Hallador Energy Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Hallador produces steam coal in Indiana through Sunrise Coal and was developing a Colorado frac-sand business through Hourglass Sands. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $66.9 | $63.6; up 5.2% |
| Net income | $2.1 | $7.4; down 71% |
| Diluted EPS | $0.07 | $0.25 |
| Cash from operations | $13.2 | $14.9 |
| Capital expenditures | $10.4 | $5.1 |
Coal sales were $66.8 million, versus $62.6 million. The company sold 1.707 million tons at an average $39.13 per ton, compared with 1.555 million tons at $40.23 per ton. Management attributed the lower average price to contract mix. All-mine operating costs averaged $27.32 per ton versus $25.53; the reported all-mine margin was $11.80 per ton versus $14.70. These per-ton measures are non-GAAP.
At March 31, cash and cash equivalents were $14.4 million, restricted cash $4.1 million, and current assets $83.5 million against current liabilities of $58.1 million. Bank debt was $191 million gross (term loan $55 million and revolver $136 million); balance-sheet debt, net of issuance costs, totaled $188.1 million. The company reported $64 million of additional borrowing capacity and total liquidity of $82 million. Leverage and debt-service coverage ratios were 2.37x and 1.69x, respectively, within covenant limits of no more than 4.25x and no less than 1.25x. The stated borrowing rate was 4.89%.
Cash, cash equivalents, and restricted cash increased $2.3 million to $18.6 million. Cash used in financing was $8.5 million, including $16.3 million of debt payments, partly offset by $5.0 million of borrowings and $4.0 million from a noncontrolling interest. Investing cash use was $2.4 million, including $10.4 million of capital expenditures and $8.0 million of Savoy sale proceeds.
Material changes and notable items
- Income before taxes fell to $2.3 million from $8.1 million. Operating costs rose to $46.6 million from $39.7 million; DD&A rose to $10.8 million from $9.7 million; and SG&A rose to $3.9 million from $2.7 million. Interest expense declined to $2.7 million from $3.1 million.
- Q1 SG&A included $1.5 million of accelerated restricted-stock-unit vesting following Chairman Victor Stabio’s death. Total stock-based compensation was $2.0 million, versus $0.8 million a year earlier.
- Hallador sold its 30.6% Savoy Energy interest for $8.0 million gross proceeds and recorded a $0.5 million loss. Net proceeds of $7.5 million, after related-party commissions, were applied to bank debt as required.
- Coal inventory increased to $20.9 million from $12.8 million at year-end. Management cited strong early-year production, possible customer pre-deliveries and spot sales, and inventory buildup for Princeton Loop deliveries.
- The company invested $4.0 million in Hourglass Sands; a director-associated company separately invested $4.0 million for a royalty interest. Hourglass was consolidated, with the other investor’s interest reported as redeemable noncontrolling interest.
Outlook, risks, and contingencies
- Management raised 2018 sales guidance to 7.0 million tons; 6.9 million tons were contracted (99%). It projected an average 2018 coal price of about $40 per ton. For 2019, guidance was 7.0 million tons, with 5.5 million contracted (79%) at an estimated $41 per ton. Overall, 20.9 million tons were contracted for 2018–2022, representing 60% of forecast sales for those years.
- Management expected Oaktown operating costs of $28–$30 per ton for the remainder of 2018, compared with $25.93 in Q1. It expected $7.5 million of SG&A for the remainder of the year. The $22 million capital-expenditure budget for the next nine months included $9 million of maintenance capex; operating cash flow was expected to fund maintenance capex, debt service, and dividends.
- Princeton Loop was expected to begin coal shipments in May 2018. Hourglass anticipated customer shipments in Q3 2018; management did not expect it to be profitable in 2018.
- The Carlisle Mine remained in hot idle status. Its $108 million net carrying value was not impaired at quarter-end, but management warned that lower estimated future cash flows could lead to a significant future impairment. Bulldog Mine assets had a $15 million net carrying value; no impairment was recorded.
- The credit facility is secured by substantially all Sunrise assets and guaranteed by Hallador. Its leverage limits tighten over time. The company disclosed $26 million of reclamation surety bonds; it also self-insures underground mining equipment. Coal contracts can include customer tonnage options, price reopeners, quality adjustments, and force-majeure provisions.
- In April, Hallador declared a $0.04-per-share dividend payable May 11, 2018. Management reported no material change in market-risk disclosures, effective disclosure controls, and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether sales volumes, contract pricing, and lower per-ton margins support management’s 2018 earnings and cash-flow expectations.
- Debt repayment capacity, available revolver borrowing, and continued compliance as leverage covenants tighten.
- Whether coal inventory normalizes and the projected capital spending and dividend remain fundable from operations.
- Progress, costs, and customer shipments at Princeton Loop and Hourglass, including Hourglass’s path beyond its expected unprofitable launch year.
- Future cash-flow assumptions and impairment exposure for Carlisle and Bulldog, and the effects of contract options and price reopeners.
The independent accountant performed a review of the interim financial statements, not an audit, and reported no material modifications needed for GAAP conformity.