PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS  

Hallador Energy Company 

Condensed Consolidated Balance Sheets 

(in thousands, except per share data) 

(unaudited) 

    

See accompanying notes to the condensed consolidated financial statements.

 

 

Hallador Energy Company 

Condensed Consolidated Statements of Operations

(in thousands, except per share data) 

(unaudited) 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

Hallador Energy Company 

Condensed Consolidated Statements of Cash Flows 

(in thousands) 

(unaudited)

 

See accompanying notes to the condensed consolidated financial statements.

 Hallador Energy Company 

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands) 

(unaudited)

 

  

 

See accompanying notes to the condensed consolidated financial statements.

 

 

Hallador Energy Company

Notes to Condensed Consolidated Financial Statements

(unaudited) 

 

(1)	GENERAL BUSINESS

 

The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements included herein have been prepared pursuant to the Securities and Exchange Commission's (the "SEC") rules and regulations; accordingly, certain information and footnote disclosures normally included in generally accepted accounting principles ("GAAP") financial statements have been condensed or omitted.

 

The results of operations and cash flows for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2023.

 

Our organization and business, the accounting policies we follow, and other information are contained in the notes to our consolidated financial statements filed as part of our 2022 Annual Report on Form 10-K. This quarterly report should be read in conjunction with such Annual Report on Form 10-K.

 

The condensed consolidated financial statements include the accounts of Hallador Energy Company (hereinafter known as “we, us, or our”) and its wholly owned subsidiaries Sunrise Coal, LLC ("Sunrise"), Hallador Power Company, LLC ("Hallador Power"), as well as Sunrise and Hallador Power's wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 

 

As the result of Hallador Power’s acquisition of the Merom one gigawatt power plant in Sullivan County, Indiana (the “Merom Power Plant”) from Hoosier Energy Rural Electric Cooperative, Inc. (“Hoosier”) on  October 21, 2022 (the “Merom Acquisition”), as further described in Note 14, beginning in the fourth quarter of 2022 we began to strategically view and manage our operations through two reportable segments:  Coal Operations and Electric Operations.  The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other and Eliminations" and primarily are comprised of unallocated corporate costs and activities, the elimination of coal sales from coal operations to electric operations, a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana, which we account for using the equity method, and our wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.  Prior periods have been recast to reflect Corporate and Other and Eliminations apart from Coal Operations, which previously were aggregated into a single reportable segment.

 

The Coal Operations reportable segment includes current operating mining complexes Oaktown 1 and 2 underground mines, Prosperity surface mine, Freelandville surface mine, and Carlisle wash plant.

 

The Electric Operations reportable segment includes electric power generation facilities of the Merom Power Plant.

 

(2)	LONG-LIVED ASSET IMPAIRMENTS

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable.  For the three and nine-month periods ended September 30, 2023 and for the three and nine-month periods ended September 30, 2022, no impairment charges were recorded for long-lived assets.

 

(3)

INVENTORY

 

Inventory is valued at a lower of average cost or net realizable value (NRV).  As of September 30, 2023, and December 31, 2022, coal inventory includes NRV adjustments of $1.1 million and $4.9 million, respectively.

 

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(4)

BANK DEBT

 

On March 13, 2023, we executed an amendment to our credit agreement with PNC Bank, National Association (in its capacity as administrative agent, "PNC"), administrative agent for our lenders under our credit agreement, which was accounted for as a debt modification. The primary purpose of the amendment was to convert $35 million of the outstanding balance on the revolver into a new term loan with a maturity of March 31, 2024, and extend the maturity date of the revolver to May 31, 2024. The amendment reduced the total capacity under the revolver to $85 million from $120 million, waived the maximum annual capital expenditure covenant for 2022, and increased the covenant for 2023 to $75 million.

 

On August 2, 2023, we executed an additional amendment to our credit agreement with PNC, which was accounted for as a debt extinguishment. The primary purpose of the amendment was to convert $65 million of the outstanding funded debt into a new term loan with a maturity of March 31, 2026, and enter into a revolver of $75 million with a maturity of July 31, 2026. The amendment increased the maximum annual capital expenditure limit to $100 million.

 

Bank debt was reduced by $23.5 million during the nine months ended September 30, 2023.  Under the terms of the August 2, 2023 amendment, bank debt is comprised of term debt ($61.8 million as of September 30, 2023) and a $75 million revolver ($0.0 million borrowed as of September 30, 2023).  The term debt requires payments of $3.3 million each quarter, which commenced in September 2023, increasing to $6.5 million in March 2024 through maturity. Our debt is recorded at amortized cost, which approximates fair value due to the variable interest rates in the agreement and is collateralized primarily by our assets.

 

Liquidity

 

As of September 30, 2023, we had an additional borrowing capacity of $63.8 million and total liquidity of $66.4 million.  Our additional borrowing capacity is net of $11.2 million in outstanding letters of credit as of September 30, 2023, that were required to maintain surety bonds.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

 

Fees

 

Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $2.5 million as of December 31, 2022. Additional costs incurred with the March 13, 2023 and August 2, 2023 amendments totaled $1.6 million and $4.3 million, respectively.  During the three and nine months ended September 30, 2022, we recognized a loss on extinguishment of debt of $1.5 million for the write-off of unamortized loan fees related to the August 2, 2023 amendment to our credit agreement, which was accounted for as a debt extinguishment. The remaining costs were deferred and are being amortized over the term of the loan. Unamortized costs as of September 30, 2023, and December 31, 2022, were $4.1 million and $2.5 million, respectively. 

