Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number:001-34743
HALLADOR ENERGY COMPANY
(www.halladorenergy.com)
Colorado
84-1014610
(State of incorporation)
(IRS Employer Identification No.)
1183 East Canvasback Drive, Terre Haute, Indiana
47802
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 812.299.2800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Shares, $.01 par value
HNRG
Nasdaq
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer ☐
Smaller reporting company ☑
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 7, 2024, we had 42,617,108 shares of common stock outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
1
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
2
Condensed Consolidated Statements of Cash Flows
4
Condensed Consolidated Statements of Stockholders’ Equity
5
Notes to Condensed Consolidated Financial Statements
6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
31
ITEM 4. CONTROLS AND PROCEDURES
32
PART II - OTHER INFORMATION
33
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 6. EXHIBITS
SIGNATURES
34
ITEM 1. FINANCIAL STATEMENTS
Hallador Energy Company
(in thousands, except per share data)
(unaudited)
September 30,
December 31,
2024
2023
ASSETS
Current assets:
Cash and cash equivalents
$
3,829
2,842
Restricted cash
5,812
4,281
Accounts receivable
11,908
19,937
Inventory
31,077
23,075
Parts and supplies
39,663
38,877
Prepaid expenses
5,964
2,262
Assets held-for-sale
1,544
1,611
Total current assets
99,797
92,885
Property, plant and equipment:
Land and mineral rights
115,486
Buildings and equipment
529,818
537,131
Mine development
167,077
158,642
Finance lease right-of-use assets
19,869
12,346
Total property, plant and equipment
832,250
823,605
Less - accumulated depreciation, depletion and amortization
(360,173)
(334,971)
Total property, plant and equipment, net
472,077
488,634
Investment in Sunrise Energy
2,071
2,811
Other assets
5,785
5,450
Total assets
579,730
589,780
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank debt, net
24,095
24,438
Accounts payable and accrued liabilities
42,915
62,908
Current portion of lease financing
6,248
3,933
Deferred revenue
57,293
23,062
Contract liability - power purchase agreement and capacity payment reduction
41,049
43,254
Total current liabilities
171,600
157,595
Long-term liabilities:
Bank debt, net
42,918
63,453
Convertible notes payable
—
10,000
Convertible notes payable - related party
9,000
Long-term lease financing
9,234
8,157
Deferred income taxes
5,846
9,235
Asset retirement obligations
15,746
14,538
Contract liability - power purchase agreement
13,456
47,425
Other
2,133
1,789
Total long-term liabilities
89,333
163,597
Total liabilities
260,933
321,192
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value, 10,000 shares authorized; none issued
Common stock, $.01 par value, 100,000 shares authorized; 42,599 and 34,052 issued and outstanding, as of September 30, 2024 and December 31, 2023, respectively
426
341
Additional paid-in capital
188,018
127,548
Retained earnings
130,353
140,699
Total stockholders’ equity
318,797
268,588
Total liabilities and stockholders’ equity
See accompanying notes to the condensed consolidated financial statements.
Three Months Ended September 30,
Nine Months Ended September 30,
SALES AND OPERATING REVENUES:
Electric sales
71,715
67,403
191,861
230,812
Coal sales
31,662
97,420
114,093
280,596
Other revenues
1,667
945
4,221
3,888
Total sales and operating revenues
105,044
165,768
310,175
515,296
EXPENSES:
Fuel
13,176
11,345
31,674
99,959
Other operating and maintenance costs
33,320
65,551
106,714
139,979
Cost of purchased power
3,149
7,694
Utilities
3,185
4,507
10,955
13,347
Labor
26,721
37,639
88,444
114,698
Depreciation, depletion and amortization
13,838
16,230
42,930
51,375
Asset retirement obligations accretion
410
468
1,208
1,380
Exploration costs
62
171
179
682
General and administrative
6,471
6,054
20,218
18,596
Total operating expenses
100,332
141,965
310,016
440,016
INCOME FROM OPERATIONS
4,712
23,803
159
75,280
Interest expense (1)
(2,692)
(3,030)
(10,364)
(10,470)
Loss on extinguishment of debt
(1,491)
(2,790)
Equity method investment (loss)
(234)
(177)
(740)
(325)
NET INCOME (LOSS) BEFORE INCOME TAXES
1,786
19,105
(13,735)
62,994
INCOME TAX EXPENSE (BENEFIT):
Current
(178)
315
Deferred
232
3,208
(3,389)
7,638
Total income tax expense (benefit)
3,030
7,953
NET INCOME (LOSS)
1,554
16,075
(10,346)
55,041
NET INCOME (LOSS) PER SHARE:
Basic
0.04
0.49
(0.27)
1.66
Diluted
0.44
1.52
WEIGHTED AVERAGE SHARES OUTSTANDING
42,598
33,140
38,455
33,088
43,018
36,848
36,748
(1) Interest Expense:
Interest on bank debt
2,073
2,006
7,657
6,316
Other interest
181
422
1,456
1,316
Amortization:
Amortization of debt issuance costs
438
602
1,251
2,838
Total amortization
Total interest expense
2,692
10,364
10,470
3
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax (benefit)
Equity loss – Sunrise Energy
740
325
Cash distribution - Sunrise Energy
-
625
Depreciation, depletion, and amortization
2,790
1,491
Loss (gain) on sale of assets
(536)
78
Cash paid on asset retirement obligation reclamation
(820)
(2,286)
Stock-based compensation
3,320
2,774
Amortization of contract asset and contract liabilities
(36,174)
(32,444)
1,352
914
Change in operating assets and liabilities:
8,029
9,197
(8,002)
14,874
(786)
(8,717)
(1,098)
1,116
(7,715)
(11,419)
34,231
(15,273)
Net cash provided by operating activities
26,985
79,527
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(39,606)
(48,746)
Proceeds from sale of equipment
3,373
Net cash used in investing activities
(36,233)
(48,684)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank debt
(86,500)
(56,463)
Borrowings of bank debt
65,000
33,000
Payments on lease financing
(4,105)
Proceeds from sale and leaseback arrangement
3,783
Issuance of related party notes payable
5,000
Payments on related party notes payable
(5,000)
Debt issuance costs
(654)
(5,940)
ATM offering
34,515
Taxes paid on vesting of RSUs
(273)
(1,150)
Net cash provided by (used in) financing activities
11,766
(30,553)
Increase in cash, cash equivalents, and restricted cash
2,518
290
Cash, cash equivalents, and restricted cash, beginning of period
7,123
6,426
Cash, cash equivalents, and restricted cash, end of period
9,641
6,716
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
2,573
4,143
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest
8,679
8,069
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Change in capital expenditures included in accounts payable and prepaid expense
(7,825)
3,214
Stock issued on redemption of convertible notes and interest
22,993
Additional
Total
Common Stock Issued
Paid-in
Retained
Stockholders’
Shares
Amount
Capital
Earnings
Equity
Balance, June 30, 2024
42,599
186,945
128,799
316,170
1,073
Net income
Balance, September 30, 2024
Balance, December 31, 2023
34,052
Stock issued on vesting of RSUs
379
(4)
(159)
(2)
(271)
Stock issued on redemption of convertible notes
3,672
36
22,957
Stock issued in ATM offering
4,655
47
34,468
Net loss
Balance, June 30, 2023
33,137
332
119,678
134,872
254,882
773
10
(5)
(41)
Balance, September 30, 2023
33,142
120,410
150,947
271,689
Balance, December 31, 2022
32,983
330
118,788
95,906
215,024
285
(3)
(126)
(1)
(1,149)
GENERAL BUSINESS
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.
