about 5.3%. Comparisons include the 2013 second-quarter $4.3m liability-extinguishment gain, which did not recur in 2014.
- Coal tons sold were 847,000 in Q2 2014 versus 774,000 in Q2 2013; first-half volumes were 1.623m versus 1.614m tons. Average coal price per ton was $42.66 in Q2 and $42.60 for the first half. Operating cost per ton was $30.81 and $30.25, respectively, compared with $28.76 and $28.22 in the comparable 2013 periods. Management’s reported coal margin per ton was $11.85 in Q2 and $12.35 for the first half, versus $15.36 and $14.00 in 2013.
- Cash provided by operating activities was $16.437m for the first half, versus $12.961m in 2013. Capital expenditures were $9.126m, compared with $14.778m; dividends paid were $2.394m, compared with $1.159m. Cash increased $4.797m to $21.025m.
- At June 30, cash was $21.025m, current assets $42.910m, and current liabilities $11.688m. Bank debt was $16.0m, unchanged from year-end; the company reported a $165m revolving facility, with current covenant limits allowing maximum borrowings of $102m. Stockholders’ equity was $188.991m.
- For the first half, Savoy equity income was $4.514m versus $2.447m; Sunrise Energy equity income was $0.087m versus $0.347m. Hallador’s equity-method share is reflected in those amounts.
Material changes, outlook, and risks
- Management attributed higher coal costs to severe winter weather, train delays and missed shipments, increased stockpiles and handling, reduced production, and a one-time employee payment that added about $1.50 per ton. Rail delays continued through April and May, and 100,000–200,000 tons might shift into 2015.
- Management estimated second-half 2014 mining costs at $29–$30 per ton or lower. It expected about $8m of capital expenditures for the remainder of 2014, primarily Carlisle maintenance, funded from operating cash flow. It projected a 20% effective tax rate for 2014 and expected additional cash tax payments; deferred-tax changes were expected to generate a deferred tax benefit. These are management estimates, not guarantees.
- On July 1, 2014, after quarter-end, Sunrise agreed to acquire Vectren Fuels for $296m plus working-capital adjustments, capped at $325m. The filing expected a September 1 closing and stated that financing commitments from the PNC-led bank syndicate exceeded the amount needed. The transaction remained pending as of the filing. Management said the combined mines would have 161m tons of controlled reserves and 2015 sales commitments of 9m tons across the referenced mines.
- The PNC facility is secured by substantially all Sunrise assets, guaranteed by Hallador, subject to leverage covenants and other restrictions, and has milestones for access to the full facility. Acquisition financing and execution, mine productivity and shipping, coal pricing and customer demand are material considerations.
- Other notable items: Savoy’s first-half net income increased to $10.013m from $5.427m (100% basis); a prospective buyer for Savoy’s Trenton-Black River properties ended discussions, and Hallador was exploring other ways to monetize its investment. The Ohio River Terminal was not expected to generate significant revenue until 2015. Hallador self-insured underground mining equipment with historical cost of about $111m, and disclosed coal-reserve estimates as a critical accounting estimate.
- Management reported disclosure controls were effective and no material change in internal control during the quarter. It stated the company would need an auditor’s internal-control report in its 2014 Form 10-K following its change in filing status.
Important facts for investors to verify
- Whether the Vectren acquisition closed, its final purchase price and working-capital adjustment, financing terms, and resulting debt and covenant headroom.
- Whether delayed shipments were recovered or shifted into 2015, and whether mining costs and coal margins met management’s second-half estimates.
- Actual 2014 effective tax rate, cash tax payments, and deferred-tax benefit versus management’s projections.
- Progress on Savoy monetization and the timing and economics of Ohio River Terminal operations.
- Updated reserve, production, sales-commitment, and mine-safety disclosures, including the Bulldog permit review and development plans.