 

Bank debt, less debt issuance costs, is presented below (in thousands):

		September 30,				December 31,
		2023				2022
Current bank debt		$	22,750			$	35,500
Less unamortized debt issuance cost			(1,562	)			(2,469	)
Net current portion		$	21,188			$	33,031
Long-term bank debt		$	39,000			$	49,713
Less unamortized debt issuance cost			(2,518	)			—
Net long-term portion		$	36,482			$	49,713
Total bank debt		$	61,750			$	85,213
Less total unamortized debt issuance cost			(4,080	)			(2,469	)
Net bank debt		$	57,670			$	82,744

 

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Covenants

 

The credit facility includes a Maximum Leverage Ratio (consolidated funded debt/trailing twelve months adjusted EBITDA), calculated as of the end of each fiscal quarter for the trailing twelve months, not to exceed the amounts below:

 

Fiscal Periods Ending		Ratio
September 30, 2023, and each fiscal quarter thereafter		2.25 to 1.00

 

As of September 30, 2023, our Leverage Ratio of 0.71 was in compliance with the 2.25 covenant defined in the credit agreement.

 

The credit facility requires a Minimum Debt Service Coverage Ratio (consolidated adjusted EBITDA/annual debt service) calculated as of the end of each fiscal quarter for the trailing twelve months of 1.25 to 1.00 through the credit facility's maturity.

 As of September 30, 2023, our Debt Service Coverage Ratio of 3.75 was in compliance with the requirements of the credit agreement.

 

As of September 30, 2023, we were in compliance with all other covenants defined in the credit agreement.

 

Interest Rate

 

The interest rate on the facility ranges from SOFR plus 4.00% to SOFR plus 5.00%, depending on our Leverage Ratio.  As of  September 30, 2023, we are paying SOFR plus 4.25% on the outstanding bank debt.

 

(5)	ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (in thousands)

 

		September 30,				December 31,
		2023				2022
Accounts payable		$	52,491			$	62,306
Accrued property taxes			3,008				1,917
Accrued payroll			7,373				5,933
Workers' compensation reserve			4,130				3,440
Group health insurance			2,300				2,250
Asset retirement obligation - current portion			3,580				3,580
Other			3,720				3,546
Total accounts payable and accrued liabilities		$	76,602			$	82,972

 

(6)

REVENUE

 

Revenue from Contracts with Customers

 

We account for a contract with a customer when the parties have approved the contract and are committed to performing their respective obligations, the rights of each party are identified, payment terms are identified, the contract has commercial substance, and it is probable substantially all the consideration will be collected. We recognize revenue when we satisfy a performance obligation by transferring control of a good or service to a customer.

 

Coal operations

 

Our coal revenue is derived from sales to customers of coal produced at our facilities. Our customers typically purchase coal directly from our mine sites or our rail facility in Princeton, Indiana, where the sale occurs and where title, risk of loss, and control pass to the customer at that point. Our customers arrange for and bear the costs of transporting their coal from our mines to their plants or other specified discharge points. Our customers are typically domestic utility companies. Our coal sales agreements with our customers are fixed-priced, fixed-volume supply contracts or include a pre-determined escalation in price for each year. Price re-opener and index provisions  may allow either party to commence a renegotiation of the contract price at a pre-determined time. Price re-opener provisions  may automatically set a new price based on the prevailing market price or, in some instances, require us to negotiate a new price, sometimes within specified ranges of prices. The terms of our coal sales agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary by customer.

 

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Coal sales agreements will typically contain coal quality specifications. With coal quality specifications in place, the raw coal sold by us to the customer at the delivery point must be substantially free of magnetic material and other foreign material impurities and crushed to a maximum size as set forth in the respective coal sales agreement. Price adjustments are made and billed in the month the coal sale was recognized based on quality standards that are specified in the coal sales agreement, such as Btu factor, moisture, ash, and sulfur content, and can result in either increases or decreases in the value of the coal shipped.

 

Electric operations

 

The Company concluded that for a Power Purchase Agreement (“PPA”) that is not determined to be a lease or derivative, the definition of a contract and the criteria in ASC 606, Revenue from Contracts with Customers ("ASC 606"), is met at the time a PPA is executed by the parties, as this is the point at which enforceable rights and obligations are established. Accordingly, the Company concluded that a PPA that is not determined to be a lease or derivative constitutes a valid contract under ASC 606.

 

The Company will recognize revenue daily, based on an output method of capacity made available as part of any stand-ready obligations for contract capacity performance obligations and daily, based on an output method of MWh of electricity delivered.

 

For the delivered energy performance obligation in the PPA with Hoosier, the Company will recognize revenue daily for actual delivered electricity plus the amortization of the contract liability as a result of the Asset Purchase Agreement with Hoosier.

 

Disaggregation of Revenue

 

Revenue is disaggregated by primary geographic markets for our coal operations and by revenue source for our electric operations, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors.

 

Coal operations

 

51% and 52% of our coal revenue for the three and nine months ended September 30, 2023, was sold to customers in the State of Indiana, with the remainder sold to customers in Florida, North Carolina, Georgia, and Alabama.  70% and 79% of our coal revenue for the three and nine months ended September 30, 2022, respectively, was sold to customers in the State of Indiana, with the remainder sold to customers in Florida, Georgia, and North Carolina.

 

Electric operations

 

100% of our electric revenue for the three and nine months ended September 30, 2023, was sold to Hoosier or the Midcontinent Independent System Operator ("MISO") wholesale market.  MISO is the independent system operator managing the flow of high-voltage electricity across 15 U.S. states and the Canadian province of Manitoba.  100% of our electric revenue through May 31, 2023, was sold to Hoosier in the state of Indiana.  32% of our electric revenue for the months of June 2023 to September 2023 was sold to Hoosier.  For the three and nine months ended September 30, 2023, revenue from delivered energy was $54.4 million and $184.7 million, respectively.  For the three and nine months ended September 30, 2023, revenue from capacity payments was $13.0 million and $46.1 million, respectively.

