Hallador Energy Company — Q1 2015 Form 10-Q
Business and reporting period: Unaudited results for the three months ended March 31, 2015, compared with the same period in 2014. Hallador mines steam coal in Indiana through Sunrise Coal and holds equity-method interests in oil and gas ventures Savoy Energy (40%) and Sunrise Energy (50%). The August 2014 acquisition of Vectren Fuels added the Oaktown mines and materially expanded the company; therefore, year-over-year growth largely reflects a different operating base.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $98.0 million | $35.8 million |
| Coal sales | $97.1 million | $33.0 million |
| Net income | $7.6 million; $0.25 per diluted share | $3.5 million; $0.12 per diluted share |
| Income before taxes | $11.0 million | $4.7 million |
| Cash from operations | $22.0 million | $6.2 million |
| Capital expenditures | $8.3 million | $2.9 million |
| Cash and cash equivalents | $11.8 million | $13.5 million at Dec. 31, 2014 |
| Total bank debt | $292.0 million | $306.3 million at Dec. 31, 2014 |
| Current assets / current liabilities | $86.5 million / $53.1 million; current ratio about 1.63 | Current ratio about 1.69 at Dec. 31, 2014 |
Coal sales were 2.146 million tons at an average $45.23 per ton, versus 0.776 million tons at $42.55 a ton in Q1 2014. Operating costs averaged $30.83 per ton versus $29.65. The company-reported coal sales less operating costs margin was $30.9 million, or $14.40 per ton, versus $10.0 million, or $12.90 per ton. SG&A rose in dollars with the larger business, but fell to 3.4% of coal revenue from 6.0%.
Operating, investing and financing activities produced a $1.7 million net decrease in cash. Financing included $14.4 million of bank-debt payments and $1.2 million of dividends. Debt consisted of a $157 million term loan and $135 million revolver. The reported leverage ratio was 2.63x, below the 3.25x maximum; covenant limits constrain maximum borrowing, reported as $362 million at quarter-end.
Material changes and operating context
- Revenue and tonnage increased sharply, principally because Q1 2014 preceded the Vectren acquisition. Average coal price rose, while cost per ton also increased slightly, which management attributed to mining issues at Carlisle.
- Interest expense rose to $5.5 million from $0.5 million; Q1 2015 includes $1.3 million for the net change in estimated fair value of interest-rate swaps.
- Equity income from Savoy declined to $0.1 million from $2.4 million. Management attributed Savoy’s lower earnings to the sharp decline in oil prices; Hallador’s shareholding also fell from 45% to 40% in October 2014.
- Year-end controlled coal reserves rose to 199.0 million tons from 124.1 million in 2013, largely reflecting the acquired Oaktown reserves and the combination with War Eagle reserves.
Outlook, risks and notable items
- Management expected operating costs to average $30 per ton or less for the remainder of 2015, versus $30.83 in Q1; contracted average price for the remaining 2015 period was $44.86 per ton. These are management expectations, not guaranteed results.
- Maintenance capital expenditures budgeted for the final nine months of 2015 were $18.7 million; management expected operating cash flow to fund them.
- Coal contracts covered 6.977 million priced tons for the remaining nine months of 2015 and 17.88 million committed but unpriced tons through 2024. Management said utility buyers were likely to be slow to commit to 2016-and-later purchases while assessing 2015 coal burns.
- The Bulldog mine permit was under review, with a decision anticipated by the company in 2015. Full-scale development would not begin without a sales commitment; estimated development cost was $150 million at a planned capacity of 3 million tons annually.
- Debt availability and pricing depend on covenant compliance. The credit facility is secured by substantially all Sunrise assets, and the company guaranteed it. Interest-rate swaps covered the full $175 million term loan and $100 million of the revolver, with a reported $2.0 million net fair-value liability.
- Hallador had terminated property insurance on underground mining equipment with historical cost of about $250 million. It also disclosed customary credit restrictions, asset-retirement obligations, and commitments and contingencies; the filing text does not provide a clear quantified total for all contingencies.
- The company expected to submit its 2012 MSHA-related reimbursement costs in Q2 2015 and anticipated collecting 2012 and 2013 costs during 2015, based on prior experience. Reimbursement depends on customer acceptance.
- The interim statements were reviewed, not audited. Management stated that results for the quarter are not necessarily indicative of full-year results. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported growth and operating performance reflects the Vectren acquisition, and how the acquired mines perform against planned production and cost assumptions.
- Compliance with debt covenants, remaining borrowing capacity, leverage, and the impact of interest expense and swap valuation changes.
- Execution and pricing of the 17.88 million committed unpriced tons, as well as contract renewals and customer demand beyond 2015.
- Whether costs remain at or below management’s target, and whether cash flow covers planned maintenance capital spending and debt service.
- The Bulldog permitting outcome and development requirements, reserve assumptions, and exposure from self-insured underground mining equipment.
- Timing and collectability of expected MSHA reimbursements and the effect of oil prices on Savoy’s contribution.