Business Context and Reporting Period
Hallador Energy Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Its principal business is producing steam coal at mines in western Indiana; the company also consolidates Hourglass Sands, whose plant ceased operations in August 2020.
Financial Results and Position
Amounts below are in millions except per-share data, per-ton measures, and where noted.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $55.6 | $50.9 | $102.3 | $113.3 |
| Operating income (loss) | $(0.4) | $1.2 | $(1.3) | $1.1 |
| Net income (loss) | $(3.0) | $0.3 | $(4.0) | $(3.4) |
| Adjusted EBITDA | $11.3 | $13.2 | $22.7 | $27.1 |
| Operating cash flow | Q2: $9.9, per management | $12.9 | $17.2 |
- Q2 coal sales were 1.403 million tons at an average $38.92 per ton. Coal operating cost was $30.20 per ton and coal margin was $8.72 per ton. For the first half, sales were 2.577 million tons at $38.99 per ton; operating cost averaged $29.60 and margin $9.39 per ton.
- Capital expenditures were $10.8 for the first half, including $3.4 of Oaktown maintenance and $7.3 of Oaktown investment. Management projected $12 of capex for the remainder of 2021, approximately $6 of it maintenance.
- At June 30, cash and cash equivalents were $2.6 and restricted cash was $3.5. Reported liquidity was $26.5, including $23.9 of additional borrowing capacity, net of $5.7 in letters of credit.
- Bank debt was $130.1 gross and $124.8 net of issuance costs; the $10.0 PPP loan was also recorded as a liability at quarter-end. Bank debt maturities include term debt through March 2023 and a revolver maturing September 2023.
- The company reported total current assets of $63.1 and current liabilities of $77.2. Inventory was $32.3, up from $24.7 at year-end 2020.
Changes Versus the Prior Comparable Period
- Q2 revenue increased 9% year over year, while the company moved from $0.3 net income to a $3.0 net loss. Six-month revenue fell about 10%, and the net loss widened from $3.4 to $4.0.
- First-half coal sales volume declined to 2.577 million tons from 2.770 million; average selling price declined to $38.99 from $40.58 per ton, reflecting contract mix and shipment delays.
- First-half operating cash flow declined to $12.9 from $17.2. Management cited lower coal margins and working-capital changes, including inventory accumulation.
- Gross bank debt declined from $137.7 at December 31, 2020 to $130.1 at June 30, 2021. Interest expense fell year over year, reflecting lower debt and a favorable noncash change in swap valuation.
Outlook, Commentary, Risks and Unusual Items
- Management expected second-half shipments of approximately 3.6 million tons, or an annualized pace of about 7.0 million tons, and expected operating costs of $29–$30 per ton. It anticipated improved second-half operating cash flow as shipments rose and inventory declined.
- At June 30, contracted volumes were 3.6 million tons for the second half of 2021 at an estimated $39.00 per ton and 5.1 million tons for 2022 at $39.25 per ton. Customer options and force majeure can affect volumes. Remaining fixed-price contract obligations were approximately $408 million; contracts with price reopeners were estimated at $237 million.
- The credit facility leverage covenant tightens from 3.00x for the final two 2021 quarters to 2.50x from Q1 2022 onward. At June 30, the leverage ratio was 2.76x versus a 3.25x limit; debt service coverage was 1.06x versus a 1.05x minimum. The minimum coverage requirement rises to 1.25x after 2021.
- On July 23, 2021, the lender notified Hallador that the SBA approved forgiveness of the entire $10 million PPP loan plus accrued interest; the forgiveness payment was received July 26 and was to be recognized in Q3 2021. The SBA retains review rights and may pursue remedies.
- Hallador announced a plan with Hoosier Energy to develop up to 1,000 MW of renewable generation near the Merom station. It planned to pursue approximately 200 MW of solar and battery storage through power purchase agreements in 2025; management said meaningful activity was not expected before the station’s anticipated 2023 retirement.
- Coal-market improvement and higher natural-gas and export-coal prices supported management’s outlook, but the filing also cites COVID-19 uncertainty, shipment delays, coal demand and pricing, and inventory valuation as risks. Coal inventory included $2.8 million of net-realizable-value adjustments. No long-lived-asset impairment was recorded in the first half of 2021.
- The company had $25 million of reclamation surety bonds and reported no material off-balance-sheet arrangements other than reclamation surety bonds. Its interim financial statements were reviewed, not audited; the filing states the review found no material modifications necessary.
Important Facts for Investors to Verify
- Whether second-half shipment and inventory-reduction expectations were achieved, and how that affected operating cash flow and liquidity.
- Compliance with the tightening leverage and debt-service covenants, particularly the 2.50x leverage limit and 1.25x coverage minimum beginning in 2022.
- Completion and accounting recognition of PPP forgiveness, including any subsequent SBA review or challenge.
- Realized coal prices, contracted volumes, customer options, price-reopener outcomes, and the cost and schedule of planned capital spending.
- Progress, financing, customer commitments, and expected economics for the renewable-generation initiative.