Hallador Energy Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Hallador operates coal mines and, following its October 2022 acquisition of the Merom power plant, an electric generation business. The 2022 comparison excludes electric operations, so consolidated comparisons are not fully like-for-like. Amounts below are in millions except per-share data and operating statistics.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $161.2 | $65.9 | $349.5 | $124.8 |
| Operating income (loss) | $22.2 | ($0.8) | $51.5 | ($9.5) |
| Net income (loss) | $16.9 | ($3.4) | $39.0 | ($13.5) |
| Diluted EPS | $0.47 | ($0.11) | $1.08 | ($0.44) |
| Operating cash flow | Not stated for quarter in summary tables | — | $44.2 | $0.3 |
- Coal: Q2 coal sales were $88.6 million; segment operating income was $26.4 million. The company shipped 1.7 million tons at an average $65.44 per ton. Coal margin was $23.92 per ton before eliminations, versus $11.55 in Q3 2022 and $17.07 in Q1 2023. Costs rose: Q2 operating cost was $41.52 per ton, up $2.71 from Q1 2023.
- Electric: Q2 electric sales were $71.0 million and segment operating income was $9.3 million. Management reported 1.0 million MWh of power production. The segment’s Q2 result included $19.6 million of revenue from amortizing the Merom purchase-accounting contract liability and $13.0 million of additional coal expense from amortizing the related contract asset.
- Cash and investment: First-half capital expenditures were $30.6 million, versus $22.9 million in first-half 2022. First-half cash from operations of $44.2 million funded investment and debt activity; cash, cash equivalents and restricted cash totaled $6.4 million at June 30, including $4.0 million restricted.
- Balance sheet and debt: Total assets were $599.9 million and stockholders’ equity $254.9 million at June 30. Bank debt was $74.2 million gross ($72.3 million net of issuance costs), down $11.0 million from year-end 2022. The company also reported $19.0 million of convertible notes. Current liabilities were $177.8 million against current assets of $112.7 million.
- Margins: Consolidated operating margin, calculated as operating income divided by revenue, was 13.8% in Q2 2023 versus negative 1.2% in Q2 2022; first-half margin was 14.7% versus negative 7.6%. These comparisons are affected by the Merom acquisition and contract accounting.
Material changes versus prior period
- Consolidated revenue and earnings increased substantially, reflecting higher coal prices and volumes as well as the inclusion of Merom electric operations, which had no comparable 2022 segment revenue.
- Coal revenue rose 73% in Q2 and 69% in the first half year over year, primarily on higher average prices and additional tons sold. Management attributed higher production costs to inflation and the addition of higher-cost surface mines.
- Interest expense increased to $3.5 million in Q2 from $2.3 million; first-half interest expense rose to $7.4 million from $4.1 million, reflecting higher bank interest and debt-cost amortization.
- First-half operating cash flow improved from $0.3 million to $44.2 million. Capital expenditures and bank debt payments also increased year over year.
Liquidity, outlook and notable items
- As of June 30, the company reported a 0.94 leverage ratio against a 2.25 maximum and a 3.05 debt-service coverage ratio against a 1.25 minimum; it stated it was in compliance with its covenants. The bank facility’s stated rate was SOFR plus 4.25%.
- On August 2, 2023, after quarter-end, Hallador amended and refinanced its PNC facility: $65 million of funded debt was converted to a term loan maturing March 31, 2026, and a $75 million revolver was established through July 31, 2026. The amendment raised the annual capital expenditure limit to $100 million. Based on the amended facility, the company reported June 30 liquidity of $56.9 million, including $54.6 million of additional borrowing capacity.
- Management expected higher 2023 coal margins to fund capital expenditures and debt service, and said margins were expected to remain elevated for the rest of 2023. It budgeted $37 million of capital expenditures for the remainder of 2023, about half for maintenance. No formal earnings or production guidance was provided.
- Forward coal commitments covered 100% of expected 2023 sales, 91% of 2024, and 76% of 2025; average prices for priced tons were $57.60, $51.40, and $50.00 per ton, respectively. Power commitments and capacity sales extend through 2025, leaving a portion of output exposed to market pricing. Management cited the improved liquidity as supporting potential forward power sales and said it was encouraged by the outlook for future power prices.
- The Merom PPA has below-market fixed prices and expires in 2025. Its acquisition-date contract liability was $184.5 million; $113.8 million remained at June 30. The associated coal purchase agreement expired in May 2023, and its contract asset was fully amortized by June 30. These accounting adjustments materially affect reported electric revenue and expenses.
- Reclamation obligations were recorded at $20.7 million; surety bonds totaling $36.3 million support reclamation. Restricted cash is also held for workers’ compensation claims and MISO power collateral. The company self-insures underground mining equipment.
- No long-lived asset impairments were recorded in either reported period. Management identified coal reserve estimates, reclamation obligations, deferred taxes, inventory valuation, acquisition accounting, and impairment estimates as critical accounting estimates. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- How coal prices, production costs, mine mix and inventory shipments develop against management’s 2023 margin outlook.
- Actual liquidity, borrowing availability, debt amortization and covenant compliance under the August 2 refinancing, including the impact of variable SOFR-based rates.
- Power-plant operating costs and market exposure as contracted output changes, and the economics of any future forward power sales.
- The effect of Merom PPA and coal-contract amortization on reported segment results as the remaining contract balances run off through 2025.
- Execution of the $37 million remaining-2023 capital budget, reclamation funding and any changes to restricted cash or surety requirements.