Primary Energy Recycling Corp. investors aren't perturbed by the company's recent announcement it is delaying its third-quarter earnings report and deferring for a second time its September dividend declaration.
"The market gets it and a lot of what is going on at Primary is beyond their control," said analyst Robert B. Winslow, of Toronto-based Wellington Inc.
Primary Energy, which has a 50 percent interest in Harbor Coal, located in East Chicago, is a Canadian company and most of its stockholders are Canadian.
The company said it's uncertain about its third-quarter results because of the impact of any inventory adjustment affecting Harbor Coal.
It is not clear if Primary will remain in compliance with its senior debt and indentured note covenants, but company officials maintain any problems are not cash related.
It's possible that October's dividend, payable in November, also may be late, according to the company statement.
Chief Financial Officer V. Michael Alverson said in a telephone interview the company's earnings are tied to the inventory results because of a shared savings agreement with Luxembourg-based steel producer and distributor ArcelorMittal, one of Primary Energy's largest customers. ArcelorMittal has three plants in Northwest Indiana.
"We provide pulverized coal to Mittal and that coal allows them to save some commodities, primarily coke, maybe natural gas or oil," Alverson said. "We make calculations on how much coke we saved them, for example. Then they go through and periodically do a survey to see how much coke they have on the ground and they compare that to the accounting records and we adjust revenue accordingly."
Therefore the customer's inventory, not yet complete, affects Primary's revenue calculation and thus its earnings.
"If there is noncompliance in the area, we would be precluded from paying distributions until we were compliant with the covenant or there is a waiver obtained," John Prunkl, president of Primary Energy Ventures and a member of the PERC board, said during a September conference call with analysts.
"To be perfectly clear, any noncompliance is a technical issue, not a cash liquidity issue," he added. "We have $10 million cash on hand and if you analyze the 80-cent distribution, which we currently have, and assume minimal Harbor Coal contributions to the company, we still have significant positive cash flow."
