Hallador Energy Company — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Interim financial statements are unaudited and were reviewed, not audited. Hallador mines Indiana steam coal and has equity-method interests in Savoy Energy and Sunrise Energy.
Financial results
Amounts below are in millions except per-share data, tons, and per-ton figures.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $66.3 | $37.7 | $140.5 | $116.1 |
| Coal sales | $64.8 | $35.0 | $133.9 | $103.1 |
| Income (loss) before taxes | ($7.2) | $6.5 | $1.0 | $24.7 |
| Net income (loss) | ($5.8) | $4.8 | $0.8 | $18.5 |
| Basic and diluted EPS | ($0.20) | $0.17 | $0.03 | $0.65 basic; $0.64 diluted |
- Coal volumes and pricing: Q3 sales were 1.50 million tons at $43.18 per ton, versus 0.817 million tons at $42.82 a year earlier. Nine-month sales were 3.123 million tons at $42.88 per ton, versus 2.431 million tons at $42.42.
- Coal operating costs and margin: Q3 operating cost averaged $35.06 per ton versus $28.65; the filing’s coal margin was $8.12 per ton versus $14.17. For the first nine months, cost averaged $32.56 per ton versus $28.37.
- Cash flow: Operating activities provided $20.7 million in the first nine months, compared with $20.3 million. Investing used $334.1 million, including $319.8 million for the Vectren Fuels acquisition and $14.3 million of coal-property capital expenditures. Financing provided $319.1 million. Cash increased $5.8 million to $22.0 million.
- Liquidity and debt: Current assets were $107.1 million and current liabilities $49.2 million at September 30. Bank debt was approximately $345.6 million, including $19.7 million classified as current, compared with $16.0 million of bank debt at year-end 2013. Stockholders’ equity was $182.9 million.
Material changes and unusual items
- On August 29, Hallador acquired Vectren Fuels for approximately $320 million, financed with a new bank facility. The acquired mines contributed $26.6 million of revenue and $2.5 million of pretax income from acquisition through September 30. The preliminary purchase-price allocation may change materially as valuation work is completed.
- The acquisition expanded the company’s operations and employee base substantially; Hallador idled the acquired Prosperity mine and planned to move its equipment and employees to Oaktown. The Oaktown 1, Oaktown 2, Carlisle and War Eagle complex represents 142 million tons of controlled reserves, according to the filing.
- Nine-month results included $7.9 million of Vectren deal costs and a $1.0 million write-off of deferred financing costs. The prior-year period included a $4.3 million noncash liability-extinguishment gain. These items affect period comparisons.
- Q3 deterioration reflected higher per-ton operating costs amid poor rail service and acquisition integration. Management said three of eight contracted customers had difficulty providing adequate freight and expected transportation improvements in 2015.
- Hallador attributed higher SG&A in part to increased stock compensation and health-care costs, as well as $210,000 in political contributions. The company is self-insured for the first $110,000 per person, subject to a $5.5 million annual cap.
Outlook, financing, and risks
- Management expected 2015 operating costs to return to $30 per ton or lower. Remaining 2014 capital expenditures were budgeted at $9.1 million, including $7.1 million for maintenance, expected to be funded from operating cash flow.
- Coal contracts listed 2.425 million tons for the final three months of 2014 at an average $43.24 per ton, 9.470 million tons for 2015 at $44.32, 3.369 million tons for 2016 at $44.03, and 1.450 million tons for 2017 at $44.39.
- The new facility comprises a $250 million revolver and $175 million term loan, matures in August 2019, and is secured by substantially all Sunrise assets with Hallador as guarantor. The filing reports a current borrowing limit of $398 million under covenants. The leverage ratio was above 2.5x; the maximum then permitted was 3.25x. The highest stated rate, LIBOR plus 3.5%, applied through Q1 2015. Swaps fixed the LIBOR component on $175 million of term debt and $100 million of revolver borrowings, targeting an effective rate no greater than 5% on those amounts.
- Other risks and uncertainties include rail availability and cost control during integration; final valuation of acquired assets and liabilities; coal-reserve estimates and related impairment/DD&A; and permitting and sales commitments for the undeveloped Bulldog project. Management estimated Bulldog development at $150 million at full capacity and anticipated a permit decision by mid-March 2015.
- Hallador had terminated property insurance on underground mining equipment with historical cost of about $245 million. The filing also identifies commitments and contingencies but does not provide a clear quantified total for them.
- Savoy’s marketing of its Michigan oil properties was on hold pending an oil-price recovery. It distributed $12 million in early October; Hallador’s $4.9 million share was applied to bank debt. Hallador’s ownership fell from 45% to 40% on October 1 following management option exercises.
Important facts for investors to verify
- Final Vectren purchase accounting, integration costs, and whether acquired operations deliver expected earnings and cost savings.
- Whether rail service improves and operating costs reach management’s stated 2015 target.
- Debt covenant headroom, borrowing availability, interest expense, and scheduled principal repayments after the acquisition.
- Coal contract deliveries and pricing, Bulldog permitting and sales commitments, and the reliability of reported reserve estimates.
- Timing and collectability of expected MSHA reimbursements; the filing said 2012 and 2013 costs were expected to be collected in 2015.