Hallador Energy Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Hallador produces steam coal in Indiana through Sunrise Coal and holds equity interests in Savoy Energy and Sunrise Energy. Results are unaudited and should be read with the 2014 Form 10-K.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $95.3 million | $38.5 million | $193.3 million | $74.2 million |
| Coal sales | $95.3 million | $36.1 million | $192.4 million | $69.1 million |
| Net income | $6.9 million | $3.1 million | $14.4 million | $6.6 million |
| Diluted EPS | $0.23 | $0.10 | $0.48 | $0.22 |
| Operating cash flow | Not provided by quarter | $57.8 million | $16.4 million |
- First-half coal shipments were 4.224 million tons at an average $45.55 per ton, compared with 1.623 million tons at $42.60 per ton in 2014. The acquisition of Vectren Fuels in August 2014 materially affects comparability: the 2014 first-half results do not include its mines.
- First-half operating costs averaged $31.83 per ton, versus $30.25; Q2 costs were $32.86 per ton, versus $30.81. Q2 coal margin was $13.01 per ton, compared with $11.85.
- At June 30, cash was $16.5 million, current assets $82.0 million and current liabilities $54.3 million. Total assets were $575.6 million and stockholders’ equity $202.8 million.
- Bank debt totaled approximately $277.6 million: $153 million term debt and $125 million revolver borrowings. The company repaid $28.8 million of bank debt in the first half. Operating cash flow funded $23.0 million of capital expenditures and $2.4 million of dividends; cash increased $3.0 million to $16.5 million.
Changes, outlook and risks
- Contract changes followed mild weather and low natural-gas prices, which left customers with excess coal for 2015. Hallador plans to shift production toward Oaktown, expected to account for over 90% of production for the next couple of years, and reduce Carlisle output. A reduction in force of 175 employees was necessary.
- Management aims to reduce Carlisle costs to $27 per ton or less for the remainder of 2015. It expects $6 million of maintenance capital expenditures in the second half, funded by operating cash flow; annual SG&A is expected to be $12 million, with costs associated with Prosperity and Carlisle of $6 million annually.
- Management expects second-half 2015 coal prices to average $44.57 per ton and estimates 2015 effective tax rate at about 28%. A $500,000 charge related to the July workforce reduction is expected in Q3.
- Contracts and communications reflect 36.167 million tons of sales commitments through 2024, including 14.880 million unpriced tons. The filing says unpriced contract tons have mechanisms for establishing market-based prices; some reprice annually over a three-year period.
- The company reported a leverage ratio of 2.76x against a current maximum of 3.00x. Its credit facility is secured by substantially all Sunrise assets, has customary covenants and drawdown milestones, and matures August 29, 2019. Interest-rate swaps cover the full $175 million term loan and $100 million of revolver borrowings.
- Carlisle assets had a $181 million carrying value; no impairment was recorded. The recoverability assessment assumes natural-gas prices begin rising in late 2016, Carlisle production increases in 2017 and the mine returns to three million tons annually in 2019. Management warns that downward revisions to projected cash flows could result in a significant future impairment.
- Savoy reported a first-half net loss of $41,000, compared with net income of $10.0 million in 2014; Hallador attributed the decline in its share of Savoy income to sharply lower oil prices. The filing also notes expected MSHA-related customer reimbursements of over $3 million for 2012 costs, which are not recognized until customers accept the charges.
- The auditor performed an interim review, not an audit, and reported no material modifications needed to the interim statements. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress on contract modifications, realized prices, committed unpriced volumes and customer acceptance of MSHA reimbursements.
- Oaktown production ramp, Carlisle cost reductions and the assumptions supporting the $181 million Carlisle asset valuation.
- Leverage covenant headroom, borrowing availability and the impact of production or cash-flow changes on compliance.
- Whether management’s cost, capital expenditure, pricing and tax-rate expectations are being met.
- The impact of the Vectren acquisition on year-over-year comparisons; prior-period results exclude its operations.