Hallador Energy Company — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited. Unless noted otherwise, amounts are in millions of dollars. Hallador operates coal mines and, following its October 2022 acquisition of the Merom power plant, reports Coal Operations and Electric Operations. The acquisition makes year-over-year comparisons less directly comparable, particularly for electric operations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $165.8 | $85.1 | $515.3 | $209.9 |
| Income (loss) from operations | $23.8 | $5.4 | $75.3 | ($4.1) |
| Net income (loss) | $16.1 | $1.6 | $55.0 | ($11.9) |
| Diluted EPS | $0.44 | $0.05 | $1.52 | ($0.38) |
| Cash provided by operating activities | $35.3* | Not stated for quarter | $79.5 | $13.9 |
*Q3 operating cash flow is reported in management’s discussion; the cash flow statement presents nine-month totals.
- Revenue growth reflects higher coal prices and shipments, plus electric sales from Merom, which was not owned in the 2022 comparison period. Q3 coal sales were $97.4 million and electric sales were $67.4 million.
- Nine-month capital expenditures were $48.7 million. Cash and cash equivalents were $2.6 million; restricted cash was $4.1 million at September 30.
- Coal Operations reported Q3 operating income of $24.8 million and nine-month operating income of $64.2 million. Electric Operations reported Q3 operating loss of $2.7 million and nine-month operating income of $25.3 million.
- Coal segment Q3 sales averaged $65.43 per ton, operating cost $46.54 per ton, and margin $18.89 per ton. Costs rose $5.02 per ton from Q2, reducing the per-ton margin by $5.03.
- Electric Operations’ Q3 variable cost was $40.03 per MWh on a segment basis; the company reported $23.49 per MWh on a consolidated basis. Its Q3 energy and PPA margin, excluding fixed costs and acquisition-contract amortization, was negative $6.28 per MWh.
Balance sheet, debt and liquidity
- Total assets were $585.2 million and total liabilities $313.5 million at September 30, 2023, compared with $630.6 million and $415.5 million, respectively, at December 31, 2022. Stockholders’ equity increased to $271.7 million from $215.0 million.
- Bank debt was $61.8 million gross ($57.7 million net of unamortized issuance costs), down $23.5 million from year-end. The company also had $10 million of convertible notes and $9 million of related-party convertible notes.
- Liquidity was $66.4 million, including $63.8 million of additional borrowing capacity and cash and cash equivalents. The $75 million revolver had no borrowings; $11.2 million of letters of credit reduced available capacity.
- In August, the credit facility was amended: $65 million of funded debt was converted to a term loan maturing March 2026, and a $75 million revolver was established through July 2026. Quarterly term-loan payments began in September 2023. The stated interest rate was SOFR plus 4.25% at quarter-end.
- The company reported compliance with its covenants: leverage ratio 0.71 versus a maximum 2.25, and debt-service coverage ratio 3.75 versus a minimum 1.25.
Changes, outlook and risks
- For the first nine months, revenue increased to $515.3 million from $209.9 million and net income improved to $55.0 million from a loss of $11.9 million. Coal revenue rose with higher average selling prices and additional tonnage. Merom added a new electric revenue stream.
- Management attributed elevated coal costs and lower production during the quarter to mining conditions, inflation, and relocating 57% of coal production units to seek better geology. Management said production improved following the relocations.
- Management projected $30 million of capital expenditures for the remainder of 2023, about half for maintenance. Remaining 2023 third-party coal shipments were expected to average $54.30 per ton, excluding coal shipped to Merom; this is an expectation, not formal earnings guidance.
- Management reported securing $325 million of energy and capacity sales for 2024–2028 during the quarter and subsequently. The filing’s forward-sales table shows approximately $942 million of total contracted coal and power revenue through 2028, before intercompany eliminations; amounts and timing depend on the stated contract assumptions.
- Merom’s below-market power purchase agreement generated a substantial acquired contract liability. The company recognized $63.2 million of revenue in the first nine months from its amortization. The related coal purchase agreement and its contract asset were fully amortized by June 30, 2023.
- A $1.5 million loss on extinguishment of debt was recorded in Q3 in connection with the August credit amendment. The nine-month effective tax rate was approximately 13%, versus approximately negative 8% in 2022.
- After quarter-end, a Merom transformer failure took one unit offline. The transformer was replaced; the unit was expected to return after a scheduled maintenance outage in the second half of December. Management did not expect an impact on power or capacity commitments.
- Key exposures include variable-rate borrowing costs, coal production and geology, inflation, power-plant reliability, customer and market conditions, and reclamation obligations. Recorded reclamation obligations were approximately $19.9 million; related surety bonds totaled $37.5 million.
Important facts for investors to verify
- Whether coal production and unit costs improved after the reported mine relocations, and how those changes affect margins and the 2023 shipment outlook.
- Merom’s operating performance, maintenance schedule, and ability to meet contracted energy and capacity commitments following the transformer outage.
- The assumptions, pricing, delivery schedules, and counterparty terms behind the reported forward coal and power sales, including the difference between fixed-price and unpriced commitments.
- Debt amortization, interest-rate exposure, covenant headroom, and actual availability under the revolver after letters of credit.
- Planned remaining-2023 capital spending and the company’s ability to fund investment and debt service from operating cash flow.