Hallador Energy Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. Hallador produces steam coal from mines in western Indiana.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $65.1 million | $83.1 million | $179.7 million | $244.7 million |
| Net income (loss) | $1.9 million | ($3.7 million) | ($1.5 million) | ($0.1 million) |
| Adjusted EBITDA (non-GAAP) | $17.1 million | $10.5 million | $44.2 million | $52.1 million |
| Cash from operations | Not separately stated | Not separately stated | $34.1 million | $36.3 million |
- Q3 coal sales were $64.8 million. Tons sold were 1.585 million, down from 2.118 million; average selling price rose to $40.85 per ton from $39.13. Coal operating cost was $29.30 per ton, yielding reported margin of $11.55 per ton.
- For the first nine months, coal sales were $177.2 million and tons sold were 4.355 million, compared with $239.2 million and 6.055 million in 2019. Management reported coal operating margin of $10.65 per ton versus $8.53.
- At September 30, cash and cash equivalents were $5.3 million, with an additional $4.2 million of restricted cash. Total liquidity was $52.7 million, including $47.4 million of available borrowing capacity.
- Gross bank debt was approximately $146.9 million, down from $180.2 million at year-end 2019; the balance-sheet carrying amount, net of issuance costs, was $140.2 million. The company also had a $10 million PPP loan. Total liabilities were $206.5 million and stockholders’ equity was $189.7 million.
- Operating cash flow was $34.1 million; capital expenditures were $14.0 million. Cash, cash equivalents, and restricted cash together declined $3.8 million from the start of the year to $9.5 million.
Changes and notable items
- Compared with Q3 2019, revenue fell about 22%, but the company moved from a net loss to net income; Adjusted EBITDA increased. For the first nine months, revenue fell about 27%, Adjusted EBITDA declined, and the net loss widened.
- Management attributed lower sales volumes primarily to COVID-19-related demand reductions, customer inventory adjustments, the company’s contract position, and low natural-gas prices. Lower production costs, including the closure of the higher-cost Carlisle Mine, supported per-ton margins.
- Hallador recorded a $1.8 million impairment after ceasing operations at its Hourglass Sands plant in August amid continued weakness in the frac-sand market. Carlisle was permanently closed in early 2020; the company reported $1.1 million of exit and disposal costs during the first nine months.
- During the first nine months, Hallador reduced bank debt by about $33 million. Q3 operating cash flow was $15.8 million, which management said was used to reduce bank debt by $14 million.
Outlook, financing, and risks
- Management expected to defer up to 400,000 tons of 2020 shipments into 2021, with possible extensions of several contracts. It estimated Q4 2020 shipments of 1.7 million tons and cited contracted sales of 5.0 million tons for 2021 and 5.3 million for 2022. Contract tons remain subject to customer options and other adjustments.
- Management expected operating costs at the Oaktown mines of $29–$30 per ton for the remainder of 2020, approximately $6 million of remaining-year capital expenditures, and $3 million of remaining-year SG&A. It expected operating cash flow to fund maintenance capital spending and debt service. These are expectations, not guarantees.
- The April 2020 credit amendment capped 2020 capital expenditures at $30 million and suspended dividends until the leverage ratio falls below 2.0x. At September 30, the leverage ratio was 2.46x, below the 3.50x covenant limit; the debt-service coverage ratio was 1.44x, above the 1.05x minimum. The facility’s leverage limit tightens over time.
- Hallador said it expected a portion of the PPP loan to be forgiven after SBA review, but provided no assurance of forgiveness. The $10 million loan was recorded as debt; the company expected to apply for forgiveness in Q4 2020 and anticipated an SBA decision in Q1 or Q2 2021. It had also deferred $0.8 million of payroll taxes through September, with repayment due in installments at the end of 2021 and 2022.
- COVID-19 remained a material uncertainty: weaker customer demand, shipment delays, employee quarantines, production interruptions, supplier or rail disruption, and reduced liquidity or financing access could adversely affect results. Management reported rail delays had begun to improve late in Q3 and that customers had increased shipments, while warning that conditions could deteriorate.
- Other items to monitor include the company’s Nasdaq minimum-bid-price deficiency, for which the stated December 28, 2020 compliance deadline had not yet passed as of the filing; self-insured workers’ compensation and reclamation obligations; and valuation estimates for coal reserves, impairment testing, taxes, and Level 3 hedges. Reclamation surety bonds totaled $27 million.
Important facts for investors to verify
- Whether deferred shipments were delivered, customers exercised contract options, and contracted volumes and prices remained intact.
- Subsequent operating cash flow, debt reduction, available revolver capacity, and compliance with tightening credit covenants.
- The SBA’s decision on PPP eligibility and forgiveness, and the amount ultimately repayable.
- Progress toward Nasdaq’s minimum-bid requirement and any subsequent listing-status notices.
- Further developments in COVID-19 impacts, Hourglass Sands closure costs, mine reclamation obligations, and impairment assumptions.