Hallador Energy Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The unaudited filing covers Hallador’s Indiana coal operations and its development-stage Colorado frac-sand subsidiary, Hourglass Sands. Comparisons are with 2017 unless noted.
Financial performance
- Third quarter: Revenue was $79.7 million, up 7.1%; net income was $2.9 million, down 25.6%; diluted EPS was $0.09 versus $0.13. Net margin was approximately 3.7%, versus 5.3%.
- First nine months: Revenue was $203.8 million, up 0.7%; net income was $5.0 million, down 57.1%; diluted EPS was $0.16 versus $0.38. Net margin was approximately 2.5%, versus 5.8%.
- Coal operations: Q3 tons sold rose to 1.962 million from 1.786 million, while average realized price declined to $40.29 per ton from $41.38. Q3 operating cost increased to $30.65 per ton from $30.43, and reported margin per ton declined to $9.64 from $10.94. For the first nine months, tons sold increased to 5.146 million from 4.889 million, but average price fell to $39.40 from $40.76; average operating cost was nearly unchanged at $28.29 per ton versus $28.25.
- Cash flow and investment: Operating cash flow was $30.3 million for the first nine months, down from $48.0 million. Capital expenditures were $25.5 million, compared with $21.3 million. Cash, cash equivalents and restricted cash increased $5.1 million to $21.4 million.
- Debt and liquidity: Gross bank debt was approximately $200 million at September 30. The $267 million facility had $56 million of additional borrowing capacity and reported total liquidity of $75 million. The facility matures in May 2022. The company reported a 2.73 leverage ratio and 2.12 debt-service coverage ratio, within the applicable covenant limits.
- Balance sheet: Current assets were $97.2 million and current liabilities $50.2 million. Total assets were $526.0 million; stockholders’ equity was $253.4 million. Restricted cash of $4.5 million is held for future workers’ compensation claims.
Changes and significant items
- Higher coal sales volume was offset by lower realized pricing and higher operating costs, depreciation, and interest expense. The company attributed the lower price per ton to contract mix changes. Lower year-to-date SG&A partly offset these increases, primarily because a $3.8 million executive stock bonus had been awarded in 2017 and not repeated in 2018.
- Coal inventory increased to $29.5 million from $12.8 million at year-end, as the company prepared for increased shipments, built inventory at the Princeton Rail Loop, and restarted Carlisle Mine. Management said this inventory build reduced operating cash flow.
- The company sold its 30.6% interest in Savoy Energy for $8.0 million, recording a $0.5 million loss; net proceeds after commissions were applied to bank debt. It also invested $4.0 million in Hourglass Sands. A related investor contributed another $4.0 million in exchange for a royalty interest, recorded as a redeemable noncontrolling interest.
- Hourglass began producing raw sand in June and shipped test loads in September. For the nine months, it reported $36,000 revenue and an $871,000 net loss. Management did not expect it to be profitable in 2018.
- Production restarted at Carlisle in July. The company found no impairment necessary for Carlisle’s $105 million carrying value at quarter-end, but warned that lower future cash-flow estimates could result in significant impairment. It also reported no impairment for Bulldog assets, whose carrying value was $15 million; the related permit was expected before year-end 2018.
Guidance, outlook and risks
- Management raised 2018 sales guidance to 7.3 million tons and expected to deliver more than 2.1 million tons in Q4, at approximately $40 per ton. It expected active-mine operating costs of $28–$30 per ton for the remainder of 2018; Q3 costs were above that range, partly due to the Carlisle restart.
- Management expected coal inventory to decline by approximately $7 million by year-end. Planned remaining-2018 capital expenditures were $6 million, including $4 million of maintenance spending; operating cash was expected to fund maintenance capex, debt service and dividends.
- For 2019, the filing lists 7.3 million targeted tons, 6.1 million contracted (84%), at an estimated $41 per ton. It reports 19.6 million tons sold for the remainder of 2018 through 2022, approximately 63% of sales at a 7.3-million-ton annualized pace. Customer options and force majeure may change contracted tonnage. Remaining performance obligations were approximately $629 million under fixed-price contracts and $330 million under indexed or price-reopener contracts; the latter were expected to be recognized beginning in 2020.
- The credit facility carries a variable LIBOR-based rate; swaps fixed the LIBOR component on the original term loan and $53 million of the revolver. The reported rate at quarter-end was 6.26%. Covenant limits tighten over time, making ongoing compliance and cash generation important.
- Reclamation obligations are supported by $26 million of surety bonds. Management identified reserve estimates, impairment assumptions, interest-rate swaps and deferred taxes among its critical accounting estimates. The company stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- On October 15, the company declared a $0.04-per-share dividend, payable November 16, 2018. The interim statements received an independent accountant’s review, not an audit; the reviewer reported no material modifications needed.
Important facts for investors to verify
- Whether Q4 deliveries meet the more-than-2.1-million-ton outlook and whether prices and per-ton costs support margins.
- Whether inventory converts to sales and operating cash as management anticipated, alongside planned capex, debt service and dividends.
- Debt covenant headroom, borrowing availability and the effects of the facility’s tightening leverage limits and interest costs.
- Progress at Carlisle and Bulldog, including permitting, production economics and the assumptions underlying impairment assessments.
- Hourglass’s customer shipments, costs and funding needs as it moves beyond test shipments, and the economic terms of the royalty interest.
- The extent to which customer options, contract reopeners and force majeure could alter reported contracted volumes and performance obligations.