Hallador Energy Company — Q2 2013 Form 10-Q
Business context and period: This unaudited quarterly report covers the three and six months ended June 30, 2013. Hallador primarily mines steam coal in Indiana through Sunrise Coal, and also holds 45% of Savoy Energy and 50% of Sunrise Energy. The interim financial statements received an accountant’s review, not an audit.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue and other income | $40.736 million | $35.175 million | $78.398 million | $69.131 million |
| Coal sales | $34.149 million | $32.487 million | $68.144 million | $62.107 million |
| Income before taxes | $11.256 million | $9.650 million | $18.177 million | $18.822 million |
| Net income | $8.165 million | $6.458 million | $13.633 million | $12.611 million |
| Diluted EPS | $0.28 | $0.23 | $0.47 | $0.44 |
| Cash from operations | Not separately provided for the quarter | $12.961 million | $13.700 million |
Q2 coal sales were 774,000 tons at an average $44.12 per ton, versus 743,000 tons at $43.72 a year earlier. Reported Q2 coal operating cost averaged $28.76 per ton, up from $25.32; coal margin was $15.36 per ton versus $18.40. For the first half, coal tons sold increased to 1.614 million from 1.444 million, while average price declined to $42.22 from $43.00 per ton and operating cost increased to $28.22 from $25.79 per ton.
Reported net income includes a $4.3 million noncash, nontaxable gain from extinguishing a liability recorded in 2006. Excluding that item, Q2 net income was $5.459 million, or $0.19 diluted per share, versus $6.458 million, or $0.23, in Q2 2012; first-half net income was $10.927 million, or $0.38 diluted per share, versus $12.611 million, or $0.44.
At June 30, cash was $14.836 million, down from $21.888 million at year-end 2012; current assets were $32.434 million and current liabilities $10.089 million. Bank debt was $11.4 million, unchanged from year-end. The company had a $165 million secured revolving facility and disclosed up to $129 million of additional borrowing capacity, subject to covenants and milestones. First-half coal-property capital expenditures were $14.778 million; investing cash use totaled $18.854 million. Financing cash use was $1.159 million, including dividends.
Material changes and operating developments
- First-half coal sales rose about 10%, reflecting higher volume, but higher mining costs and a lower average realized price weighed on coal margins.
- Management attributed elevated costs primarily to poor mining conditions in March and May, which it said had improved by June and July. The workforce increased to 355 from 324, partly due to the Ace mine.
- Hallador bought the Ohio River truck/barge terminal for $2.8 million in May. It expects no significant revenue from the asset until late 2014.
- Hallador adopted a regular quarterly dividend policy and paid $0.04 per share in May; another $0.04 dividend was authorized for August.
Outlook, risks and contingencies
- Management expected second-half 2013 coal sales of approximately 1.8 million tons at an average contracted price of $43.28 per ton. It expected mining costs of $25–$26 per ton for the rest of 2013 and margins of $17–$18 per ton; these are management expectations, not guarantees.
- For the rest of 2013, management expected an effective tax rate of 25%, with about half of that rate for current taxes.
- The contract backlog was 1.8 million tons for the second half of 2013 at $43.28 per ton, 2.9 million tons for 2014 at $43.15, and 1.2 million tons for 2015 at $41.40.
- Ace was expected to begin shipping in late August 2013, with planned annual capacity of up to 500,000 tons. Hallador anticipated another $2.5 million of Ace equipment and development spending in the remainder of 2013. Bulldog permitting was expected to be approved in Q1 2014; full-scale development depends on securing sales commitments.
- Risks identified by management include low-priced natural gas, environmental regulation, competition from new Illinois Basin mines, and a slow economy. Hallador also noted possible growth in demand for Illinois Basin coal as utilities install scrubbers and switch from other coal regions.
- Hallador had submitted $4.2 million of 2011 MSHA-related costs to customers for reimbursement; one customer had paid $2 million and discussions with the other were ongoing. Reimbursement revenue is recognized only after customer acceptance. The company self-insures approximately $110 million of underground mining equipment at historical cost.
- Coal stored under bill-and-hold arrangements generated $7.3 million of first-half revenue. At June 30, 550,000 tons were stored for two customers; the filing says all related receivables outstanding at quarter-end had been collected by July 31.
- Savoy’s results depend partly on drilling outcomes and oil prices; it had no oil-price hedges. Hallador stated it did not anticipate liquidity issues and had no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether coal costs and per-ton margins recover as management anticipated after the difficult mining conditions.
- Whether the $4.3 million liability release is kept distinct from recurring earnings when assessing performance.
- Whether Ace begins shipments as planned and achieves contracted volumes and expected production costs.
- Progress on MSHA reimbursement claims, Bulldog permitting, and the timing and returns of terminal investment.
- Available revolver capacity and compliance with the facility’s covenants and drawdown milestones.