 

Performance Obligations

 

Coal operations

 

A performance obligation is a promise in a contract with a customer to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and, therefore, determine when and how revenue is recognized. In most of our coal contracts, the customer contracts with us to provide coal that meets certain quality criteria. We consider each ton of coal a separate performance obligation and allocate the transaction price based on the base price per the contract, increased or decreased, for quality adjustments.

 

We recognize revenue at a point in time as the customer does not have control over the asset during the contract's fulfillment. For substantially all of our customers, this is supported by the fact that title and risk of loss transfer to the customer upon loading of the truck or railcar at the mine. This is also the point at which physical possession of the coal transfers to the customer, as well as the right to receive substantially all benefits and the risk of loss in ownership of the coal.  

 

We have remaining coal sales performance obligations relating to fixed-priced contracts of approximately $426.1 million, which represent the average fixed prices on our committed contracts as of September 30, 2023. Approximately 31% of this relates to committed obligations in 2023, with the remainder committed in 2024 through 2027.

 

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We have remaining performance obligations relating to 3.0 million tons of unpriced coal sales contracts of approximately $155 million, which represents our estimate of the expected price on committed contracts as of September 30, 2023. We expect to recognize all of this coal sales revenue beginning in 2025.

 

The coal tons used to determine the remaining performance obligations are subject to adjustment in instances of force majeure and exercise of customer options to either take additional tons or reduce tonnage if such an option exists in the customer contract.

 

Electric operations

 

The Company concluded that each megawatt-hour ("MWh") of delivered energy is capable of being distinct as a customer could benefit from each on its own by using/consuming it as a part of its operations.  The Company also concluded that the stand-ready obligation to be available to provide electricity to Hoosier is capable of being distinct as each unit of capacity provides an economic benefit to the holder and could be sold by the customer.

 

We have remaining delivered energy obligations through 2028 totaling $312 million as of September 30, 2023.

 

In addition to delivered energy, Hallador provides stand-ready obligations to provide electricity, also known as contract capacity.  We have remaining capacity obligations through 2028 totaling $204 million as of September 30, 2023.

 

Contract Balances

 

Under ASC 606, the timing of when a performance obligation is satisfied can affect the presentation of accounts receivable, contract assets, and contract liabilities. The main distinction between accounts receivable and contract assets is whether consideration is conditional on something other than the passage of time. A receivable is an entity’s right to consideration that is unconditional.

 

Under the typical payment terms of our contracts with customers, the customer pays us a base price for the coal, increased or decreased for quality adjustments, electricity, or capacity. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our consolidated balance sheets. As of  January 1, 2022, accounts receivable for coal sales billed to customers was $12.8 million. We do not currently have any contracts in place where we would transfer coal, electricity, or capacity in advance of knowing the final price, and thus do not have any contract assets recorded. Contract liabilities also arise when consideration is received in advance of performance. As of January 1, 2023, deferred revenue for payments related to coal operations in advance of performance was $8.9 million, and deferred revenue for payments related to electric operations in advance of performance was $26.6 million.  Additional payments for electric operations in advance of performance for the three and nine months ended September 30, 2023 were $0.0 million and $43.8 million, respectively.  For the three and nine months ended  September 30, 2023, we recognized revenue from coal operations of $2.5 million and $7.5 million, respectively, as tons of outstanding coal delivery obligations were fulfilled, and we recognized revenue from electric operations of $12.9 million and $46.0 million, respectively, as outstanding capacity obligations were fulfilled.  Pursuant to the terms of the underlying contracts, performance obligations representing $1.3 million and $8.3 million will be satisfied and recognized as revenue related to our coal operations and electric operations, respectively, during the three-month period ending December 31, 2023.

 

(7)	INCOME TAXES

 

For the nine months ended September 30, 2023, and 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items, and statutory rates in states in which we operate.  The effective tax rate for the nine months ended September 30, 2023, and 2022 was ~13% and ~ (8%), respectively. Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion in excess of tax basis. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.

 

(8)	STOCK COMPENSATION PLANS

 

Non-vested grants as of December 31, 2022			1,056,937
Awarded - weighted average share price on award date was $9.38			267,000
Vested - weighted average share price on vested date was $9.18			(285,221	)
Forfeited			(10,000	)
Non-vested grants as of September 30, 2023			1,028,716

 

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For the three and nine months ended September 30, 2023, our stock compensation was $0.8 million and $2.8 million, respectively. For the three and nine months ended September 30, 2022, our stock compensation was $0.1 million and $0.2 million, respectively.  

 

Non-vested RSU grants will vest as follows:

 

Vesting Year		RSUs Vesting
2023			189,000
2024			300,608
2025			539,108
			1,028,716

 

The outstanding RSUs have a value of $14.8 million based on the September 30, 2023 closing stock price of $14.42.

 

As of September 30, 2023, unrecognized stock compensation expense is $4.7 million, and we had 395,657 RSUs available for future issuance.  RSUs are not allocated earnings and losses as they are considered non-participating securities.

 

(9)

LEASES

 

The following table (in thousands) relates to our operating leases:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Operating lease information:
Operating cash outflows from operating leases		$	52			$	54			$	156			$	164
Weighted average remaining lease term in years			8.75				1.51				8.75				1.51
Weighted average discount rate			6.0	%			6.0	%			6.0	%			6.0	%

 

Future minimum lease payments under non-cancellable leases as of September 30, 2023, were as follows:

	Amount
	(In thousands)
2023	$	85
2024		89
2025		121
2026		124
2027		128
After 2027		516
Total minimum lease payments	$	1,063
Less imputed interest		(323	)
Total operating lease liability	$	740
As reflected within the following balance sheet line items:
Accounts payable and accrued liabilities	$	85
Other long-term liabilities		655
Total operating lease liability	$	740

 

As of  September 30, 2023 and December 31, 2022, we had approximately $0.7 million and $0.2 million, respectively, of right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.