We strategically view and manage our operations through two reportable segments: Electric Operations and Coal Operations. The Electric Operations reportable segment includes electric power generation facilities of the Merom Power Plant. The Coal Operations reportable segment includes mining complexes Oaktown 1 and 2 underground mines, Prosperity surface mine, Freelandville surface mine, and Carlisle wash plant. On February 23, 2024, our Coal Operations Segment committed to a reorganization effort designed to strengthen its financial and operational efficiency and create significant operational savings and higher margins. For further information, see “Note 16 – Organizational Restructuring” below. 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 (“Summit”), a logistics transport facility located on the Ohio River. See “Note 20 – Assets Held-for-Sale” for further discussion on Summit.
All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the Company’s prior period condensed consolidated financial information to conform to the current period presentation. These presentation changes did not impact the Company’s condensed consolidated net income (loss), consolidated cash flows, total assets, total liabilities or total stockholders’ equity.
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, 2024, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2024.
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 2023 Annual Report on Form 10-K. This quarterly report should be read in conjunction with such Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 primarily requires enhanced disclosures about significant segment expenses regularly provided to the chief operating decision maker (“CODM”), the amount and composition of other segment items, and the title and position of the CODM. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2023-07, but do not expect it to have a material effect on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 primarily requires enhanced disclosures to (1) disclose specific categories in the rate reconciliation, (2) disclose the amount of income taxes paid and expensed disaggregated by federal, state, and foreign taxes, with further disaggregation by individual jurisdictions if certain criteria are met, and (3) disclose income (loss) from continuing operations before income tax (benefit) disaggregated between domestic and foreign. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2023-09, but do not expect it to have a material effect on our consolidated financial statements.
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 months ended September 30, 2024 and 2023, no impairment charges were recorded for long-lived assets.
INVENTORY
Inventory is valued at a lower of cost or net realizable value (NRV). As of September 30, 2024, and December 31, 2023, coal inventory includes NRV adjustments of $1.8 million and $2.0 million, respectively.
BANK DEBT
On September 27, 2024, the Company executed the First Amendment (“First Amendment”) to the Fourth Amended and Restated Credit Agreement, dated as of August 2, 2023 (as amended, the “Credit Agreement”), with PNC Bank, National Association (in its capacity as administrative agent, "PNC"), which was accounted for as a debt modification. The primary purpose of the First Amendment was to provide the Company with short-term covenant relief to pursue additional liquidity. The First Amendment provides for additional flexibility for the Company to enter into prepaid forward power sale contracts, provided that the Company repays outstanding term loans under the Credit Agreement (“Term Loan”) with proceeds received from certain eligible power purchase agreements, up to a maximum of $20.0 million. These required prepaid forward power sale Term Loan repayments, if any, will take the place of the $6.5 million quarterly Term Loan payments. Furthermore, the First Amendment defines certain administrative changes which include, among other things, added requirements related to reporting, third party financial advisors, and appraisals on coal and power assets.
Bank debt was reduced by $21.5 million during the nine months ended September 30, 2024. Bank debt is comprised of our Term Loan ($45.5 million as of September 30, 2024) and a $75.0 million revolver ($24.5 million borrowed as of September 30, 2024) under the Credit Agreement. The term debt required quarterly payments of $6.5 million starting in April 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, 2024, we had additional borrowing capacity of $31.1 million under the revolver and total liquidity of $34.9 million. Our additional borrowing capacity is net of $19.4 million in outstanding letters of credit that we were required to maintain for surety bonds and $24.5 million drawn on the revolver at September 30, 2024. Liquidity consists of our additional borrowing capacity and cash and cash equivalents.
Fees
Unamortized bank fees and other costs incurred in connection with our initial facility totaled $4.3 million. Additional costs incurred with the First Amendment totaled $0.6 million. These unamortized bank fees were deferred and are being amortized over the term of the loan. Unamortized bank fees as of September 30, 2024, and December 31, 2023, were $3.0 million and $3.6 million, respectively.
7
Bank debt, less debt issuance costs, is presented below (in thousands):
Current bank debt
26,000
Less unamortized debt issuance cost
(1,905)
(1,562)
Net current portion
Long-term bank debt
44,000
65,500
(1,082)
(2,047)
Net long-term portion
Total bank debt
70,000
91,500
Less total unamortized debt issuance cost
(2,987)
(3,609)
Net bank debt
67,013
87,891
Future Maturities (in thousands):
6,500
2025
2026
37,500
Covenants
The First Amendment, among other things, provided the Company with short-term covenant relief to pursue additional liquidity. The First Amendment waived the Company’s Leverage Ratio requirement for the third and fourth quarters of 2024, increased the threshold to 5.50 to 1.00 for the first quarter of 2025, and decreased the threshold back to 2.25 to 1.00 for each fiscal quarter thereafter. Additionally, the Debt Service Coverage Ratio requirement (1.25 to 1.00) was waived from third quarter of 2024 through the first quarter of 2025. The First Amendment also added additional financial covenants which include: (i) a maximum First Lien Leverage Ratio for the first quarter of 2025, calculated as of the end of each fiscal quarter for the trailing twelve months, not to exceed 3.50 to 1.00; (ii) a minimum liquidity requirement of $10.0 million, beginning on the First Amendment execution date and ending when the second quarter of 2025 compliance certificate is received; and (iii) a minimum quarterly EBITDA requirement, as defined in the First Amendment, of $5.0 million for the third quarter of 2024 through the first quarter of 2025. As of September 30, 2024, our liquidity of $34.9 million and quarterly EBITDA of $9.6 million were in compliance with the requirements of the Credit Agreement.
