Hallador Energy Company — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Hallador produces steam coal in western Indiana through Sunrise Coal; Hourglass Sands is a developing frac-sand business. Financial amounts below are in millions unless stated otherwise. Interim financial statements are unaudited.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $83.1 | $79.7 | $244.7 | $203.8 |
| Net income (loss) | $(3.7) | $2.9 | $(0.1) | $5.0 |
| EPS, basic and diluted | $(0.12) | $0.09 | $(0.00) | $0.16 |
| Cash from operations | Not presented by quarter | $36.3 | $30.3 |
- Q3 coal shipments were 2.118 million tons, versus 1.962 million a year earlier. Average realized price was $39.13 per ton, down from $40.29; operating cost rose to $33.70 per ton from $30.65, reducing coal margin to $5.43 per ton from $9.64.
- For the first nine months, coal sales were $239.2 million versus $202.8 million. Tons sold increased to 6.055 million from 5.146 million; average price was $39.51 per ton versus $39.40. Average operating cost increased to $30.98 per ton from $28.29.
- Q3 total costs and expenses were $90.3 million, including $3.6 million interest expense. Nine-month interest expense was $13.5 million, including a $3.0 million noncash increase in the estimated fair value of interest-rate swaps.
- At September 30, cash and cash equivalents were $6.4 million and restricted cash was $4.7 million. Current assets were $83.3 million and current liabilities $68.4 million.
- Gross bank debt was $172.0 million ($165.0 million net of unamortized debt issuance costs), compared with $188.5 million gross at December 31, 2018. The company reported $58 million of additional borrowing capacity and $67 million total liquidity. Debt is secured primarily by company assets.
- Nine-month capital expenditures were $27.3 million; dividends paid were $3.7 million. Total assets were $508.8 million and stockholders’ equity was $252.5 million at quarter end.
Changes, outlook, and commentary
- Revenue increased year over year, but profitability weakened: Q3 moved from net income to loss, and nine-month results moved from $5.0 million income to near break-even loss. Management attributed the Q3 loss to temporary mining and production issues that increased costs by $3.86 per ton.
- Management cited difficult mining conditions at Oaktown 2, low recovery at Carlisle after its reopening, and planned development at Ace in the Hole. It reported improved production at Oaktown 2 by early October and record Carlisle production in October, up 40% month over month. Management expected the cost effects to be temporary and projected coal-mine operating costs of $29–$30 per ton for the remainder of 2019.
- Management anticipated 2.0 million tons of Q4 shipments and said Sunrise was on pace for record 2019 shipments of 8 million tons. It expected the remaining 2019 cash from operations to fund maintenance capital spending, debt service, and dividends; projected remaining-2019 capital expenditures were $6 million.
- For 2019–2022, the company reported 19.6 million tons contracted against 26.0 million targeted tons, or about 75% committed. Contracted coverage was 100% for the remaining 2019 target, 88% for 2020, and 66% for each of 2021 and 2022. Contract volumes may be adjusted under customer options or force majeure provisions.
- On September 30, the credit agreement was amended to extend the revolver maturity to September 2023 and reduce pricing by 50 basis points. The reported interest rate was 5.92% after the amendment. The company complied with its leverage covenant (2.43 against a 3.25 maximum) and debt-service coverage covenant (1.96 against a 1.25 minimum) at quarter end; covenant limits tighten over time.
- Management characterized 2020 as an industry “correction” year, citing expected additional production closures, weaker global coal prices and low domestic natural-gas prices. It expected Sunrise to be better positioned in 2021, but these are management expectations, not guarantees.
- Other income included a $2.9 million gain from selling oil-property royalty interests. Coal inventory included net-realizable-value adjustments of $2.7 million at September 30, versus $1.1 million at year-end 2018. The company reported no impairment for Bulldog Mine assets, whose carrying value was $15 million; future impairment could result if assumptions change.
- Asset-retirement obligations were $15.3 million, with $27 million of reclamation surety bonds. Restricted cash is held for workers’ compensation claims. The company reported no material off-balance-sheet arrangements other than reclamation surety bonds.
- A $0.04-per-share dividend was declared October 15, payable November 15, 2019. The independent accountant performed a review of interim statements, not an audit, and reported no material modifications identified.
Important facts for investors to verify
- Whether October’s reported operational improvements persisted and whether costs returned to management’s projected $29–$30 per ton range.
- Progress on 2020–2022 contracting, customer volume options, and the impact of coal-market and natural-gas-price assumptions on realized prices and shipments.
- Liquidity and covenant headroom as debt amortizes and leverage limits tighten; distinguish unrestricted cash from restricted cash and available revolver capacity.
- The extent to which future earnings are affected by noncash swap fair-value changes, inventory valuation adjustments, and other nonrecurring income items.
- Maintenance and investment capital requirements, reclamation obligations, and the assumptions supporting the no-impairment conclusion for Bulldog Mine assets.