 

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(10)	SELF-INSURANCE

 

We self-insure our underground mining equipment. Such equipment is allocated among seven mining units dispersed over ten miles. The historical cost of such equipment was approximately $299 million and $280 million as of September 30, 2023, and December 31, 2022, respectively.

 

Restricted cash of $4.1 million and $3.4 million as of September 30, 2023, and December 31, 2022, respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments and cash collateral to provide power in the MISO grid.

 

(11)	FAIR VALUE MEASUREMENTS

 

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. We have no Level 1 instruments.

                                                                                 

Level 2: Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. We have no Level 2 instruments.

 

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). We have no Level 3 instruments.

 

(12)	EQUITY METHOD INVESTMENTS

 

We own a 50% interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment and generates revenue from gas sales. Sunrise Energy plans to continue developing and exploring for oil, gas, and coal-bed methane gas reserves on or near our underground coal reserves. The carrying value of the investment included in our condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, was $3.0 million and $4.0 million, respectively.

 

(13)	CONVERTIBLE NOTES

 

On May 2, 2022, and May 20, 2022, we issued senior unsecured convertible notes (the "Notes") to five parties, in the aggregate principal amount of $10 million, with $9 million going to related parties affiliated with independent members of our board of directors and the remainder to a non-affiliated party. The Notes were scheduled to mature on December 29, 2028, and accrue interest at 8% per annum, with interest payable on the date of maturity. Pursuant to the terms of the Notes, the holders of the Notes were entitled to convert the entire principal balance and all accrued and unpaid interest then outstanding during the period beginning June 1, 2022, and ending on May 31, 2027, into shares of the Company Common Stock at a conversion price the greater of (i)$3.33 and (ii) the 30-day trailing volume-weighted average sales price for the Common Stock on the Nasdaq Capital Market ending on and including the date on which the Note was converted.

 

In June 2022, the four holders of the $9 million related party Notes converted them into 1,965,841 shares of common stock of the Company, and the one holder of the $1 million Note converted it into 231,697 shares of common stock pursuant to the terms of the Notes and their related agreements.

 

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On July 29, 2022, we issued $5 million of a senior unsecured convertible note to a related party affiliated with an independent member of our board of directors.  The note carries an interest rate of 8% per annum with a maturity date of December 29, 2028.  For the period August 18, 2022, through August 17, 2024, the holder has the option to convert the notes into shares of the Company's common stock at a conversion price of $6.254.  Beginning August 18, 2025, the Company may elect to redeem the note, and the holder shall be obligated to surrender the note at 100% of the outstanding principal balance, together with any accrued unpaid interest.  Upon receipt of the redemption notice from the Company, the holder may elect to convert the principal balance and accrued interest into the Company's common stock.

 

On August 8, 2022, we issued $4 million of senior unsecured convertible notes to related parties affiliated with independent members of our board of directors.  The notes carry an interest rate of 8% per annum with a maturity date of December 29, 2028.  For the period August 18, 2022, through August 17, 2024, the holder has the option to convert the notes into shares of the Company's common stock at a conversion price of $6.254.  Beginning August 8, 2025, the Company may elect to redeem the note, and the holder shall be obligated to surrender the note at 100% of the outstanding principal balance together with any accrued unpaid interest.  Upon receipt of the redemption notice from the Company, the holder may elect to convert the principal balance and accrued interest into the Company's common stock.

On August 12, 2022, we issued a $10 million senior unsecured convertible note to an unrelated party.  The note carries an interest rate of 8% per annum with a maturity date of December 31, 2026.  For the period August 18, 2022, through the maturity date, the holder has the option to convert the notes into shares of the Company's common stock at a conversion price of $6.15.  Beginning August 12, 2025, the Company may elect to redeem the note, and the holder shall be obligated to surrender the note at 100% of the outstanding principal balance together with any accrued unpaid interest.  Upon receipt of the redemption notice from the Company, the holder may elect to convert the principal balance and accrued interest into the Company's common stock.

 

The funds received from the notes described above were used to provide additional working capital to the Company.  Each Conversion Share will consist of one share of our common stock. The conversion price and number of shares of the Company’s Common Stock issuable upon conversion of the notes are subject to adjustment from time to time for any subdivision or consolidation of the Company’s shares and other standard dilutive events.

  

(14)	MEROM ACQUISITION

(17)	SUBSEQUENT EVENTS

 

On October 2, 2023, the Merom Power Plant had a transformer failure causing one unit to be offline for the month of October.  The failed transformer has since been replaced.  However, the unit will not return to service before entering its previously planned MISO scheduled outage for routine maintenance work.  The unit is expected to return to service in the second half of December and is not expected to impact our ability to perform under our power & capacity commitments.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2022 ANNUAL REPORT ON FORM 10-K AND SHOULD BE READ IN CONJUNCTION THEREWITH.

 

Our condensed consolidated financial statements should also be read in conjunction with this discussion. The following analysis includes a discussion of metrics on a per-ton basis derived from the condensed consolidated financial statements, which are considered non-GAAP measurements.  These metrics are significant factors in assessing our operating results and profitability.