As of September 30, 2024, 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, 2024, we were paying SOFR plus 5.00% on the outstanding bank debt which equates to an all-in rate of 9.76%.
8
(6)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following for the indicated dates (in thousands):
Accounts payable
23,437
43,636
Accrued property taxes
4,808
2,987
Accrued payroll
5,123
6,575
Workers' compensation reserve
4,397
3,629
Group health insurance
1,750
2,300
Asset retirement obligation - current portion
1,330
2,150
2,070
1,631
Total accounts payable and accrued liabilities
(7)
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.
Electric operations
We 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, we concluded that a PPA that is not determined to be a lease or derivative constitutes a valid contract under ASC 606.
We 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, we recognize revenue daily for actual delivered electricity plus the amortization of the contract liability as a result of the Asset Purchase Agreement with Hoosier. For delivered energy to all other customers, we recognize revenue daily for the actual delivered electricity.
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 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.
9
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.
Disaggregation of Revenue
Revenue is disaggregated by revenue source for our electric operations and by primary geographic markets for our coal 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.
Delivered energy (including contract liability amortization)
55,855
54,391
147,355
184,675
Capacity
15,860
13,012
44,506
46,137
Total Electric Operations sales
Outside third-party Indiana customers
13,338
32,137
46,490
115,787
Customers in Florida, North Carolina, Alabama and Georgia
18,324
65,283
67,603
164,809
Total Coal Operations sales
Performance Obligations
We 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. We also concluded that the stand-ready obligation to be available to provide electricity is capable of being distinct as each unit of capacity provides an economic benefit to the holder and could be sold by the customer.
During 2022, we entered into an Asset Purchase Agreement (“APA”) with Hoosier (“Hoosier APA”) in which Hallador Power shall sell, and Hoosier shall buy, delivered energy quantities through 2025 at the contract price, which is $34.00 per MWh. We have remaining delivered energy obligations to Hoosier on the APA totaling $70.1 million through 2025 as of September 30, 2024. The agreement was amended August 31, 2023, to extend through 2028. The amendment included additional obligations to Hoosier of $186.6 million, or $56.00 per MWh, as of September 30, 2024.
In addition to delivered energy, under the Hoosier APA, Hallador Power shall provide a stand-ready obligation to provide electricity to MISO, also known as contract capacity. The contract capacity that Hallador Power shall provide to Hoosier is 917 megawatts (“MW”) for contract year one, and on average 300 MW for contract years two to four. Hoosier shall pay Hallador Power the capacity price of $5.80 per kilowatt month for the contract capacity. We have remaining capacity obligations to Hoosier through 2025 totaling $25.0 million as of September 30, 2024. The agreement was amended August 31, 2023, to extend through 2028, with additional capacity obligations to Hoosier of $60.9 million as of September 30, 2024, at a price of $7.02 per kilowatt month for the contract capacity.
During the second quarter 2024, the Company entered into an 11-month, $45.0 million prepaid physically delivered power contract in which Hallador will provide a total of 1,302,480 MWh. We have energy and capacity obligations to customers, excluding the Hoosier APA, through 2029 totaling $134.1 million and $140.2 million, respectively, as of September 30, 2024. We have $32.6 million and $24.7 million of deferred revenue as of September 30, 2024, related to the prepaid physically delivered power contract and other capacity obligations outside of the Hoosier APA, respectively.
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 at any point during the fulfillment of the contract. For substantially all 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 to third-party customers of approximately $320.28 million, which represents the average fixed prices on our committed contracts as of September 30, 2024. We expect to recognize approximately 9.9% of this coal sales revenue in 2024, with the remainder recognized through 2028.
We have remaining volume performance obligations relating to coal contracts with price reopeners of 3.0 million tons (1.0 million tons in 2025, 2026 and 2027) as of September 30, 2024.
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.
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 any quality adjustments, electricity, or capacity. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our condensed consolidated balance sheets. As of January 1, 2023, accounts receivable for coal sales billed to customers was $16.3 million.
(8)
INCOME TAXES
For the nine months ended September 30, 2024 and 2023, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income (loss), 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, 2024 and 2023, was ~24% and ~13%, 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.
11
(9)
STOCK COMPENSATION PLANS
Non-vested grants as of December 31, 2023
858,363
Awarded - weighted average share price on award date was $5.69
599,013
Vested - weighted average share price on vested date was $5.30
(379,390)
Forfeited
(42,500)
Non-vested grants as of September 30, 2024
1,035,486
For the three and nine months ended September 30, 2024, our stock compensation was $1.1 million and $3.3 million, respectively. For the three and nine months ended September 30, 2023, our stock compensation was $0.8 million and $2.8 million, respectively.
Non-vested RSU grants will vest as follows:
Vesting Year
RSUs Vesting
1,000
682,068
176,210
2027
176,208
The outstanding RSUs have a value of $9.8 million based on the September 30, 2024 closing stock price of $9.43.
As of September 30, 2024, unrecognized stock compensation expense is $3.8 million, and we had 53,761 RSUs available for future issuance. RSUs are not allocated earnings and losses as they are considered non-participating securities.
(10)
LEASES
We have operating leases for office space with remaining lease terms ranging from 1 month to 8 years. As most of the leases do not provide an implicit rate, we calculated the right-of-use assets and lease liabilities using our secured incremental borrowing rate at the lease commencement date. Imputed interest on our operating leases was $0.3 million as of September 30, 2024.
During the nine months ended September 30, 2024, we entered into four finance leases that were accounted for as failed sale-leaseback transactions. Finance lease assets are included in finance lease right-of-use assets on the condensed consolidated balance sheets and the associated finance lease liabilities are reflected within current portion of lease financing and long-term lease financing on the condensed consolidated balance sheets, as applicable. Depreciation on our finance lease assets was $1.5 million and $3.7 million for the three and nine months ended September 30, 2024. Interest expense on our finance lease liability was $0.4 million and $1.1 million during the three and nine months ended September 30, 2024, respectively. Imputed interest on our future remaining finance lease liability was $1.8 million as of September 30, 2024. We had deferred financing fees of $0.2 and $0.1 million at September 30, 2024 and December 31, 2023, respectively, in connection with entry into the finance leases. These deferred financing fees will be amortized on a straight-line basis over the term of the finance leases. We did not have finance leases during the three and nine months ended September 30, 2023.
