Hallador Energy Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Hallador produces steam coal at mines in western Indiana. Financial statements are unaudited. The company also had a pending agreement to acquire the 1-GW Merom Generating Station, subject to regulatory and financial approvals.
Financial results and position
- Revenue: $58.9 million, up from $46.7 million in Q1 2021. Coal sales were $57.0 million versus $45.9 million; other revenue was $1.9 million versus $0.8 million.
- Profitability: Operating loss was $8.7 million versus $0.9 million; net loss was $10.1 million, or $0.33 per share, versus $1.0 million, or $0.03 per share. Operating expenses rose to $67.6 million from $47.6 million.
- Coal economics: Hallador sold 1.377 million tons at an average $41.40 per ton, compared with 1.174 million tons at $39.08. Average operating cost increased to $39.54 per ton from $28.88, reducing coal margin to $1.86 per ton from $10.20.
- Cash flow and capital spending: Operating cash flow was $3.0 million, similar to $3.0 million a year earlier. Capital expenditures were $9.1 million, resulting in $9.0 million of investing cash outflow. Financing activities provided $7.7 million; cash, cash equivalents, and restricted cash ended at $7.6 million.
- Debt and liquidity: Gross bank debt was $120.1 million at quarter-end, up $8.3 million from year-end; net bank debt was $116.2 million. All bank debt was classified as current because of possible future covenant violations. Available borrowing capacity was $16.3 million; the company reported total liquidity of $20.6 million including cash and cash equivalents. Restricted cash was $3.3 million.
- Balance sheet: Total assets were $357.9 million and stockholders’ equity was $172.2 million at March 31, 2022, compared with $354.0 million and $182.2 million, respectively, at December 31, 2021.
Changes versus Q1 2021 and notable items
- Revenue increased, reflecting higher coal shipments and a higher average sales price, but cost inflation and lower productivity more than offset the improvement. Management cited supply constraints, vendor price increases, and the integration of new hires.
- Management reported that coal operating margins fell by $9.4 million year over year. General and administrative expense increased $0.3 million, partly due to Merom acquisition legal and due-diligence costs. A $0.2 million provision was recorded for an unprofitable customer contract.
- There were no long-lived asset impairment charges in either comparative quarter. Interest expense declined to $1.8 million from $1.9 million. The effective tax rate was approximately 2% versus 63% in Q1 2021.
Outlook, risks, and contingencies
- Going concern and covenants: Management concluded that conditions raised substantial doubt about Hallador’s ability to continue as a going concern within one year, and stated that its plans had not alleviated that doubt. The company reported a 3.03 leverage ratio, above the then-applicable 3.00 covenant; credit amendments provided relief for Q1 and Q2 2022. Future covenant compliance remains uncertain.
- Management plans and projections: The company reported improved production productivity in April and May and expected production-cost improvements and revised sales contracts to lift margins toward its historical level of more than $10 per ton beginning in June. It expected to ship 6.5–7.0 million tons in 2022. Management projected 2023 adjusted EBITDA above $150 million, versus a stated historical level of about $50 million annually; these are company expectations, not guaranteed results.
- Coal market and contracts: Management described thermal coal demand and pricing as strong, citing electricity demand, constrained supply, higher natural-gas prices, and disruption related to the war in Ukraine. It reported contracted average prices of about $41.30 per ton for the remainder of 2022 and $45.10 for 2023, with some 2023 tonnage available for repricing. Results remain exposed to production costs, productivity, contract terms, and customer volume options.
- Merom acquisition: Hallador anticipated closing in Q3 2022, subject to approvals. The agreement includes a 3.5-year power purchase agreement and assumption of certain decommissioning costs and environmental responsibilities; closing and expected profitability benefits are not assured.
- Financing: In May 2022, Hallador issued $10 million of senior unsecured convertible notes, including notes purchased by parties affiliated with directors. The notes carry 8% annual interest, mature in 2028, and may be converted into common shares, potentially diluting existing shareholders. The May credit amendment also allowed additional indebtedness to support liquidity.
- Management expected operating cash flow and additional borrowing, if necessary, to fund maintenance capital expenditures and debt service. It projected $18 million of remaining 2022 capital expenditures and $16.5 million of scheduled long-term debt payments for the last nine months of the year. The filing cautions that plans and projections may not be realized.
Important facts for investors to verify
- Whether the company sustains production improvements and achieves the anticipated cost and margin recovery.
- Compliance with amended and future leverage and debt-service covenants, and adequacy of liquidity for debt service and planned capital spending.
- Whether the Merom acquisition closes on schedule, its financing and integration requirements, and the resulting liabilities and earnings contribution.
- Actual realized coal prices and costs, including the effects of contract reopeners, customer options, and changing market conditions.
- Terms and potential dilution from the convertible notes, and the status of any further financing or credit amendments.