 

Net income of $16.1 million for the quarter helped add to net income of $55.0 million for the first nine months of the year.  Cash flow from operations of $79.5 million for the first nine months has been reinvested through $48.7 million of capital expenditures in our mines and power plant to improve efficiency and reliability.  In the first nine months of 2023, we have utilized $30.5 million in financing activities, including $23.5 million to repay debt. Improved earnings and debt repayment have improved our balance sheet by reducing our debt to adjusted EBITDA multiple to 0.71X and increasing our liquidity to $66.4 million. Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

 

On August 2, 2023, we successfully amended our credit facility with PNC Bank, which we accounted for as a debt extinguishment.  This amendment is important as it extends the maturity of our credit into 2026.

 

During the third quarter of 2023, high coal sales prices coupled with large coal shipment volumes led to significant coal revenue growth.  Our well-contracted sales book supported our revenue growth despite operational challenges increasing our cost per ton during the quarter.  We chose to relocate 57% of our coal units of production during the third quarter and into October to obtain better geologic conditions.  This led to higher costs and decreased production during this timeframe but is resulting in overall production improvements following the moves.   

 

On the power side of the business, intercompany coal sales from our coal division to our power plant division increased average variable costs per MWh of electric operations to $40.03 per MWh, an increase of $9.98 per MWh over the prior quarter on a segment basis.  We set the price of the coal we sell to ourselves based on third-party market indicators that we review from time to time. Costs per MWh were $23.49 per MWh on a consolidated basis.

 

During the third quarter and subsequently, our power division was successful in securing $325 million of energy and capacity sales for the years 2024 - 2028.  Latest sales include approximately 3.3 million MWh of energy at $56 per MWh, totaling $186 million, delivered over energy years 2026, 2027, and 2028. An energy year is defined as June 1st through May 31st.  Additionally, we sold $139 million in capacity sales for energy years 2024-2028 at an average price of approximately $220 per MWd during the quarter and subsequently.

 

 

OVERVIEW

 

I.

Q3 2023 Net Income of $16.1 million.

 

a.

2.1 million tons of coal were shipped at an average sales price of $65.43 on a segment basis during the quarter, with approximately 0.5 million tons of that being shipped to the Merom Power Plant for $37.0 million.  The average sales price of coal was $62.41 per ton on a consolidated basis.

 

i.

The sales price for remaining tons to ship for 2023 is expected to average $54.3 per ton on a consolidated basis (not including coal shipped to Merom).

 

b.

In Q3 2023, Hallador's coal operating costs were $46.54 per ton on a segment basis, which represents a $5.02 per ton increase from Q2 2023.  Coal operating costs were $48.92 per ton on a consolidated basis.

  

c.

We recorded coal margins for the quarter at $18.89 per ton on a segment basis.  This is a decline of $5.03 per ton from Q2 2023 margins, due to higher costs resulting from relocation of 57% of our coal production units to take advantage of improved geologic conditions.  Margins for the quarter were $13.49 on a consolidated basis.

 

II.

Q3 2023 Activity

 

a.

Cash Flow & Debt

 

i.

During Q3 2023, our operating cash flow was $35.3 million, and we decreased our bank debt by $12.5 million.

 

ii.

As of September 30, 2023, our bank debt was $61.8 million, liquidity was $66.4 million, and our leverage ratio came in at 0.71X, within our covenant of 2.25X.

 

b.

Coal & Power

 

i.

Coal production was 1.6 million tons for the quarter, 0.1 million less than Q2 2023.  Approximately 0.5 million tons of that production were shipped to the Merom Power Plant in Q2 2023.

 

ii.

Power production was 1.3 million MWh for the quarter.

 

 

III.

Solid Forward Sales Position - Segment Basis, Before Intercompany Eliminations

  

		2023 (Q4)				2024				2025				2026				2027				2028				Total
Coal
Priced tons (in millions)			2.4				3.4				1.3				0.5				0.5				-				8.1
Average price per ton		$	54.30			$	51.10			$	50.80			$	56.00			$	56.00			$	-
Contracted coal revenue (in millions)		$	130.32			$	173.74			$	66.04			$	28.00			$	28.00			$	-			$	426.10
% Priced			100	%			49	%			19	%			7	%			7	%			0	%
Committed & unpriced tons (in millions) - 3rd party			-				-				1.0				1.0				1.0				-				3.0
Committed & unpriced tons (in millions) - Merom			-				2.9				2.9				2.9				2.9				2.9				14.5
Total contracted tons (in millions)			2.4				6.3				5.2				4.4				4.4				2.9				25.6
% Coal Sold*			100	%			90	%			74	%			63	%			63	%			41	%
Average cost per ton of coal was $42.57 for the nine months ending September 30, 2023 ($43.25 after eliminating for intercompany sales to Merom)
Coal Capex Budget (in millions)		$	10.00
Power
Energy
Contracted MWh (in millions)			0.4				1.6				1.7				1.6				1.3				0.4				7.0
Contracted price per MWh		$	34.00			$	34.00			$	34.00			$	56.00			$	56.00			$	56.00
Contracted revenue (in millions)		$	13.60			$	54.40			$	57.80			$	89.60			$	72.80			$	24.19			$	312.39
% Energy Sold*			27	%			27	%			28	%			27	%			22	%			7	%
Capacity
Average monthly contracted capacity			828				670				450				508				550				354
% Capacity Contracted**			100	%			78	%			52	%			59	%			64	%			41	%
Average contracted capacity price per MWd		$	146			$	178			$	200			$	226			$	225			$	224
Contracted capacity revenue (in millions)		$	11.00			$	43.65			$	32.92			$	41.89			$	45.26			$	28.88			$	203.60
Total Energy & Capacity Revenue
Contracted Power Revenue (in millions)		$	24.60			$	98.05			$	90.72			$	131.49			$	118.06			$	53.07			$	515.99
Contracted Power Revenue per MWh*		$	41.33			$	43.34			$	44.49			$	67.82			$	67.79			$	67.69
2023 average cost per MWh was $33.43 for the nine months ending September 30, 2023 ($27.45 assuming intercompany sales of coal were sold at cost)
Power Capex Budget (in millions)		$	20.00
TOTAL CONTRACTED REVENUE (IN MILLIONS)		$	154.92			$	271.79			$	156.76			$	159.49			$	146.06			$	53.07			$	942.09

 

*Based on coal production of 7.0 million tons and 6.0 million MWh annually.