12
The following information relates to our leases (dollar amounts in thousands):
Operating lease information:
Operating cash outflows from operating leases
38
52
142
156
Weighted average remaining lease term in years
8.0
8.75
Weighted average discount rate
9.8
%
6.0
Finance lease information:
Financing cash outflows from finance leases
1,440
4,105
2.39
9.09
Future minimum lease payments under non-cancellable leases as of September 30, 2024, were as follows:
Operating Leases
Finance Leases
(In thousands)
1,872
108
7,490
121
7,331
125
749
2028
129
Thereafter
494
Total minimum lease payments
977
17,442
Less imputed interest and deferred finance fees
(320)
(1,960)
Total lease liability
657
15,482
The following are reflected within the indicated condensed consolidated balance sheet line items:
For the Nine Months Ended September 30,
For the Year Ended December 31,
Operating lease assets
712
Operating lease liabilities:
Current operating lease liabilities
58
Non-current operating lease liabilities
Other long-term liabilities
654
Total operating lease liability
Finance lease assets
Finance lease liabilities:
Current finance lease liabilities
Non-current finance lease liabilities
Total finance lease liabilities
12,090
(11)
SELF-INSURANCE
We self-insure our non-leased underground mining equipment. Such equipment was allocated among four mining units dispersed over seven miles and seven mining units dispersed over eleven miles, at September 30, 2024 and December 31, 2023, respectively. The historical cost of such equipment was approximately $247.3 million and $262.0 million as of September 30, 2024, and December 31, 2023.
13
We also self-insure for workers’ compensation claims. Restricted cash of $5.8 million and $4.3 million as of September 30, 2024, and December 31, 2023, represents cash held and controlled by a third party and is restricted primarily for future workers’ compensation claim payments.
(12)
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). ARO liabilities use Level 3 non-recurring fair value measures.
Credit Risk
The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, and restricted cash.
The Company’s cash and cash equivalent and restricted cash balances on deposit with financial institutions total $9.6 million and $7.1 million as of September 30, 2024 and December 31, 2023, respectively, which exceeded FDIC insured limits. The Company regularly monitors these institutions’ financial condition. The Company utilizes large and reputable banking institutions which it believes mitigates these risks. The Company has not experienced any losses in such accounts.
(13)
EQUITY METHOD INVESTMENTS
We own a 50% interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment with plans to develop and operate such reserves. Sunrise Energy, LLC, also plans to develop and explore for oil, natural 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, 2024, and December 31, 2023, was $2.1 million and $2.8 million, respectively.
(14)
CONVERTIBLE NOTES
On July 29, 2022, we issued a $5.0 million senior unsecured convertible note (the “July 29th Note”) to a related party affiliated with an independent member of our board of directors. The July 29th Note carried 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 had the option to convert the July 29th Note into shares of the Company’s common stock at a conversion price of $6.254. During the first quarter of 2024, the holders of the July 29th Note converted them into 799,488 shares of common stock of the Company, and in connection with such early conversion, we elected to pay interest through August 2025 with 112,570 shares of common stock on the conversion date. We recorded a loss on extinguishment of debt in the condensed consolidated statements of operations in the amount of $0.6 million during the three months ended March 31, 2024. As of September 30, 2024, the entire July 29th Note had been converted to shares of common stock of the Company.
14
On August 8, 2022, we issued an additional $4.0 million of senior unsecured convertible notes (the “August 8th Notes”) to related parties affiliated with independent members of our board of directors. The August 8th Notes carried 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 had 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, we could elect to redeem the August 8th Notes and the holder was obligated to surrender them at 100% of the outstanding principal balance together with any accrued unpaid interest. Upon receipt of the redemption notice from the Company, the holder could have elected to convert the principal balance and accrued interest into the Company’s common stock. During the first quarter of 2024, the holders converted $3.0 million of the August 8th Notes into 479,693 shares of common stock of the Company, and in connection with such early conversion, we elected to pay interest through August 2025 with 67,542 shares of common stock on the conversion date. During the same period, the holders also converted accrued interest into 57,564 shares of the Company’s common stock. We recorded a loss on extinguishment of debt during the first quarter of 2024 in the condensed consolidated statements of operations in the amount of $0.3 million. During the second quarter of 2024, the holder converted the remaining $1.0 million of August 8th Notes into 159,898 shares of common stock of the Company, and in connection with such early conversion, we paid accrued interest and additional shares of common stock of 5,099 and 25,003, respectively, on the conversion date. We recorded a loss on extinguishment of debt during the second quarter of 2024 in the condensed consolidated statements of operations in the amount of $0.2 million. As of September 30, 2024, the entire August 8th Note had been converted to shares of common stock of the Company.
On August 12, 2022, we issued an additional $10.0 million senior unsecured convertible note (the “August 12th Note”) to an unrelated party. The August 12th Note carried 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 had the option to convert the August 12th Note into shares of the Company’s common stock at a conversion price of $6.15. Beginning August 12, 2025, we could elect to redeem the August 12th Note and the holder would have been obligated to surrender at 100% of the outstanding principal balance together with any accrued unpaid interest. Upon receipt of the redemption notice from the Company, the holder could elect to convert the principal balance and accrued interest into the Company’s common stock. During the three months ended March 31, 2024, the holder converted accrued interest into 65,041 shares of the Company’s common stock. During the second quarter of 2024, the holder converted the $10.0 million August 12th Note into 1,626,016 shares of common stock of the Company, and in connection with such early conversion, we paid accrued interest and additional shares of common stock of 49,716 and 224,268, respectively, on the conversion date. We recorded a loss on extinguishment of debt in the condensed consolidated statements of operations in the amount of $1.7 million during the second quarter of 2024. As of September 30, 2024, the entire August 12th Note had been converted to shares of common stock of the Company.
The funds received from the issuance of the various notes described above were used to provide additional working capital to the Company. The conversion price and number of shares of the Company’s common stock issuable upon conversion of the above notes are subject to adjustment from time to time for any subdivision or consolidation of our shares of common stock and other standard dilutive events.
(15)
NOTES PAYABLE - RELATED PARTIES
In March 2024, we issued unsecured promissory notes, having a 12-month maturity date and 12% per annum interest rate, to (i) Charles R. Wesley IV Revocable Trust (in which our director Charles R. Wesley IV has a pecuniary interest) in the principal amount of $2,000,000, (ii) Lubar Opportunities Fund I, LLC (in which are our director David J. Lubar has a pecuniary interest) in the principal amount of $2,500,000, and (iii) Hallador Alternative Investment Advisors LLC (in which our director David C. Hardie has a pecuniary interest) in the principal amount of $500,000. The related party notes were paid off in June 2024 with proceeds from the prepaid physically delivered power contract mentioned above in “Note 7 – Revenue”.
