Hallador Energy Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Hallador produces steam coal at mines in western Indiana; its Hourglass subsidiary is developing a Colorado frac-sand business. Financial amounts below are in U.S. dollars; figures are in millions unless stated otherwise.
Financial results and position
- Q2 revenue: $72.3 million, up from $57.2 million a year earlier. Coal sales were $71.1 million versus $56.9 million.
- Q2 earnings: Net loss of $3.3 million, or $(0.11) per share, compared with a $0.02 million loss (reported as $(0.00) per share) in Q2 2018. Management attributed most of the loss to a $1.8 million noncash quarterly fair-value adjustment on interest-rate swaps and said seasonal shipments were 15% below Q1.
- First-half results: Revenue of $161.6 million versus $124.1 million; net income of $3.7 million, or $0.12 per share, versus $2.1 million, or $0.07 per share. Other income rose to $5.3 million from $0.4 million, including a $2.9 million gain on oil-property royalty interests.
- Coal volumes and pricing: First-half tons sold increased to 3.937 million from 3.184 million; average realized price rose to $39.71 per ton from $38.85. Q2 tons sold were 1.807 million versus 1.477 million, at $39.35 versus $38.54 per ton.
- Operating margins: Coal operating cost averaged $29.84 per ton in Q2, up from $26.28; disclosed coal margin was $9.52 per ton versus $12.26. For the first half, cost averaged $29.51 per ton versus $26.84. The Carlisle mine restart contributed to higher costs.
- Cash flow and investment: First-half operating cash flow was $23.7 million, up from $15.9 million. Capital expenditures were $18.3 million, compared with $19.7 million. Cash, cash equivalents, and restricted cash totaled $11.0 million at June 30, including $4.6 million restricted for workers’ compensation claims.
- Liquidity and debt: The company reported $73 million of total liquidity, including $65 million of additional revolver capacity. Gross bank debt was $173.1 million ($166.8 million net of issuance costs), down from $188.5 million gross at year-end 2018. The facility matures May 2022; the June 30 borrowing rate was 5.91%. Leverage and debt-service coverage ratios of 2.20 and 2.25, respectively, were within covenant limits.
- Balance sheet: Current assets were $81.3 million and current liabilities $61.2 million. Total assets were $512.9 million and stockholders’ equity $257.1 million.
Material changes and outlook
- Management reported 21.7 million tons contracted from the remainder of 2019 through 2022, about 77% of its 28.1-million-ton target for that period, based on an 8-million-ton annualized pace. Contracted coverage was 100% for 2019, 88% for 2020, and 66% for each of 2021 and 2022; customer options may adjust some volumes.
- Remaining performance obligations included approximately $684 million under fixed-price contracts, with about 61% expected to be recognized through 2020, and an estimated $330 million under contracts with price reopeners, expected to begin being recognized in 2020.
- Management expected coal-mine operating costs of $29–$30 per ton for the remainder of 2019, plus $0.9 million in costs at idled Prosperity. It projected $14 million of remaining-2019 capital spending, primarily maintenance, and $7 million of SG&A. Management expected cash from operations for the rest of the year to fund maintenance capital expenditures, debt service, and dividends. These are management expectations, not guarantees.
- Management cited the Indiana Utility Regulatory Commission’s April 2019 rejection of Vectren’s proposed gas generation facility and approval of $95 million in upgrades to Culley Unit 1 as supportive of continued coal demand. An Indiana legislative committee was to report on state energy policy by December 2020.
Risks, contingencies, and unusual items
- Quarterly swap fair-value changes create noncash earnings volatility; the company says it intends to hold the swaps long term. Its debt is primarily asset-collateralized, has variable-rate exposure, and is subject to progressively tighter leverage limits.
- Coal demand and operations remain exposed to utility fuel choices, contract price reopeners, customer volume options, force majeure, production costs, and mine performance. Management reported no impairment for Bulldog Mine assets, whose carrying value was $15 million, but noted that changed estimates could result in future impairment.
- Reclamation obligations were $15.0 million; surety bonds totaled $26 million. The company said it had no material off-balance-sheet arrangements other than reclamation surety bonds.
- Hourglass reported first-half revenue of $0.1 million and a net loss of $0.4 million. The related $4 million royalty interest held by a director-associated Yorktown company is presented as redeemable noncontrolling interest.
- The company adopted the new lease standard on January 1, 2019, recording a $0.5 million right-of-use asset and lease liability at adoption; the June 30 operating lease liability was $0.9 million. The interim statements were reviewed, not audited; the reviewer reported no material modifications identified.
- After quarter-end, Hallador declared a $0.04-per-share dividend, payable August 16, 2019, to shareholders of record July 31.
Key facts for investors to verify
- Whether contracted volumes, price realizations, and customer options support the 8-million-ton annualized sales target.
- Whether mine costs—particularly at Carlisle—and maintenance capital spending remain within management’s outlook.
- How cash generation, debt repayments, borrowing capacity, and covenant headroom evolve ahead of the May 2022 facility maturity.
- The impact of swap mark-to-market changes and the assumptions underlying future interest costs.
- Whether coal demand in Indiana and other served markets remains consistent with contract assumptions, and whether any mine impairment or reclamation exposure changes.