 

**Based on a MISO accreditation of 860MW per day.  Accreditations are adjusted annually based on 3-year rolling performance metrics.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

I.

Liquidity and Capital Resources

 

a.

As set forth in our condensed consolidated statements of cash flows, cash provided by operations was $79.5 million and $13.9 million for the nine months ended September 30, 2023 and 2022, respectively.

 

i.

Operating margins from coal sales, which we define as coal sales less operating expenses, were $108.7 million on a segment basis, during the first nine months of 2023, up from $35.6 million during the first nine months of 2022.  Operating margins for coal shipped to the Merom Power Plant were $29.4 million and are eliminated in consolidation.

 

1.

Our operating margins from coal sales were $19.91 per ton on a segment basis in the first nine months of 2023  compared to $7.62 in the first nine months of  2022 Operating margins were $17.04 on a consolidated basis.

 

2.

We shipped 5.5 million tons of coal in the first nine months of 2023, with 0.8 million tons of that being shipped to the Merom Power Plant.

 

ii.

Operating margins for electric, which we define as operating revenues less operating expenses on a segment basis, were $43.3 million, with $32.4 million attributed to the amortization of the contract asset and liability adjustments related to the Merom Acquisition in Q4 2022.  Operating margins were $64.9 million on a consolidated basis.

 

b.

Our projected capital expenditure budget for the remainder of 2023 is $30 million, of which approximately one-half is anticipated for maintenance capex.

 

c.

We paid down debt of $23.5 million in the first nine months of 2023. As of September 30, 2023, our bank debt was $61.8 million. On August 2, 2023, we executed an amendment to our credit agreement with PNC Bank, National Association (in its capacity as administrative agent, "PNC"), administrative agent for our lenders under our credit agreement. The primary purpose of the amendment was to increase the term debt to $65 million, enter a revolver of $75 million, and extend the maturity of the debt to 2026.

 

d.

We expect cash from operations generated primarily to fund our capital expenditures and our debt service.  As of September 30, 2023, we also had an additional borrowing capacity of $63.8 million.

 

II.

Material Off-Balance Sheet Arrangements

 

a.

Other than our surety bonds for reclamation, we have no material off-balance sheet arrangements. We have recorded the present value of reclamation obligations of $19.9 million, including $7.7 million at Merom, presented as asset retirement obligations (ARO) and accounts payable and accrued liabilities in our accompanying balance sheets. In the event we are not able to perform reclamation, we have surety bonds in place totaling $37.5 million to cover ARO.

 

CAPITAL EXPENDITURES (capex)

 

For the first nine months of 2023, capex was $48.7 million allocated as follows (in millions):

 

Oaktown – maintenance capex		$	23.8
Oaktown – investment			12.9
Freelandville Mine			1.2
Merom Plant			10.1
Other			0.7
Capex per the Condensed Consolidated Statements of Cash Flows		$	48.7

 

 

RESULTS OF OPERATIONS

 

Presentation of Segment Information

 

Our operations are divided into two primary reportable segments:  coal operations and electric operations.  The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other and Eliminations" within the Notes to the Consolidated Financial Statements and primarily are comprised of unallocated corporate costs and activities, including a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana, which we account for using the equity method, and our wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.

 

Coal Operations

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
		(in thousands)								(in thousands)
OPERATING REVENUES:		$	134,896			$	84,530			$	343,267			$	208,190
EXPENSES:
Operating expenses			95,592				64,836				232,462				169,095
Depreciation, depletion and amortization			11,508				11,149				37,249				31,772
Asset retirement obligations accretion			309				255				912				751
Exploration costs			171				121				682				393
General and administrative			2,552				2,071				7,747				5,599
Total operating expenses			110,132				78,432				279,052				207,610
INCOME FROM OPERATIONS		$	24,764			$	6,098			$	64,215			$	580

 

2023 vs. 2022 (third quarter)

 

Operating revenues from coal operations increased 60% over 2022 due to a combination of an increase in the volume and average sales price for coal. As a result, higher-priced contracts sold in the summer of 2022 that were delivered in Q3 of 2023 increased our average sales price by over $16 per ton from Q3 2022. We also sold 0.3 million additional tons over Q3 2022 at higher average prices.  Operating revenues for Q3 2023 include $37.0 million in sales to the Merom plant which are eliminated in the consolidation but increased the average price per ton of coal sold for the quarter by approximately 4.8%. 

 

Operating expenses, however, increased $9.08 per ton over Q3 2022. The addition of the higher-cost Prosperity surface mine, poor temporary mining conditions at Oaktown, as well as continued significant inflationary pressures, have elevated the costs.

 

General and administrative expenses increased 23% over Q3 2022 due to performance and production bonuses paid and accrued to employees, additional professional fees, and additional IT costs related to enhanced security and compliance activities.

