Hallador Energy Company — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Interim financial statements are unaudited. Hallador primarily mines steam coal in Indiana and also holds equity interests in Michigan oil and gas producer Savoy Energy and coal-bed methane venture Sunrise Energy.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue and other income | $44.6 million | $33.2 million | $116.2 million | $100.1 million |
| Coal sales | $34.2 million | $34.2 million | $100.3 million | $100.6 million |
| Income before taxes | $19.5 million | $9.9 million | $43.3 million | $29.2 million |
| Net income | $12.6 million | $6.5 million | $27.3 million | $18.1 million |
| Diluted earnings per share | $0.44 | $0.23 | $0.95 | $0.63 |
- Q3 coal sales were 805,000 tons at an average $42.45 per ton, compared with 811,000 tons at $42.15 a year earlier. Nine-month sales were 2.386 million tons at $42.02 per ton, versus 2.373 million tons at $42.41.
- Operating costs averaged $24.42 per ton in Q3, up from $22.66; for the nine months, they averaged $23.66 versus $23.90. The filing does not provide a conventional gross-margin figure.
- Cash provided by operations was $40.4 million for the nine months, up from $33.7 million. Coal-property capital expenditures were $17.0 million versus $24.6 million. Cash increased $23.3 million to $33.6 million.
- At September 30, cash was $33.6 million, current assets $52.5 million, and current liabilities $31.3 million. Bank debt totaled $20.0 million, down from $27.5 million at year-end 2010. The company reported a $30 million revolving facility available for mine expansion.
- Shareholders’ equity was $151.9 million, compared with $126.7 million at December 31, 2010. Nine-month dividends were $3.5 million.
Changes, unusual items, and management commentary
- Higher reported revenue and profit primarily reflect a $9.1 million pretax gain from selling a 90% working interest in North Dakota oil and gas leases, $1.9 million of customer reimbursements for MSHA-related costs from 2008–2009, and improved equity income from Savoy. Coal sales revenue was essentially flat.
- The North Dakota sale closed in July for $12.6 million. Hallador retained a 10% working interest and an approximately 3% average overriding royalty interest; it expected up to a further $1.6 million in Q4, subject to title curative and delivery of additional leases.
- Savoy reported nine-month net income of $9.0 million, compared with a $1.3 million loss in 2010. Hallador’s equity-method income from Savoy was $4.1 million. Savoy’s results depend on drilling outcomes and oil prices, and it does not hedge prices.
- Interest expense fell with lower debt. Reported interest expense includes credits from changes in the fair value of interest-rate swaps. Although the loan’s stated floating rate was 2.72%, Hallador said swaps, fees, and financing-cost amortization brought its effective rate to about 7.7%; the swaps expire in December 2011 and July 2012.
- Management said it did not anticipate near-term liquidity issues and planned to fund Carlisle mine expansion with operating cash and the revolving facility. Remaining-2011 capital spending was budgeted at $14–$16 million. Developing Allerton or another large reserve may require increased borrowing and credit-facility restructuring.
- Management maintained a positive long-term view of domestic steam-coal demand, expecting modest U.S. demand growth in 2011 and a stronger recovery in 2012. Essentially all 2011 production and 85%–90% of 2012 and 2013 production were contracted; about one-third of 2014 production was contracted, with none beyond 2014.
Outlook, risks, and contingencies
- Management expected Q4 coal sales of about 900,000 tons at approximately $42 per ton, assuming no spot sales, and operating costs of $23–$25 per ton. It expected an effective tax rate of about 37%, potentially declining slightly.
- Customers were reviewing a further $4 million of MSHA cost-reimbursement claims submitted in September. Hallador expected a resolution in mid-December; it had not recognized the amount pending agreement.
- Allerton in Illinois had 26.2 million estimated recoverable tons under control, including 10.7 million proven and 15.5 million probable. Management anticipated a mining permit in early 2013 and production in 2014; these unassigned reserves would require substantial development capital.
- Hallador self-insured approximately $85 million of underground mining equipment at historical cost. It was contesting 11 MSHA citations; the filing reported no 104(b), 104(d), 107(a), or 110(b)(2) orders or violations for the first nine months. The company said it had received no notice of a pattern or potential pattern of violations.
- Other uncertainties include mining safety and regulatory compliance, coal demand and contract coverage, Savoy drilling and oil-price exposure, and execution of planned mine development. Hallador reported no material off-balance-sheet arrangements. Disclosure controls were concluded effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the pending $4 million MSHA reimbursement is approved, and whether the expected additional North Dakota sale proceeds are received.
- Coal volumes, realized prices, per-ton operating costs, and contract coverage as 2011 results and 2012–2014 sales develop.
- Cash generation, planned capital spending, use of the revolver, debt repayments, and the effect of expiring interest-rate swaps.
- Allerton permitting, development costs, and schedule, along with Savoy’s drilling results and sensitivity to oil prices.
- Status and potential assessments of the 11 contested MSHA citations and the company’s equipment self-insurance exposure.