Business context and reporting period
Hallador Energy Company filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Its principal business is mining steam coal in Indiana through Sunrise Coal; it also holds 45% of oil-and-gas company Savoy Energy and 50% of Sunrise Energy, both accounted for using the equity method. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total reported revenue and other income | $37.7m | $37.1m | $116.1m | $106.2m |
| Coal sales | $35.0m | $36.2m | $103.1m | $98.3m |
| Income before taxes | $6.5m | $9.3m | $24.7m | $28.1m |
| Net income | $4.8m | $6.2m | $18.5m | $18.8m |
| Diluted earnings per share | $0.17 | $0.22 | $0.64 | $0.65 |
Q3 coal volume was 817,000 tons, up from 810,000; average realized price fell to $42.82 per ton from $44.63, while operating cost rose to $28.65 per ton from $25.61. Coal margin was $14.17 per ton versus $19.02. For the first nine months, volume increased to 2.431 million tons from 2.255 million, but average price declined to $42.42 from $43.57 and operating cost increased to $28.37 per ton from $25.72.
Operating cash flow for the first nine months was $20.3m, down from $29.6m. Investing used $26.2m, including $23.6m of coal-property capital expenditures and $2.9m for the Ohio River Terminal. Financing used $2.3m, entirely reported as dividends; cash declined $8.2m to $13.7m.
At September 30, 2013, total assets were $246.6m and stockholders’ equity was $179.7m. Current assets were $34.3m versus current liabilities of $10.1m. Bank debt was $11.4m, unchanged from year-end 2012; the company had a $165m secured revolving facility, with up to an additional $120m currently available under covenants. Deferred taxes were $40.8m and asset-retirement obligations were $2.7m.
Material changes versus comparable periods
- Q3 total reported revenue rose modestly, but coal sales decreased; lower realized prices and higher unit costs reduced coal margin and net income.
- Nine-month total reported revenue increased, while net income edged lower. The 2013 period included a $4.3m noncash gain from extinguishing a liability recorded in 2006. Excluding it, nine-month net income was $15.3m and basic and diluted EPS were $0.53.
- Capital spending rose substantially: coal-property capital expenditures were $23.6m for nine months versus $9.2m in 2012. Cash fell from $21.9m at December 31, 2012 to $13.7m.
- Equity income increased: Savoy contributed $4.5m for nine months versus $3.0m, and Sunrise Energy contributed $0.5m versus $0.05m.
Outlook, risks and notable items
- Management expected approximately 825,000 tons of Q4 2013 coal sales at an average contracted price of $43.99 per ton, and projected remaining-2013 margins of $16–$17 per ton. It expected costs of $27–$28 per ton for the rest of 2013; wash-plant recovery was expected to improve from below-normal May and August levels, but remain in the upper 60% range in Q4 before returning to a historical 72%.
- Management expected an effective tax rate of about 25% for the remainder of 2013 and stated it did not anticipate near-term liquidity issues, expecting to fund projects through operating cash and revolver draws.
- Ace-in-the-Hole, a surface mine, began shipping in August 2013 and was expected to enter production in November. The company had invested $18m through September 30 and expected another $1m of 2013 development and equipment spending. Bulldog’s permit was expected in Q1 or Q2 2014; full-scale development was contingent on a sales commitment. Permitting for Russellville was planned to begin in fall 2013.
- The Ohio River Terminal was acquired in May for $2.8m; management did not expect revenue from it until late 2014.
- Bill-and-hold arrangements generated $7.3m of nine-month revenue; 300,000 tons and 250,000 tons were in storage for the two customers at quarter-end. The company said all related receivables outstanding at September 30 had been collected by October 31.
- Other risks cited include low natural-gas prices and mild weather, environmental regulation, competition from new Illinois Basin mines, and a slow economy. Management also highlighted potential demand tailwinds from utilities switching to Illinois Basin coal. Savoy had no oil-price hedges; management cautioned that its interim results could vary with drilling outcomes, exploration spending, and oil prices.
- The company self-insures approximately $110m of underground mining equipment at historical cost. It reported no material off-balance-sheet arrangements. The board adopted a regular quarterly dividend policy of $0.04 per share; another $0.04 dividend was declared in October, payable in November.
Important facts for investors to verify
- Whether mine conditions and wash-plant recovery improve as management projected, and how unit costs and coal margins develop.
- Whether Ace reaches expected production and sales levels, and whether Bulldog and Russellville permitting and future development meet stated milestones.
- Customer demand, contracted volumes and prices, and the sustainability of bill-and-hold sales and MSHA cost reimbursements.
- Remaining revolver availability and covenant headroom as capital spending and project funding needs continue.
- The contribution and volatility of Savoy and Sunrise Energy, including Savoy’s unhedged exposure to oil prices and drilling results.