Hallador Energy Company — Q3 2021 Form 10-Q
Business context and reporting period. Hallador produces steam coal from mines in western Indiana; the filing covers the three and nine months ended September 30, 2021. Results are unaudited. The company also owns Hourglass Sands, whose plant ceased operations in 2020, and has announced plans to develop renewable generation with Hoosier Energy.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $79.8 million | $65.2 million | $182.2 million | $178.6 million |
| Operating income (loss) | $(1.4) million | $3.9 million | $(2.7) million | $5.0 million |
| Net income (loss) | $8.0 million | $1.9 million | $4.0 million | $(1.5) million |
| Adjusted EBITDA (non-GAAP) | $20.5 million | $17.1 million | $43.2 million | $44.2 million |
| Operating cash flow | Management reported $24.1 million | Not clearly stated for the quarter | $37.0 million | $34.1 million |
- Q3 coal shipments were 2.042 million tons, at an average sales price of $38.71 per ton and average operating cost of $33.15 per ton; reported coal margin was $5.55 per ton. In Q3 2020, the corresponding figures were 1.585 million tons, $40.85, $29.30, and $11.55 per ton.
- For the first nine months, coal operating margin was $7.70 per ton versus $10.65 in 2020, reflecting lower contracted prices and higher operating costs. The filing reports coal operating costs of $31.17 per ton for this period, compared with $30.03 in 2020.
- At September 30, cash and cash equivalents were $4.5 million, with $3.2 million restricted. Current assets were $49.1 million and current liabilities $66.0 million. Reported total liquidity was $41.7 million, including $37.1 million of additional borrowing capacity.
- Bank debt was $114.9 million before unamortized issuance costs ($110.3 million net); the $10 million PPP loan was forgiven. Debt declined from $137.7 million at December 31, 2020. The company reported leverage of 2.29x and debt-service coverage of 1.15x, both compliant with covenants at quarter-end.
- Capital expenditures were $18.1 million for the first nine months. Total assets were $363.1 million and stockholders’ equity was $190.1 million at September 30, 2021.
Material changes and unusual items
- Q3 revenue rose year over year as shipments increased, but operating results weakened: operating expenses rose to $81.2 million from $61.3 million, including higher coal operating costs. The average coal sales price fell from $40.85 to $38.71 per ton.
- Q3 and nine-month net income included a $10 million gain from forgiveness of the PPP loan, approved and paid in July. Excluding this item, reported net income materially overstates earnings from ongoing operations. The SBA may review the forgiven loan and retains potential legal remedies.
- Nine-month operating cash flow increased by $2.9 million year over year; management attributed the improvement primarily to working-capital movements, including reduced inventory, partly offset by lower coal margins.
- No long-lived-asset impairment was recorded in 2021. The company recorded a $1.8 million Hourglass Sands impairment in Q3 2020 after ceasing plant operations.
Outlook, commentary and risks
- Management expected Q4 2021 shipments of 1.6 million tons at an average price of $41.40 per ton, and full-year shipments of 6.2 million tons, including a 600,000-ton inventory drawdown; expected production was 5.7 million tons.
- Management targeted approximately 7 million tons of production and sales capacity in 2022, with hiring and training identified as the principal constraint. It expected 2022 average sales prices to exceed 2021 levels and cited strong coal demand and low utility inventories.
- Q3 production costs were elevated due to long underground travel at Oaktown 2, supply-chain disruption and premium input prices, and Ace in the Hole nearing the end of its reserve life. Management expected costs to remain high in Q4 and normalize during 2022 as a new hoist becomes operational, supply pressures ease, and the mine transitions to a new reserve. These are management expectations, not guarantees.
- Management expected strong Q4 operating cash flow as inventory declined, with remaining 2021 cash flow expected to fund maintenance capital expenditures and debt service. Remaining 2021 capex budget was approximately $5 million.
- The company had contracted coal volumes of 6.8 million tons for 2022 at an estimated $39.50 per ton and 3.8 million tons for 2023 at $41.30 per ton. Volumes may change under customer options and contract provisions.
- Hallador announced plans with Hoosier Energy to develop up to 1,000 MW of renewable power near the Merom station. It planned to develop approximately 200 MW of solar and battery storage through power purchase agreements in 2025; management expected little near-term financial activity before the station’s anticipated 2023 retirement.
- Risks noted include COVID-19 effects on operations and liquidity, labor recruitment and training, supply availability and pricing, coal-market and contract-price changes, and covenant requirements. Reclamation obligations were supported by $25 million of surety bonds; asset retirement obligations were $17.2 million. The filing reported no other material off-balance-sheet arrangements and no material subsequent events.
Important facts for investors to verify
- How much of Q3 earnings and adjusted EBITDA reflects the one-time $10 million PPP forgiveness, and whether any SBA review develops.
- Whether hiring, training, the Oaktown 2 hoist and the Ace in the Hole transition deliver the targeted 2022 production and cost improvements.
- Whether forecast shipments, contracted prices and inventory reductions translate into sustained cash generation and debt repayment.
- Future covenant headroom: the leverage limit tightens to 2.50x beginning March 31, 2022, and the minimum debt-service coverage requirement increases to 1.25x after December 31, 2021.
- Execution, customer commitments and financing for the proposed renewable-generation projects.