Hallador Energy Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Hallador produces steam coal from mines in western Indiana. Financial statements are unaudited; the independent accountant conducted a review, not an audit.
Financial performance and position
- Revenue: $63.6 million, down 16% from $75.9 million in Q1 2016. Coal sales were $62.6 million versus $75.8 million.
- Profit: Net income was $7.4 million, up 20% from $6.2 million; diluted EPS was $0.25 versus $0.21. Lower interest expense and a lower estimated tax rate contributed to the improvement.
- Coal economics: Sales volume was 1.555 million tons versus 1.629 million. Average price declined to $40.23 per ton from $46.53, while reported operating cost per ton fell to $25.53 from $30.56. Margin per ton was $14.70 versus $15.97.
- Cash flow: Operating cash flow was $12.6 million, down from $19.1 million. Capital expenditures were $3.1 million versus $6.1 million. Cash and cash equivalents ended the quarter at $13.8 million, essentially unchanged from year-end.
- Debt and liquidity: Gross bank debt was approximately $232 million ($95 million term loan and $137 million revolver); net debt carrying value was about $227.6 million. The company reported $63 million of additional borrowing capacity and $84 million of total liquidity. It was in compliance with its leverage and debt-service coverage covenants: 2.83x versus a 4.50x maximum, and 2.15x versus a 1.25x minimum.
- Balance sheet: Total assets were $532.7 million and stockholders’ equity was $223.9 million at March 31, compared with $531.3 million and $216.9 million, respectively, at December 31, 2016. The quarter included $1.2 million of dividends.
Changes versus Q1 2016
- Coal sales fell as both tons sold and average selling price declined. Despite lower revenue, operating costs per ton improved by about $5, and total operating costs declined to $39.7 million from $49.8 million.
- Net income increased despite lower sales, with interest expense falling to $3.1 million from $5.6 million. Interest expense included a $0.4 million benefit from the change in swap fair value in 2017, compared with a $1.5 million expense in 2016.
- Operating cash flow declined by $6.5 million. Capital spending was lower, and Q1 2016 investing cash flows included an $18 million purchase of Freelandville assets.
Outlook, risks and other notable items
- Management budgeted $27 million of capital expenditures for the remaining nine months of 2017, including $16 million of maintenance capex. It expected operating cash flow to fund maintenance capex, debt service and dividends; this is an expectation, not a guarantee.
- Management projected Oaktown cash costs of $26–$28 per ton for the rest of 2017, compared with $23.22 per ton in Q1. It expected $8 million of SG&A and $5.5 million of cash costs related to Prosperity and Carlisle for the remainder of the year. Additional haulage equipment and a new Oaktown 1 elevator were expected later in 2017.
- The company projected 6.3–6.6 million contracted tons for 2017. It had 11–16 million firm but unpriced tons committed through 2024; contracts provide mechanisms to set prices. Future results remain exposed to coal prices, demand, production and contract terms.
- The North End of Carlisle Mine was sealed in March after management determined it could not be mined safely and profitably. Carlisle remained in hot-idle status. No impairment was recorded on its $115 million carrying value, but management warned that a reduction in estimated future cash flows could result in a significant future impairment.
- Surety bonds covering reclamation totaled $24 million. The company also self-insured underground mining equipment; $3.1 million of restricted cash was held for future workers’ compensation claims.
- Management expected the 2017 effective tax rate to remain about 8%, primarily reflecting statutory depletion. A $1.25 million customer reimbursement for previously incurred MSHA-related costs was expected in Q2 2017; additional historical costs were to be submitted, and recognition depends on customer acceptance.
- The credit facility matures in August 2019 and requires a minimum 1.25x debt-service coverage ratio, with maximum leverage limits stepping down over time. The company reported no material change in market-risk disclosures and effective disclosure controls.
Important facts for investors to verify
- Whether coal prices, volumes and Oaktown unit costs develop in line with management’s expectations and contracted delivery plans.
- Whether operating cash generation can cover planned capex, debt service and dividends as borrowing limits tighten.
- Whether Carlisle’s hot-idle assets remain recoverable and whether any impairment becomes necessary.
- Customer acceptance and timing of the expected MSHA reimbursement, and the final amount of reimbursable historical costs.
- Debt covenant headroom, refinancing plans ahead of the August 2019 maturity, and the components of reported total liquidity.