Hallador Energy Company — Q2 2012 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2012. Hallador primarily mines thermal coal underground in Indiana through Sunrise Coal. It also holds equity interests in Michigan oil and gas business Savoy Energy (45%) and Sunrise Energy (50%). Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total reported revenue | $35.2 | $33.7 | $69.1 | $71.5 |
| Coal sales | $32.5 | $32.1 | $62.1 | $66.1 |
| Net income | $6.5 | $6.5 | $12.6 | $14.7 |
| Diluted EPS | $0.23 | $0.23 | $0.44 | $0.51 |
| Cash from operating activities | Not provided quarterly | Not provided quarterly | $13.7 | $27.9 |
Total reported revenue includes coal sales, equity income or loss from the two investees, and other income. Net margin, calculated as net income divided by total reported revenue, was approximately 18.4% in Q2 2012 versus 19.2% in Q2 2011, and 18.2% for the first half versus 20.6% in the prior-year period.
- First-half coal sales volume was 1.444 million tons at an average $43 per ton, compared with 1.581 million tons at $41.81 per ton in 2011. Second-quarter volume was 743,000 tons at $43.72 per ton versus 765,000 tons at $42 per ton.
- Operating costs averaged $25.79 per ton for the first half, up from $23.15; second-quarter costs were $25.32 per ton versus $23.40. Management attributed the increase mainly to poor mining conditions in March and part of April and reduced operating hours tied to customer demand.
- At June 30, cash was $36.3 million, current assets $50.9 million, and current liabilities $22.4 million. Bank debt was $12.5 million, with no revolver borrowings. The company paid $4.1 million in dividends during the first half.
- Six-month investing cash use was $5.9 million, including $4.2 million of coal-property capital expenditures and a $0.5 million Sunrise Energy investment. Financing cash use was $9.1 million, including $5.0 million of bank repayments and $4.1 million of dividends. Cash declined $1.3 million during the period.
Changes, outlook, and material items
- First-half total reported revenue declined 3.3% and net income declined 14.4% year over year, despite higher average coal prices; coal volume was lower. Second-quarter total revenue rose about 4.5%, while net income was essentially unchanged.
- Operating cash flow fell to $13.7 million from $27.9 million. Management cited lower coal sales, income-tax payments, higher receivables, and increased coal inventory.
- Other income included $4.2 million of MSHA-related customer reimbursements in the first half of 2012, compared with $1.9 million in the first half of 2011. The 2012 amount included $2.3 million recorded in Q1 and $1.9 million in Q2; the company expects to submit its 2011 reimbursable costs before year-end.
- Hallador recognized approximately $3 million of revenue under customer coal-storage (“bill and hold”) agreements after storing 73,000 tons for one customer. The filing says ownership risks and rewards passed on placement in segregated storage and that all June 30 receivables had been paid by July 31.
- Management expected the first-half shipment shortfall of about 42,000 tons (approximately $2.3 million) to be made up in the second half. It forecast second-half coal sales of about 1.45 million tons at an average $43 per ton and costs of $25–$27 per ton. The remaining-2012 capital expenditure budget was $8–$9 million.
- The company’s $12.5 million term loan matures in December 2012. Management expected to negotiate a replacement credit agreement before year-end. The loan bears interest at one-month LIBOR plus 2.50% (2.75% at the reported LIBOR rate) and is subject to customary covenants and distribution restrictions.
- On July 31, the board declared a second special dividend of $0.50 per share, payable August 17, with an estimated cash cost of $14.6 million. This was a subsequent event, not a June 30 liability.
- Management described a challenging thermal-coal market, citing mild weather, high coal inventories, low natural-gas prices and fuel switching, as well as regulatory uncertainty and possible utility coal-plant retirements. It also noted that Savoy’s results depend on drilling outcomes, exploration spending, and oil prices; Savoy had no oil-price hedges.
- The Bulldog (Allerton) reserve in Illinois had 32.3 million estimated recoverable tons, including 16.3 million proven and 16.0 million probable. Permitting had been filed in June 2012; a permit could be received as early as the first half of 2013, but full-scale development is contingent on proven market demand. In July, Hallador decided to substantially curtail its oil-and-gas prospect leasing activities.
Key facts for investors to verify
- Progress and terms of refinancing the December 2012-maturity bank debt, including covenant and distribution capacity.
- Whether second-half shipment expectations and per-ton cost guidance were achieved, particularly given customer demand and mining conditions.
- The sustainability and collectability of bill-and-hold revenue and MSHA reimbursements, and how much of reported revenue depends on such items.
- Cash and liquidity after the $14.6 million special dividend, planned capital spending, and any mine-development or expansion commitments.
- Coal-market conditions, contracted sales volumes and prices, and the timing, permitting, market-demand, and capital requirements for Bulldog development.