Hallador Energy Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The interim financial statements are unaudited. Hallador’s primary business is underground thermal coal mining in Indiana; it also holds equity interests in Michigan oil and gas operations through Savoy Energy and Sunrise Energy. Unless indicated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $33.956 | $37.861; down 10.3% |
| Coal sales | $29.620 | $33.965; down 12.8% |
| Income before taxes | $9.172 | $13.570 |
| Net income | $6.153 | $8.278; down 25.7% |
| Basic / diluted EPS | $0.22 / $0.21 | $0.30 / $0.29 |
| Cash from operations | $9.579 | $13.866 |
| Capital expenditures for coal properties | $2.372 | $6.858 |
| Cash and cash equivalents | $40.581 at March 31 | $37.542 at December 31, 2011 |
| Bank debt | $15.000 | $17.500 at December 31, 2011 |
Net income margin was approximately 18.1% of revenue, compared with 21.9% a year earlier; pretax margin was approximately 27.0%, versus 35.8%. These are calculated from reported figures. Operating costs per ton rose to $26.30 from $22.92. The filing does not provide a clear consolidated operating-margin figure.
At quarter-end, current assets were $50.521 million and current liabilities were $32.860 million, a current ratio of approximately 1.54. Cash exceeded bank debt by $25.581 million. Total liabilities were $71.790 million and stockholders’ equity was $163.626 million. The $15 million bank term loan matures in December 2012; nothing was drawn on the $30 million revolving facility. The company said it expected to negotiate a replacement loan agreement before year-end.
Material changes and operating drivers
- Coal shipments were 701,000 tons, down from 816,000 tons; average realized price increased to $42.24 per ton from $41.62. Management attributed about $2.8 million of lower first-quarter coal sales to shipments running approximately 52,000 tons behind schedule.
- Management expected to make up the shipment shortfall by June or July and projected coal sales of approximately 2.2 million tons for the remainder of 2012. Contracted tons and average prices were 2.913 million at $42.74 for 2012, 2.900 million at $40.01 for 2013, and 1.100 million at $46.64 for 2014.
- Higher costs per ton reflected poor mining conditions in March, continuing into part of April, and reduced operating hours due to customer demand. Management said conditions were improving and expected costs of $25–$26 per ton for the balance of 2012.
- Equity income from Savoy rose to $1.818 million from $1.442 million; Savoy’s reported net income increased to $4.033 million from $3.185 million. Sunrise Energy equity income declined to $0.056 million from $0.425 million.
- Operating cash flow declined year over year, primarily due to lower coal sales. Cash increased by $3.039 million during the quarter after investing outflows of $4.017 million and debt payments of $2.500 million.
Outlook, risks, and unusual items
- Management reported no expected near-term liquidity issues, planned $8–$10 million of capital expenditures for the remainder of 2012, and expected to fund Carlisle mine expansion with operating cash and possible revolver draws.
- Coal-market risks included mild winter weather, high coal inventories, abundant low-priced natural gas and utility fuel switching, regulatory uncertainty, and possible coal-plant retirements. Two customers reported rising stockpiles. In April, Hallador agreed to store 250,000 tons for one customer for at least one year and up to two years; title-related risks and rewards transfer as coal is placed in storage, and Hallador receives a storage fee. Discussions with a second customer were ongoing.
- Other income included $2.336 million of MSHA-related customer reimbursements in Q1 2012, versus $1.900 million in Q1 2011. The 2012 amount included $2.3 million received for eligible 2010 costs; another customer agreed after quarter-end to reimburse approximately $2 million, which management said would be recorded in Q2. The 2011 reimbursement related to costs from 2008 and 2009.
- The term loan’s stated rate was one-month LIBOR plus 2.50%; after swaps, fees, and financing-cost amortization, the effective rate was approximately 6.6% in both comparison periods. One interest-rate swap expired in December 2011 and the remaining swap was due to expire in July 2012. Management estimated a roughly 3% stated rate for the second half of 2012 if rates remained stable, excluding fees and amortization.
- Management expected an effective tax rate of 33%–35% for the rest of 2012, with about 60% of the rate representing currently due taxes. April pay increases and 143,000 restricted stock units granted to employees were expected to add about $850,000 to costs for the remainder of 2012.
- Savoy’s results depend on drilling outcomes, exploration spending, and oil prices; management noted Savoy had no oil-price hedges and its first-quarter results might not indicate full-year results. Sunrise Energy development was pending higher natural-gas prices. The Allerton reserve had an estimated 32.3 million recoverable tons; permitting was underway, with a formal filing anticipated in Q2 2012 and a permit expected in the first half of 2013 if the process proceeded smoothly. Full-scale development was conditional on market demand and a sales commitment.
- Hallador self-insured approximately $94 million, at historical cost, of underground mining equipment. The filing states that commitments and contingencies exist but provides no clear quantified aggregate exposure in the supplied text. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Confirm whether the delayed 52,000 tons were shipped by the expected June/July timeframe and whether the remaining 2012 sales outlook was achieved.
- Check collection and recognition of the additional approximately $2 million MSHA reimbursement, and distinguish these reimbursements from recurring operating performance.
- Review the refinancing completed before the December 2012 term-loan maturity, including facility size, covenants, rates, and collateral.
- Track whether customer coal storage expanded beyond the initial 250,000-ton agreement and assess related delivery, storage-fee, and inventory implications.
- Monitor mining costs, operating conditions, and planned capital spending, as well as Allerton permitting and the conditions required before mine development.
- Review the complete filing exhibits for mine-safety violations and the full notes to the 2011 Form 10-K for additional risk and contingency detail.