Hallador Energy Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The interim financial statements are unaudited. Hallador produces steam coal from mines in western Indiana and also holds minority interests in oil and gas ventures.
Financial performance
Amounts are in millions of dollars except per-share and per-ton data. Q1 2016 results are compared with Q1 2015.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Coal sales | $75.8 | $97.1 |
| Total revenue and other income | $75.9 | $98.0 |
| Operating costs and expenses | $49.8 | $66.2 |
| Income before taxes | $7.9 | $11.0 |
| Net income | $6.2 | $7.6 |
| Diluted earnings per share | $0.21 | $0.25 |
| Cash provided by operations | $19.1 | $22.0 |
- Coal sold fell to 1.629 million tons from 2.146 million tons. Average realized price rose to $46.53 per ton from $45.23; operating cost per ton improved to $30.56 from $30.83.
- Reported coal margin, defined in the filing as coal sales less operating costs, was $26.0 million, or $15.97 per ton, versus $30.9 million, or $14.40 per ton.
- DD&A was $9.2 million versus $11.3 million. A change to units-of-production depreciation for underground mining equipment reduced Q1 2016 DD&A by $1.6 million.
- Interest expense was $5.8 million versus $5.5 million and included $1.5 million of net fair-value changes in interest-rate swaps, compared with $1.3 million a year earlier. The effective tax rate was 22%, versus 31%.
Cash flow, liquidity, and debt
- Operating cash flow was $19.1 million and included a non-recurring $1.8 million cash distribution from Savoy. Investing activities used $24.6 million, including the $18.0 million Freelandville purchase and $6.1 million of mining equipment spending. Financing provided $3.4 million; cash declined $2.2 million to $13.8 million.
- At March 31, current assets were $62.3 million and current liabilities were $44.2 million. Cash and cash equivalents were $13.8 million; marketable securities were $1.5 million.
- Bank debt was approximately $256 million before deferred debt issuance costs. The balance sheet reports $249.9 million net of those costs, including $24.3 million current and $225.6 million long term.
- A March credit amendment reduced the revolver from $250 million to $200 million; the term loan remained unchanged. The company reported $67 million of additional borrowing capacity. Maximum leverage limits were increased, and the minimum debt-service coverage ratio is 1.25x. At quarter-end, leverage was 2.89x and debt-service coverage was 2.40x; Hallador said it complied with both tests.
- Q1 dividends were $1.2 million. The amended facility includes a maximum annual capital expenditure limit of $30 million.
Material changes, outlook, and risks
- Hallador completed its $18 million purchase of Freelandville reserves and a coal sales agreement on March 22. The transaction added 14.2 million tons of proven reserves and access to 1.6 million tons of previously inaccessible leased reserves. The purchased sales agreement covers 1.435 million tons for delivery in 2017.
- Management budgeted $15 million of capital expenditures for the remaining nine months of 2016, including $8 million for maintenance, and expected operating cash flow to fund capital spending, debt service, and dividends. It projected Oaktown cash costs of $28–$30 per ton for 2016, annual SG&A of about $12 million, and annual costs associated with Prosperity and Carlisle of about $9 million. Management expected an approximately 22% effective tax rate for the rest of 2016.
- Production at Carlisle remained significantly curtailed. The company recorded no impairment, based on assumptions that natural-gas prices begin recovering in late 2017, Carlisle production increases in 2018–2019, and the mine returns to normal capacity of 3.3 million tons annually in 2020. Carlisle assets had a $137 million carrying value; Hallador warned that lower future cash-flow estimates could result in significant impairment charges.
- Coal contracts included 12–18 million tons of firm but unpriced commitments through 2024; prices are to be established through contract mechanisms. Hallador also expected approximately $3 million of reimbursement for 2012 MSHA-related costs during 2016, but does not recognize reimbursements until customers accept the charges.
- Hallador had curtailed Carlisle production and reduced its workforce; Indiana employees numbered 721 at quarter-end, down from 1,018 a year earlier. Savoy and Sunrise Energy both reported Q1 2016 losses, and Hallador cited lower oil prices as a factor in Savoy’s weaker results.
- Hallador disclosed $23 million of reclamation surety bonds and said it had no other material off-balance-sheet arrangements. It had terminated property insurance on underground mining equipment with historical cost of about $255 million.
Important facts for investors to verify
- Whether reduced coal volumes, contract pricing, and the 2016 cost outlook support management’s expected cash generation and debt-service capacity.
- Actual borrowing availability and future covenant headroom under the amended credit agreement, including compliance as leverage limits step down.
- Whether Carlisle’s production and natural-gas price assumptions remain supportable and whether an impairment becomes necessary.
- Delivery, pricing, and customer adjustment terms for the firm unpriced coal commitments and the Freelandville sales agreement.
- Collection of the expected MSHA reimbursement and the uninsured-equipment and reclamation exposures.
The independent accountant performed an interim review, not an audit, and reported that it was not aware of material modifications needed for conformity with U.S. GAAP.