15
(16)
ORGANIZATIONAL RESTRUCTURING
On February 23, 2024, (the “Effective Date”), we committed to a reorganization effort in the Coal Operations Segment (the “Reorganization Plan”) that included a workforce reduction of approximately 110 employees, or approximately 12% of the workforce. The reduction in workforce was communicated to employees on the Effective Date and implemented immediately, subject to certain administrative procedures. The Reorganization Plan is designed to strengthen our financial and operational efficiency and create significant operational savings and higher margins in our coal segment. This step will help to advance our transition from a company primarily focused on coal production to a more resilient and diversified integrated independent power producer (“IPP”). As part of this initiative, we substantially idled production at our higher cost surface mines, Prosperity Mine, and Freelandville Mine, with minimal ongoing production. We also focused our seven units of underground equipment on four units of our lowest cost production at our Oaktown Mine. In connection with the Reorganization Plan, we incurred aggregate expenses of $1.9 million ($1.1 million in the first quarter of 2024 and $0.8 million in the second quarter of 2024) that were included in operating expenses in the condensed consolidated statements of operations. These charges related to compensation, tax, professional, and insurance related expenses and are considered one-time charges paid in the nine months of 2024.
(17)
AT THE MARKET AGREEMENT
On December 18, 2023, we entered into an At The Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), pursuant to which we may issue and sell, from time to time, shares (the “Shares”) of our common stock, par value $0.01 per share (the “Common Stock”), with aggregate gross proceeds of up to $50.0 million through an “at-the-market” equity offering program under which the Agent will act as sales agent (the “ATM Program”). Under the Sales Agreement, we or the Agent have the right, by giving five (5) days’ notice, to terminate the Sales Agreement in our and the Agents sole discretion. The Agent may also terminate the Agreement, by notice to us, upon the occurrence of certain events described in the Sales Agreement.
During the nine months ended September 30, 2024, we issued 4,654,430 shares of Common Stock under the ATM Program for net proceeds of $34.5 million. No shares were issued under the ATM Program during the third quarter of 2024.
16
(18)
SEGMENTS OF BUSINESS
As of September 30, 2024, our operations are divided into two primary reportable segments, Electric Operations and Coal 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, including a 50% interest in Sunrise Energy, LLC, which the Company accounts for using the equity method and our held-for-sale wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.
Operating revenues
Electric operations(i)
71,902
67,544
192,379
231,141
49,331
134,896
162,630
343,267
Corporate and other and eliminations
(16,189)
(36,672)
(44,834)
(59,112)
Consolidated operating revenues
Operating expenses
52,547
70,220
150,989
205,856
61,510
110,132
197,587
279,052
(13,725)
(38,387)
(38,560)
(44,892)
Consolidated operating expenses
Income (loss) from operations
19,355
(2,676)
41,390
25,285
(12,179)
24,764
(34,957)
64,215
(2,464)
1,715
(6,274)
(14,220)
Consolidated income (loss) from operations
4,802
4,695
14,197
14,045
9,013
11,508
28,671
37,249
23
27
81
Consolidated depreciation, depletion and amortization
Assets
217,826
209,455
356,252
375,682
5,652
49
Consolidated assets
585,186
4,602
6,566
16,121
10,092
6,810
11,570
23,002
38,654
150
483
Consolidated capital expenditures
11,562
18,136
39,606
48,746
17
(i).
Electric operations revenue as of each period presented were comprised of the components noted below (in thousands):
Operating revenues:
Capacity revenue
Delivered energy
44,549
44,110
111,181
121,492
Amortization of contract liability
11,306
10,281
36,174
63,183
Other operating revenue
187
141
518
329
Total Electric Operations revenue:
(19)
NET INCOME (LOSS) PER SHARE
The following table (in thousands, except per share amounts) sets forth the computation of basic earnings (loss) per share for the periods indicated:
Basic earnings per common share:
Net income (loss) - basic
Weighted average shares outstanding - basic
Basic earnings (loss) per common share
The following table (in thousands, except per share amounts) sets forth the computation of diluted net income (loss) per share:
Diluted earnings per common share:
Add: Convertible Notes interest expense, net of tax
303
898
Net income (loss) - diluted
16,378
55,939
Add: Dilutive effects of if converted Convertible Notes
3,162
3,164
Add: Dilutive effects of Restricted Stock Units
420
546
496
Weighted average shares outstanding - diluted
Diluted net income (loss) per share
(20)ASSETS HELD-FOR-SALE
During the third quarter of 2024, the Company considered strategic alternatives with respect to its wholly-owned subsidiary Summit. Summit is included in our “Corporate and other and eliminations” segment and primarily holds property, plant and equipment. On July 29, 2024, the Company entered into a ninety day right of first refusal (“ROFR”) with a potential buyer of Summit for $3.2 million. As of July 29, 2024 Summit met the held-for-sale criteria, and its assets are included in "assets held-for-sale" in the current assets section of the condensed consolidated balance sheets. The Company recorded the Summit assets, once held for sale, at the lower of their carrying value or their estimated fair value less cost to sell. The Company also did not record depreciation and amortization of $0.1 million ($0.1 million after-tax) on assets held-for-sale and will continue to do so while held-for-sale criteria is met. The Company expects the Summit sale to be executed by December 31, 2024.
18
Fair value is the amount at which an asset, liability or business could be bought or sold in a current transaction between willing parties and may be estimated using a number of techniques, or may be observable using quoted market prices. The Company used a market approach consisting of the contractual ROFR sales price, subject to prorations for property taxes and utilities, to determine the fair value as of September 30, 2024, and subtracted estimated costs to sell from that calculated fair value. The resulting net fair value of Summit's assets exceeded the carrying value of Summit’s assets, and accordingly no impairments were recorded.
The sale of Summit does not represent a strategic shift that has or will have a major effect on the Company, and as such, does not qualify for treatment as a discontinued operation.
(21)
SUBSEQUENT EVENTS
On October 23, 2024, the Company entered into a 19-month (beginning in June of 2025) $60.0 million prepaid physically delivered power contract in which Hallador will provide a total of 1,918,275 MWh. A portion of the proceeds were used to pay down $20.0 million on our Term Loan, which satisfies our January 2025, April 2025, July 2025 and a portion of our October 2025 required quarterly Term Loan payments. We also paid $34.0 million on our revolver.