 

 

2023 vs. 2022 (first nine months)

 

Operating revenues from coal operations increased 65% over 2022 due largely to an increase in the average sales price for coal. As a result, higher-priced contracts increased our average sales price by approximately $19 per ton from the first nine months of 2022. We also sold 0.8 million additional tons over the first nine months of 2022 at higher average prices. Operating revenues for the first nine months of 2023 include $60.6 million in sales to the Merom plant which are eliminated in the consolidation but increased the average price per ton of coal sold for the first nine months by approximately 3.6%. 

 

Operating expenses increased by $6.42 per ton sold over the first nine months of 2022. The addition of the higher-cost Freelandville and Prosperity surface mines, poor temporary mining conditions at Oaktown, as well as continued significant inflationary pressures have elevated the costs.

 

Depreciation, depletion, and amortization increased by 17% as a significant amount of our assets were depreciated and amortized based on production, which increased approximately 10% over the first nine months of 2022.  Inflationary pressures have also contributed to the higher capital asset additions over the past couple of years contributing to the increase.

 

General and administrative expenses increased 38% over the first nine months of 2022 due to performance, production, and discretionary bonuses paid to employees, additional professional fees related to the 2022 audit, and additional IT costs related to enhanced security and compliance activities.

 

Quarterly coal sales and cost data (in thousands, except per ton and percentage data) are provided below. Per ton calculations below are based on tons sold on a segment basis.

 

All Mines		4th 2022				1st 2023				2nd 2023				3rd 2023				T4Qs
Tons produced			1,721				2,006				1,723				1,594				7,044
Tons sold			1,664				1,693				1,714				2,054				7,125
Coal sales		$	84,641			$	94,602			$	112,171			$	134,400			$	425,814
Average price/ton		$	50.87			$	55.88			$	65.44			$	65.43			$	59.76
Wash plant recovery in %			68	%			70	%			67	%			65	%
Operating costs		$	67,319			$	65,700			$	71,168			$	95,592			$	299,779
Average cost/ton		$	40.46			$	38.81			$	41.52			$	46.54			$	42.07
Margin		$	17,322			$	28,902			$	41,003			$	38,808			$	126,035
Margin/ton		$	10.41			$	17.07			$	23.92			$	18.89			$	17.69
Capex		$	12,368			$	12,639			$	14,445			$	11,570			$	51,022
Maintenance capex		$	5,748			$	7,778			$	9,754			$	7,938			$	31,218
Maintenance capex/ton		$	3.45			$	4.59			$	5.69			$	3.86			$	4.38

 

All Mines		4th 2021				1st 2022				2nd 2022				3rd 2022				T4Qs
Tons produced			1,447				1,397				1,762				1,663				6,269
Tons sold			1,554				1,377				1,595				1,705				6,231
Coal sales		$	64,388			$	57,010			$	64,161			$	83,563			$	269,122
Average price/ton		$	41.43			$	41.40			$	40.23			$	49.01			$	43.19
Wash plant recovery in %			70	%			67	%			71	%			69	%
Operating costs		$	54,583			$	54,443			$	50,776			$	63,876			$	223,678
Average cost/ton		$	35.12			$	39.54			$	31.83			$	37.46			$	35.90
Margin		$	9,805			$	2,567			$	13,385			$	19,687			$	45,444
Margin/ton		$	6.31			$	1.86			$	8.39			$	11.55			$	7.29
Capex		$	9,975			$	9,082			$	13,821			$	15,096			$	47,974
Maintenance capex		$	3,302			$	4,481			$	7,600			$	6,625			$	22,008
Maintenance capex/ton		$	2.12			$	3.25			$	4.76			$	3.89			$	3.53

 

 

Electric Operations

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
		(in thousands)								(in thousands)
OPERATING REVENUES:		$	67,544			$	—			$	231,141			$	—
EXPENSES:
Operating expenses			64,171				991				187,849				991
Depreciation, depletion and amortization			4,695				—				14,045				—
Asset retirement obligations accretion			159				—				468				—
General and administrative			1,195				—				3,494				—
Total operating expenses			70,220				991				205,856				991
INCOME (LOSS) FROM OPERATIONS		$	(2,676	)		$	(991	)		$	25,285			$	(991	)

 

A comparative discussion is not relevant as the Electric Operations did not begin until the Merom Acquisition was completed in October 2022.

 

Operating revenue is derived from a power purchase agreement signed with Hoosier in conjunction with the Merom Acquisition at fixed prices below market prices at the date we closed the transaction.  The power purchase agreement expires in 2025 and requires us to provide a fixed amount of power over the term of the agreement.  As a result of the below-market contract, we recorded a contract liability at the close of the acquisition totaling $184.5 million that will be amortized over the term of the agreement as the contract is fulfilled.  For the three and nine months ended September 30, 2023, we recorded $10.3 million and $63.2 million, respectively, of revenue as a result of amortizing the contract liability.

 

Operating expenses include coal purchased under an agreement signed with Hoosier in conjunction with the Merom acquisition at fixed prices which were below market prices at the date we entered into the agreement.  The coal purchase agreement expired in May 2023 that required us to purchase a fixed amount of coal over the term of the agreement.  As a result of the below-market contract, we recorded a contract asset at the close of the acquisition totaling $34.3 million that was amortized over the term of the agreement as the contract was fulfilled.  For the three and six months ended June 30, 2023, we recorded $13.0 million and $30.7 million in additional operating expenses for coal purchased and used and a reduction of $6.8 million and $11.2 million, respectively, to inventory for coal purchased and unused as a result of amortizing the contract asset, thereby eliminating the remaining balance of the contract asset as of June 30, 2023.

 

 

Quarterly electric sales and cost data (in thousands, except per MWh data) are provided below.  Fixed costs in the table are considered "non-GAAP" and are a component of operating expenses, the most comparable GAAP measure. We consider fixed costs to be costs associated with the plant whether or not the plant is in operation.

