Hallador Energy Company — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. The filing also reports fourth-quarter coal operating data; quarterly net income is not provided in the supplied text. Hallador’s principal business is Indiana coal mining through Sunrise Coal, supplemented by equity-method oil and gas interests in Savoy Energy and Sunrise Energy.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue and other income | $141.3 million | $157.4 million |
| Coal sales | $131.4 million | $138.0 million |
| Income before taxes | $34.5 million | $56.7 million |
| Net income | $23.8 million | $35.8 million |
| Diluted earnings per share | $0.83 | $1.25 |
| Cash from operations | $37.0 million | $60.7 million |
| Capital expenditures | $26.2 million | $33.0 million |
- Coal sales volume was 3.006 million tons, versus 3.307 million in 2011. Average realized price increased to $43.70 per ton from $41.73, while reported operating cost per ton rose to $26.53 from $23.31. Coal margin declined to $51.6 million from $60.9 million.
- Fourth-quarter 2012 coal sales were $33.1 million on 752,000 tons, at an average $44.03 per ton. Operating costs were $21.7 million and coal margin was $11.4 million; cost per ton was $28.91.
- Cash and cash equivalents were $21.9 million at year-end, down from $37.5 million. Total bank debt was $11.4 million, compared with $17.5 million at year-end 2011. Working capital was $23.8 million.
- In October 2012, Sunrise entered a five-year, $165 million secured revolving credit facility. The filing states that the currently available borrowing limit is $125 million, subject to covenants and milestones. The company plans to fund projects through operating cash flow and facility draws.
- Hallador paid $23.4 million in dividends in 2012, including three special dividends totaling $0.80 per share. The effective tax rate was 31%.
Material changes versus 2011
- Total revenue and other income fell about 10%, and net income fell about 34%. Lower coal volume, sharply reduced equity income from Savoy and Sunrise Energy, and the absence of the prior-year $10.7 million North Dakota property-sale gain affected the comparison.
- Coal volume declined about 9%, attributed mainly to a warm winter and low natural-gas prices. Higher average coal prices partly offset lower volume.
- Coal operating cost per ton increased about 14%, which management attributed mainly to poor mining conditions and reduced operating hours during periods of lower demand. Overall coal margin declined about 15%.
- Operating cash flow declined about 39%, primarily due to lower coal sales and income-tax payments. Cash taxes paid were $9.3 million versus $0.1 million in 2011.
- Hallador acquired permitted Ace-in-the-Hole surface mine reserves and properties for $6 million in November 2012. It reported 3.1 million tons of controlled reserves there and expected shipments to begin in March 2013.
- Total controlled coal reserves increased 43% to 111.6 million tons, including new Russellville reserves and growth at Bulldog. Ace added 0.5 million tons of annual capacity; Carlisle’s reported annual capacity was 3.3 million tons.
Outlook, commentary, risks and unusual items
- Management budgeted $27 million of 2013 capital expenditures, including $14 million at Carlisle and $5.5 million at Ace. It planned to focus on cost control, leasing and permitting additional reserves. Management expected the 2013 tax rate to be 31%–33%.
- Contracted coal deliveries totaled 4.921 million tons for 2013–2014: 3.221 million tons in 2013 at an average $40.49 per ton and 1.700 million in 2014 at $45.01. Three customers accounted for at least 90% of coal sales in both years; one customer represented 46% of 2012 sales.
- Management cited low natural-gas prices, mild weather, new Illinois Basin competition, environmental regulation and coal-demand uncertainty as headwinds. It identified scrubber installations and Illinois Basin coal replacing higher-cost Central Appalachian supply as potential supports.
- Coal-market exposure is compounded by customer concentration, regulatory and permitting delays, mine safety and reclamation obligations, production conditions, and uncertainty in reserve estimates. Hallador also notes it has no property insurance on underground mining equipment with historical cost of about $100 million.
- Hallador recognized about $20 million of revenue under “bill and hold” storage arrangements for 405,000 tons at year-end; customers took ownership when coal was placed in segregated storage, and the company reported that year-end receivables had been collected by January 31, 2013.
- Other income included $4.2 million of MSHA-cost reimbursements in 2012. A further $4.2 million of 2011 costs had been submitted to customers; as of filing, one customer was substantially in agreement and the other had not responded. The agreed amount was expected to be recorded in first-quarter 2013.
- Hallador paid its CEO $1.5 million in October 2012 to cancel 200,000 stock options; no options remained outstanding. Savoy’s net income fell to $4.5 million from $12.1 million, including increased exploration-related expenses and $1.4 million of stock-based compensation expense.
- The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to ICFR.
Important facts for investors to verify
- Whether Ace began shipping on schedule, achieved its planned production and blending targets, and required the anticipated additional development spending.
- Actual 2013 coal volumes, realized prices and unit costs against the 3.221 million contracted tons and the stated contract price.
- Customer acceptance and collection of the remaining MSHA reimbursement claim, and the accounting for bill-and-hold deliveries.
- Availability under the credit facility, compliance with leverage covenants and milestones, and funding needs for the stated capital program and dividends.
- Progress and permitting timelines for Bulldog and Russellville, and whether reserve estimates and coal quality support expected economics.
- Effects of natural-gas prices, weather, environmental rules and power-plant fuel switching on customer demand and contract renewals.