On October 23, 2024, the Company entered into a second amendment to the Fourth Amended and Restated Credit Agreement with PNC, dated as of August 2, 2023, to clarify certain provisions of the First Amendment that was entered into on September 27, 2024.
19
THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2023 ANNUAL REPORT ON FORM 10-K AND SHOULD BE READ IN CONJUNCTION THEREWITH.
Hallador Energy made significant progress in its transformation to an Independent Power Producer this quarter by signing a non-binding term sheet (“Term Sheet”) with a leading global data center developer. Our team is working diligently to finalize definitive agreements with this partner and relevant utilities that will support the delivery of our in front of the meter energy and capacity to the large hyperscaler. As we have discussed before, these types of deals are complex arrangements involving multiple parties. If we reach definitive agreements, we will have contracted large portions of our plant’s energy and capacity at much improved margins for more than a decade to come. The completion of the transaction contemplated by the Term Sheet is subject to, among other matters, the negotiation and execution of definitive agreements and there can be no assurance that definitive agreements will be entered into or that the proposed transaction will be consummated on the terms or timeframe currently contemplated, or at all.
The path to this type of long-term, higher margin transaction has been focused and deliberate. While we have not yet reached a binding agreement, we are encouraged both by the relationship with our current partner and the heavy interest that we continue to see from alternative counterparties in our energy and capacity offerings. This continued interest highlights the supply shortage in accredited capacity that we believe the MISO market is experiencing and provides the Company options in the event that we are unable to reach agreement in connection with the executed Term Sheet.
We believe accredited capacity in MISO continues to increase in value and demand, particularly in our sales region of MISO Zone 6, an area that includes Indiana and a portion of western Kentucky. This is important to Hallador based on our belief that Hallador has a significant amount of the remaining unsold accredited capacity in MISO Zone 6 over the next few years. Our current belief is guided by several factors, including:
Our goal is for Hallador Power to generate approximately 1,500,000 MWh on a quarterly basis, which equates to approximately 6,000,000 MWh annually (see Hallador Power’s capacity and utilization information below). During the nine months ended September 30, 2024, Hallador Power generated 2,670,000 MWh, or 59.3% of our target. During the first nine months of the year, we experienced sales prices of nearly $261.00 per MWh for limited times, balanced against several days of pricing below our variable cost to produce. These fluctuations led to an inconsistent dispatch schedule.
Power Capacity and Utilization
Nameplate capacity (MW)(i)
1,080
Accredited capacity for the period (MW)(ii)
828
864
858
899
Accredited capacity utilization(iii)
59.00
69.00
47.00
61.00
Nameplate capacity for the Merom Power Plant refers to the maximum electric output generated by the plant in the period presented and may not reflect actual production. Actual production each period varies based on weather conditions, operational conditions, and other factors.
(ii).
Accredited capacity is based on MISO’s average seasonal accreditations for the year. Average seasonal accreditations were 769 MW and 838 MW per day for 2024 and 2023, respectively. Accreditations are weighted and adjusted annually based on 3-year rolling performance metrics.
(iii).
Accredited capacity utilization is measured as power produced (MWh) divided by accredited capacity for the period (MW) multiplied by 24 times the number of days for the period.
When forward selling Capacity, we target annual sales of around $65.0 million to offset our fixed annual costs at the plant of approximately $60.0 million. We have already sold a large portion of our near term Capacity, which we believe makes our forward Capacity sales goals attainable as illustrated in our “Solid Forward Sales Position” table below.
In addition to the Term Sheet discussed above, which is not included in the graph below, our forward contracted energy sales position has a significant price increase in future years as illustrated in the graph below.
21
To match Sunrise’s production levels and cost structure to that of the market demands, we restructured Sunrise operations in the first quarter of 2024. As we have previously noted, the restructuring included a reduction in force (“RIF”) of approximately 110 people in February, and we have since allowed attrition to further reduce our workforce by approximately 140 additional people, a total workforce reduction of more than 25%. We also restructured our operations to focus on our more profitable units and to idle units with higher production costs. Transitioning our Oaktown mining facilities from 7 units of production to 4 units of production was a deliberate process which took considerable time and effort, and was completed in mid-July. We are encouraged by the early results of Sunrise’s restructuring and have seen improvement in mining costs since we made the decision to adjust our operations.
The Company last reviewed its long-lived assets for impairment during the fourth quarter of 2023 and concluded no impairment was indicated. In preparing the Company’s impairment analysis, it utilizes undiscounted net cash flows over the expected life of the long-lived asset based upon anticipated production along with contracted and forward prices as well as historical operating expenses adjusted for inflation. This cash flow analysis is largely dependent upon the operating plans of the Company, which are reviewed by the Company and its Board of Directors no less than annually, normally during the fourth quarter of each year. Changes in anticipated activity levels, pricing or operating expenses can have significant effects on the ultimate value of the undiscounted cash flow analysis.
During the third quarter of 2024, the Company began a review of our mining assets and our future mining plans. This review will continue through the fourth quarter of 2024. Should the anticipated future mining activity be reduced, an impairment of our mining assets could occur. The amount of any such potential impairment, if any, is not currently estimable and will ultimately be based upon the finalized operating plans of the Company as approved by its Board of Directors, market driven pricing and cost trends, which are not known at this time. Nevertheless, the carrying amount of the Company’s mining assets is material to its condensed consolidated balance sheet at September 30, 2024 and any future impairment of such assets could therefore be material. The Company has concluded that no impairment exists as of September 30, 2024 as no triggering events have occurred during the period ended September 30, 2024.
Our condensed consolidated financial statements should be read in conjunction with this discussion. This analysis includes a discussion of metrics on a per mega-watt hour (MWh) and a per ton basis as 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.
22
OVERVIEW
I.
Q3 2024 Net Income of $1.6 million.
II.
Q3 2024 Activity
III.