 

		1st 2023				2nd 2023				3rd 2023				2023
MWh sold			1,262				1,043				1,307				3,612
Capacity revenue		$	15,970			$	17,155			$	13,012			$	46,137
Delivered energy and PPA revenue			76,422				53,862				54,391				184,675
Total electric sales			92,392				71,017				67,403				230,812
Less amortization of contract liability			(33,347	)			(19,555	)			(10,281	)			(63,183	)
Total electric sales less amortization of contract liability		$	59,045			$	51,462			$	57,122			$	167,629
Average price/MWh of delivered energy and PPA revenue less amortization of contract liability		$	34.13			$	32.89			$	33.75			$	33.64
Operating expenses (on a segment basis)		$	67,682			$	55,996			$	64,172			$	187,850
Less fixed costs			(12,807	)			(11,693	)			(11,858	)			(36,358	)
Less amortization of contract asset			(17,778	)			(12,962	)			-				(30,740	)
Operating expenses less fixed costs and amortization of contract asset		$	37,097			$	31,341			$	52,314			$	120,752
Average variable cost/MWh of operating expenses less fixed costs and amortization of contract asset		$	29.40			$	30.05			$	40.03			$	33.43
Energy and PPA margin less fixed costs and amortization of contract asset and liabilities		$	5,978			$	2,966			$	(8,204	)		$	740
Energy & PPA margin/MWh less fixed costs amortization of contract asset and liabilities		$	4.74			$	2.84			$	(6.28	)		$	0.20

 

Presentation of Consolidated Information

 

EARNINGS (LOSS) PER SHARE

 

		4th 2022				1st 2023				2nd 2023				3rd 2023
Basic		$	0.91			$	0.67			$	0.51			$	0.49
Diluted		$	0.83			$	0.61			$	0.47			$	0.44

 

		4th 2021				1st 2022				2nd 2022				3rd 2022
Basic		$	(0.25	)		$	(0.33	)		$	(0.11	)		$	0.05
Diluted		$	(0.25	)		$	(0.33	)		$	(0.11	)		$	0.05

 

 

INCOME TAXES

 

Our effective tax rate (ETR) is estimated at ~13% and ~ (8)% for the nine months ended September 30, 2023, and 2022, respectively.  For the nine months ended September 30, 2023, and 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items, and statutory rates in states in which we operate. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis and changes in the valuation allowance. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.

 

RESTRICTED STOCK GRANTS

 

See “Item 1. Financial Statements - Note 8. Stock Compensation Plans” for a discussion of RSUs.

 

CRITICAL ACCOUNTING ESTIMATES

 

We believe that the estimates of our coal reserves, our asset retirement obligation liabilities, our deferred tax accounts, our valuation of inventory, our treatment of business combinations, and the estimates used in our impairment analysis are our critical accounting estimates.

 

The reserve estimates are used in the depreciation, depletion, and amortization calculations and our internal cash flow projections. If these estimates turn out to be materially under or over-stated, our depreciation, depletion and amortization expense, and impairment test may be affected.  The process of estimating reserves is complex, requiring significant judgment in the evaluation of all available geological, geophysical, engineering, and economic data.  The reserve estimates are prepared by professional engineers, both internal and external, and are subject to change over time as more data becomes available.  Changes in the reserves estimates from the prior year were nominal. 

 

We have analyzed our filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We identified our federal tax return and our Indiana state tax return as “major” tax jurisdictions. We believe that our income tax filing positions and deductions would be sustained on audit and do not anticipate any adjustments that will result in a material change to our consolidated financial position.  We have not taken any significant uncertain tax positions, and our tax provisions and returns are prepared by a large public accounting firm with significant experience in energy-related industries.  Changes to the estimates from reported amounts in the prior year were not significant.

 

Inventory is valued at a lower of cost or net realizable value (NRV).  Anticipated utilization of low-sulfur, higher-cost coal from our Ace in the Hole, Freelandville, and Prosperity mines has the potential to create NRV adjustments as our estimated needs change.  The NRV adjustments are subject to change as our costs may fluctuate due to higher or lower production, and our NRV may fluctuate based on sales contracts we enter into from time to time.  There were no significant changes to our NRV adjustment estimates from the prior year.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

No material changes from the disclosure in our 2022 Annual Report on Form 10-K.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

DISCLOSURE CONTROLS

 

We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our CEO, CFO, and CAO as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO, CFO, and CAO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO, CFO, and CAO concluded that our disclosure controls and procedures are effective.

 

There have been no changes to our internal control over financial reporting during the quarter ended September 30, 2023, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

See Exhibit 95.1 to this Form 10-Q for a listing of our mine safety violations.

 

ITEM 6.  EXHIBITS

 

Exhibit No.		Document
10.1		Amendment and Restated Loan Agreement dated August 2, 2023
31.1		SOX 302 Certification - Chief Executive Officer
31.2		SOX 302 Certification - Chief Financial Officer
31.3		SOX 302 Certification - Chief Accounting Officer
32		SOX 906 Certification
95.1		Mine Safety Disclosures
101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Schema Document
101.CAL		Inline XBRL Calculation Linkbase Document
101.LAB		Inline XBRL Labels Linkbase Document
101.PRE		Inline XBRL Presentation Linkbase Document
101.DEF		Inline XBRL Definition Linkbase Document
104		Cover Page Interactive Data File (embedded with the Inline XBRL document)

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		HALLADOR ENERGY COMPANY
Date: November 6, 2023		/S/ LAWRENCE D. MARTIN
		Lawrence D. Martin, CFO
Date: November 6, 2023		/S/ R. TODD DAVIS
		R. Todd Davis, CAO