Hallador Energy Company — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Hallador produces steam coal from mines in western Indiana. Financial statements are unaudited; the independent accountant performed a review, not an audit. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $64.3 | $68.6 | $127.9 | $144.4 |
| Coal sales | $62.8 | $66.3 | $125.4 | $142.1 |
| Income before taxes | $0.7 | $6.2 | $8.8 | $14.1 |
| Net income | $0.4 | $5.9 | $7.8 | $12.0 |
| Diluted earnings per share | $0.01 | $0.19 | $0.25 | $0.40 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $23.5 | $30.4 |
Q2 coal sales were 1.548 million tons at an average $40.59 per ton, versus 1.464 million tons at $45.27 per ton a year earlier. Coal operating cost averaged $28.47 per ton, compared with $31.01; reported coal margin was $12.11 per ton versus $14.26. For the first half, coal sales were 3.103 million tons at $40.41 per ton, versus 3.093 million tons at $45.93. Operating cost averaged $27.00 per ton, compared with $30.77.
At June 30, cash and cash equivalents were $10.1 million, restricted cash $3.3 million, and current assets $84.7 million against current liabilities of $53.1 million. Total assets were $527.9 million and stockholders’ equity $225.4 million. Bank debt was $225 million gross ($35 million current and $190.5 million long-term before debt issuance costs). The company reported $63 million of additional borrowing capacity and $79 million of total liquidity. It was compliant with its maximum leverage covenant (2.76x versus 4.25x permitted) and minimum debt-service coverage covenant (2.15x versus 1.25x required). Its reported borrowing rate was 4.54%.
Cash increased by $0.3 million in the first half to $10.1 million. Investing used $7.6 million, including $11.9 million in cash capital expenditures; financing used $15.5 million, including $13.1 million of debt repayments and $2.4 million of dividends. Reported first-half capex was $13.4 million including $1.5 million of non-cash equipment acquisitions.
Material changes versus comparable periods
- First-half total revenue declined $16.6 million year over year, mainly reflecting lower coal prices; first-half tons sold were nearly flat. Management attributed lower average prices to contract mix, contract expirations, and replacement contracts.
- First-half net income fell $4.2 million, while Q2 net income fell $5.5 million. Q2 SG&A was $6.6 million, up from $2.7 million, primarily because of a $3.8 million stock bonus to three executives. First-half stock-based compensation was $5.4 million versus $1.2 million.
- Operating costs per ton declined year over year. Management cited higher early-quarter production and new haulage equipment at Oaktown, where some units achieved production increases of about 30%. Q2 wash-plant recovery declined to 61% from 63% a year earlier.
- Operating cash flow declined $6.9 million, primarily because of increased coal inventory, which management expected to normalize in the second half. Coal inventory was $22.8 million at June 30, versus $10.1 million at year-end 2016.
- Bank debt declined from $235.6 million gross at year-end 2016 to $225 million at June 30, 2017. The Carlisle Mine’s North End was sealed in March after management concluded it could not be mined safely and profitably; the remaining Carlisle Mine was in hot-idle status.
Outlook, risks, and unusual items
- Management projected 2017 contracted coal deliveries of 6.3–6.6 million tons; 3.1 million tons had been sold in the first half. Minimum contracted volume for the full year was 6.2 million tons. Minimum contracted prices shown were $41.38 per ton for the second half of 2017 and $43.04 for 2018. The filing also identifies 8–13 million tons of firm but unpriced commitments through 2024.
- For the second half, management budgeted $21 million of capex, including $11 million of maintenance capex; it expected operating cash flow to fund maintenance capex, debt service, and dividends. Oaktown costs were expected to range from $26 to $28 per ton for the remainder of 2017. Management also expected $5 million of second-half SG&A and $3.5 million of cash costs for Prosperity and Carlisle.
- Management expected its 2017 effective tax rate to remain about 11%, primarily affected by statutory depletion in excess of tax basis. It expected to submit 2013 MSHA-related reimbursable costs in 2017, estimated at $2–$2.7 million; the filing does not report approval or collection of those amounts. A $1.25 million reimbursement for 2012 costs was recognized in Q2 2017.
- Management found no impairment necessary for Carlisle at June 30, but its $113 million net carrying value could be subject to significant future impairment if estimated cash flows decline. Coal reserve estimates and impairment assumptions are identified as critical accounting estimates.
- Reclamation surety bonds totaled $25 million; restricted cash of $3.3 million is held for future workers’ compensation claims. The company self-insures underground mining equipment with historical cost of about $253 million. It reported no other material off-balance-sheet arrangements.
- Executive RSU awards were an unusual expense and dilution item: 495,000 units were granted and immediately vested in May, and 645,000 were granted in June with four-year vesting. The June grant was valued at $5.3 million; 1.292 million RSUs were non-vested at quarter-end.
Important facts for investors to verify
- Whether contracted volume, selling prices, and customer options support management’s 2017 sales outlook and future unpriced commitments.
- Whether coal inventory normalizes and operating cash flow covers planned capex, debt service, and dividends.
- Oaktown’s expected cost range, production improvements, and the lower Q2 wash-plant recovery rate.
- Carlisle’s operating status, cash-flow assumptions, and potential impairment exposure.
- Debt-covenant headroom, borrowing capacity, interest-rate exposure, and the company’s ability to meet its $21 million second-half capex plan.
- The accounting and dilution effects of executive stock awards, and the timing and collectability of MSHA reimbursements.