Solid Forward Sales Position (unaudited)
2029
Power
Energy
Contracted MWh (in millions)
0.81
2.56
1.83
1.78
1.09
0.27
8.34
Average contracted price per MWh
35.51
35.81
55.37
54.65
53.07
51.33
Contracted revenue (in millions)
28.76
91.67
101.33
97.28
57.85
13.86
390.75
Average daily contracted capacity MW
716
801
744
623
454
100
Average contracted capacity price per MW
205
198
230
226
225
Contracted capacity revenue (in millions)
13.54
57.89
62.46
51.39
37.39
3.47
226.14
Total Energy & Capacity Revenue
Contracted Power revenue (in millions)
42.30
149.56
163.79
148.67
95.24
17.33
616.89
Coal
Priced tons - 3rd party (in millions)
0.66
1.50
0.50
5.94
Avg price per ton - 3rd party
48.02
50.04
56.17
57.17
Contracted coal revenue - 3rd party (in millions)
31.69
89.07
84.26
85.76
29.50
320.28
Committed and unpriced tons - 3rd party (in millions)
Total contracted tons - 3rd party (in millions)
2.78
2.50
8.94
TOTAL CONTRACTED REVENUE (IN MILLIONS) - CONSOLIDATED
73.99
238.63
248.05
234.43
124.74
937.17
Priced tons - Merom (in millions)
2.30
9.47
Avg price per ton - Merom
51.00
Contracted coal revenue - Merom (in millions)
13.77
117.30
482.97
TOTAL CONTRACTED REVENUE (IN MILLIONS) - SEGMENT
87.76
355.93
365.35
351.73
242.04
1,420.14
24
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Material Off-Balance Sheet Arrangements
CAPITAL EXPENDITURES (capex)
For the nine months ended September 30, 2024, capex was $39.6 million allocated as follows (in millions):
Oaktown – maintenance capex
18.3
Oaktown – investment
4.7
Freelandville Mine
Merom Plant
16.1
0.5
Capex per the Condensed Consolidated Statements of Cash Flows
39.6
RESULTS OF OPERATIONS
Presentation of Segment Information
Our operations are divided into two primary reportable segments: Electric Operations and Coal 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 Condensed 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 held-for-sale wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.
25
Electric Operations
Delivered Energy
OPERATING REVENUES:
29,602
50,652
76,522
147,032
6,176
5,727
25,958
16,640
91
87
316
306
7,360
7,705
22,203
23,871
115
339
1,252
1,195
3,760
3,494
INCOME (LOSS) FROM OPERATIONS
(per MWh Sold)
MWh Generated (in thousands)
1,074
1,307
2,670
3,612
MWh Purchased (in thousands)
109
243
MWh Sold (in thousands)
1,183
2,913
47.21
41.62
50.59
51.13
13.41
9.96
15.28
12.77
0.16
0.11
0.18
0.09
60.78
51.69
66.05
63.99
25.02
38.75
26.27
40.71
5.22
4.38
8.91
4.61
2.66
2.64
0.08
0.07
6.22
5.90
7.62
6.61
4.06
3.59
4.87
3.89
0.10
0.12
0.13
1.06
0.91
1.29
0.97
44.42
53.72
51.83
57.00
INCOME (LOSS) FROM OPERATIONS:
16.36
(2.03)
14.22
6.99
26
2024 vs. 2023 (third quarter)
Revenues from electric operations increased $4.4 million, or 6.5%, compared to the third quarter of 2023. While the Merom Facility ran less hours in the third quarter of 2024 compared to 2023, the contracted hours were at higher prices. We have new delivered energy contracts and capacity contracts with sales starting in 2024. We entered into three new delivered energy contracts during the current year which increased revenues by $20.9 million. We entered into three capacity contracts during 2023 that began delivery in 2024 and one new capacity contract that we entered into during the current year, which increased revenues by $10.9 million. Revenue increases from new contracts were offset by suppressed MISO pricing (~66% of total energy hours at the Merom node being priced below our production cost at our Merom Facility), and reductions in demand for Power and higher demand for Gas as Gas inventories remained high, with a continued decline in average spot pricing per MBtu of $2.11 compared to $2.59 during the same three-month period in 2023.
Fuel decreased $21.1 million, or 41.6%, compared to the third quarter of 2023. Our MWh sold decreased by 124 MWh, or 9.5%, from the third quarter of 2023. The decrease in fuel costs are primarily related to our decreased electricity sales and declines in coal market pricing. We used 0.1 million less tons of coal in our electric production compared to the third quarter of 2023. The average purchase price per ton of coal used in the plant on a segment basis, was $53.33 in the third quarter of 2024, decreasing from $76.94 per ton in the third quarter of 2023.
Cost of purchased power was $3.1 million during the third quarter of 2024. As noted above, when energy hours at the Merom Hub are priced below our production cost at our Merom Facility, we make net hourly purchases of power in the MISO market.
Income from operations increased $22.0 million, or 823.3%, and increased $18.39 per MWh, from the three months ended September 30, 2023. The main drivers of this change in income from operations are described in the discussion above.
2024 vs. 2023 (nine months)
Delivered energy revenues from electric operations decreased $37.3 million, or 20.2%, compared to the nine months ended September 30, 2023 due to suppressed MISO pricing (~75% of total energy hours at the Merom Hub being priced below our production cost at our Merom Facility), reductions in demand for Power and higher demand for Gas as Gas inventories remained high with a continued decline in average spot pricing per MBtu of $2.11 compared to $2.47 during the same nine-month period in 2023.
Fuel decreased $70.5 million, or 48.0%, compared to the nine months ended September 30, 2023. Production decreased by 942 MWh, or 26.1%, from the first nine months of 2023. The decrease in fuel costs are due to the expiration of a coal purchase contract in June of 2023 and declines in coal market pricing. We used 0.5 million less tons of coal in our electric production compared to the nine months ended September 30, 2023. The average purchase price per ton of coal used in the plant on a segment basis, was $54.83 for the nine months ended September 30, 2024, decreasing from $62.37 during the nine months ended September 30, 2023. As discussed above, average spot prices for Gas were down per MMBtu decreasing the demand for Electric Power.
Cost of purchased power was $7.7 million during the first nine months of 2024. As noted above, when energy hours at the Merom Hub are priced below our production cost at our Merom Facility, we make net hourly purchases of power in the MISO market.
Other operating and maintenance costs increased $9.3 million, or 56.0%, compared to the nine months ended September 30, 2023 primarily due to our planned maintenance outage during the second quarter of 2024 which resulted in $7.0 million in additional costs for the period.
Income from operations increased $16.1 million, or 63.7%, and increased $7.23 per MWh, from the nine months ended September 30, 2023. The main drivers of this change in income from operations are described in the discussion above.
