Hallador Energy Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company produces steam coal from mines in western Indiana. Financial statements are unaudited; the independent accountant performed a review, not an audit. Amounts below are in millions unless stated otherwise.
Financial results and position
- Revenue: $62.5, down 30% from $89.3 in Q1 2019. Coal sales were $61.9 versus $85.2; other operating income fell to $0.6 from $4.1, including the prior-year $2.5 gain on oil-property royalty sales.
- Profitability: Net loss was $3.7, or $0.12 per share, compared with net income of $7.0, or $0.23 per share. The income-tax benefit was $2.2. Management said noncash interest-rate-swap and fuel-hedge adjustments reduced net income by $3.9.
- Coal operations: Sales were 1.526 million tons versus 2.130 million; production was 1.701 million versus 2.205 million. Average realized price rose to $40.58 per ton from $40.02, while operating cost rose to $31.67 from $29.24 per ton. Coal margin declined to $8.91 from $10.78 per ton.
- Cash flow: Operating cash flow was $16.3 versus $20.8. Capital expenditures were $6.0; debt payments were $12.1 and dividends paid were $1.2. Cash, cash equivalents and restricted cash ended the quarter at $12.7, including $4.7 restricted for workers’ compensation claims.
- Debt and liquidity: Gross bank debt was $168.1 at quarter-end ($162.0 net of unamortized issuance costs), down from $180.2 gross at year-end 2019. Current bank debt, net, was $34.9. The company reported $47.5 of additional borrowing capacity and $55.4 of total liquidity under the April 15 amended facility. Its March 31 leverage ratio was 2.93 and debt-service coverage ratio was 1.48, both in compliance with covenants.
- Balance sheet: Total assets were $415.7 and stockholders’ equity was $187.0 at March 31, versus $425.6 and $191.5, respectively, at December 31, 2019.
Material changes and significant items
- COVID-19-related customer shipment delays reduced sales and production and increased coal inventory to $37.4 from $28.3 at year-end. Accounts receivable fell to $12.7 from $25.6. Management reported March and April sales were 30% below expectations and anticipated further shipment delays in Q2.
- The company permanently closed the Carlisle Mine after idling it in Q4 2019. It recorded no additional impairment in Q1, following a $65.7 impairment in 2019. Q1 Carlisle exit and disposal costs were $0.5; management estimated total 2020 operating, exit and disposal costs of $3.0. About $23 million of equipment is being redeployed to Oaktown.
- Q1 interest expense rose to $5.7 from $4.6, including $2.6 of noncash expense from changes in interest-rate-swap valuation. Fair-value liabilities for swaps and fuel hedges totaled $7.7 at March 31.
- On April 15, the company amended its credit agreement to increase borrowing availability by modifying leverage terms. The amendment caps 2020 capital expenditures at $30 million and suspends dividends until leverage falls below 2.0x. The post-amendment rate was temporarily 6.92%, expected to return to 6.42% after submission of the quarterly compliance certificate.
- On April 16, the company received a $10 million unsecured Paycheck Protection Program loan at 1% interest. The company intends to use proceeds for eligible expenses and expects a portion may be forgiven, subject to SBA review and the program’s requirements.
Outlook, risks and contingencies
- Management cited an MISO estimate of a 10% decline in 2020 power demand; 78% of the company’s customers sell power into MISO. Customers’ difficulty accepting contracted minimum shipments could delay revenue and increase inventory. Management believed most delayed shipments would be made up later in 2020, but timing and demand recovery remained uncertain.
- Management expected Oaktown operating costs of $29–$30 per ton for the remainder of 2020, compared with $29.92 per ton for Oaktown in Q1. It expected $14 million of capital expenditures for the remainder of 2020, including approximately $7 million of maintenance capex, and $9 million of SG&A for the remainder of the year. It expected operating cash flow for the rest of the year to fund maintenance capex and debt service.
- Management reported 15.4 million contracted tons for Q2–Q4 2020 through 2022: 5.0 million in 2020 at an estimated $40.25 per ton, 5.1 million in 2021 at $39.65, and 5.3 million in 2022 at $40.25. Volumes may change under customer options and force-majeure provisions.
- Key risks include continued COVID-19 effects on demand, shipments, production, employees, suppliers, liquidity and financing; coal-market conditions; and uncertainty in the timing of customer deliveries. The company also has $27 million of reclamation surety bonds supporting its asset-retirement obligations.
Important facts for investors to verify
- Whether delayed customer shipments were recovered and inventory converted to sales after Q1.
- Available borrowing capacity, covenant compliance, borrowing costs and the effect of the amended credit agreement on liquidity.
- The amount of PPP loan forgiveness, if any, and the timing and outcome of SBA review.
- Actual Carlisle closure costs, equipment redeployment and operating-cost trends at Oaktown.
- Changes in derivative fair values and their impact on reported interest expense and earnings.