Coal Operations
572
1,537
2,557
5,712
27,031
59,700
80,419
122,882
3,094
4,421
10,639
13,041
19,361
29,934
66,241
90,827
295
309
869
912
2,082
2,552
8,012
7,747
(per ton)
Tons Sold (in thousands)
926
2,054
2,989
5,461
53.27
65.67
54.41
62.86
0.62
0.75
0.86
1.05
29.19
29.07
26.90
22.50
3.34
2.15
3.56
20.91
14.57
22.16
16.63
9.73
5.60
9.59
6.82
0.32
0.15
0.29
0.17
0.06
2.25
1.24
2.68
1.42
66.43
53.61
66.10
51.10
(13.16)
12.06
(11.69)
11.76
Segment operating revenues from coal operations decreased $85.6 million, or 63.4%, from the third quarter of 2023. Consolidated operating revenues from coal operations decreased $65.2 million, or 66.6%, from the third quarter of 2023. These declines were due to reductions in volume and average sales price for our coal. Our average sales price, on a segment basis, decreased $12.40 per ton and we sold 1.1 million tons less compared to the third quarter of 2023. Our average sales price on a consolidated basis decreased $7.91 per ton and we sold 1.0 million tons less compared to the third quarter of 2023. Operating revenues for the third quarter of 2024 include $16.7 million in sales to the Merom plant which were eliminated in the consolidation.
Other operating and maintenance costs decreased $32.7 million, or 54.7%, and labor decreased $10.6 million, or 35.3%, from the third quarter of 2023. These changes were driven by impacts from the Reorganization Plan disclosed in “Item 1. Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements. During the third quarter 2024, underground costs such as roof support and belt maintenance, fuel and utilities, as well as maintenance costs all had significant decreases in comparison to the third quarter of 2023. We produced 0.7 million tons less in the third quarter of 2024 than the third quarter of 2023.
28
Depreciation, depletion, and amortization decreased $2.5 million, or 21.7%, from the third quarter of 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.
Income (loss) from operations decreased $36.9 million, or 149.2%, and decreased $25.22 per ton, from the three months ended September 30, 2023. The main drivers of this change in income (loss) from operations are described in the discussion above.
Segment operating revenues from coal operations decreased $180.6 million, or 52.6%, from the nine months ended September 30, 2023. Consolidated operating revenues from coal operations decreased $166.0 million, or 58.7%, from the nine months ended September 30, 2023. These declines were due to reductions in volume and average sales price for our coal. Our average sales price, on a segment basis, decreased $8.45 per ton and we sold 2.5 million tons less compared to the first nine months of 2023. Our average sales price, on a consolidated basis, for the first nine months of 2024, decreased $4.63 per ton and we sold 2.6 million tons less compared to the first nine months of 2023.
Other operating and maintenance costs decreased $42.5 million, or 34.6%, and labor decreased $24.6 million, or 27.1%, from the nine months ended September 30, 2023. These changes were driven by the Reorganization Plan disclosed in “Item 1. Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements. During the first nine months of 2024, we produced 2.3 million tons less on a segment basis than the first nine months of 2023. Additionally, we went from 5 mines producing to 1 mine producing and reduced our coal employee headcount by 313 employees as part of the Reorganization Plan.
Depreciation, depletion, and amortization decreased $8.6 million, or 23.0%, from the nine months ended September 30, 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.
Income (loss) from operations decreased $99.2 million, or 154.4%, and decreased $23.45 per ton, from the nine months ended September 30, 2023. The main drivers of this change in income from operations are described in the discussion above.
Quarterly coal sales and cost data on a segment basis are as follows (in thousands, except per ton data and wash plant recovery percentage):
All Mines
4th 2023
1st 2024
2nd 2024
3rd 2024
T4Qs
Tons produced
1,331
1,271
889
873
4,364
Tons sold
1,461
1,214
849
4,450
Wash plant recovery in %
60
59
Capex
17,867
8,632
7,560
40,869
Maintenance capex
13,567
8,085
6,014
4,208
31,874
Maintenance capex per ton sold
9.29
6.66
7.08
4.54
7.16
4th 2022
1st 2023
2nd 2023
3rd 2023
1,721
1,723
1,594
7,044
1,664
1,693
1,714
7,125
68
70
67
65
12,368
12,639
14,445
51,022
5,748
7,778
9,754
7,938
31,218
Maintenance capex per ton
3.45
4.59
5.69
3.86
29
Presentation of Consolidated Information
EARNINGS (LOSS) PER SHARE
(0.31)
(0.05)
0.67
0.51
0.83
0.61
0.47
Our effective tax rate (ETR) is estimated at ~24% and ~13% for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income (loss), 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 9 - Stock Compensation Plans” for a discussion of RSUs.
CRITICAL ACCOUNTING ESTIMATES
We believe that the estimates of coal reserves, asset retirement obligation liabilities, deferred tax accounts, valuation of inventory, and the estimates used in 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.
SMCRA and similar state statutes require, among other things, that surface disturbance be restored in accordance with specified standards and approved reclamation plans. SMCRA requires us to restore affected surface areas to approximate the original contours as contemporaneously as practicable with the completion of surface mining operations. Federal law and some states impose on mine operators the responsibility for replacing certain water supplies damaged by mining operations and repairing or compensating for damage to certain structures occurring on the surface as a result of mine subsidence, a consequence of longwall mining and possibly other mining operations.
Obligations are reflected at the present value of their future cash flows. We reflect accretion of the obligations for the period from the date they are incurred through the date they are extinguished. The ARO assets are amortized using the units-of-production method over estimated recoverable (proven and probable) reserves. We use credit-adjusted risk-free discount rates ranging from 7% to 10% to discount the obligation, inflation rates anticipated during the time to reclamation, and cost estimates prepared by its engineers inclusive of market risk premiums. Activities include reclamation of pit and support acreage at surface mines, sealing portals at underground mines, and reclamation of refuse areas and slurry ponds.
30
Accretion expense is recognized on the obligation through the expected settlement date. On at least an annual basis, we review our entire reclamation liability and make necessary adjustments for permit changes as granted by state authorities, changes in the timing and extent of reclamation activities, and revisions to cost estimates and productivity assumptions, to reflect current experience. Any difference between the recorded amount of the liability and the actual cost of reclamation will be recognized as a gain or loss when the obligation is settled.
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 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. As of September 30, 2024, and December 31, 2023, coal inventory includes NRV adjustments of $1.8 million and $2.0 million, respectively.
Long-lived assets used in operations are depreciated and assessed for impairment annually or whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows is expected to be generated by an asset group. For impairment assessments, management groups individual assets based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The determination of the lowest level of cash flows is largely based on nature of production, common infrastructure, common sales points, common regulation and management oversight to make such determinations. These determinations could impact the determination and measurement of a potential asset impairment. This cash flow analysis is largely dependent upon the operating plans of the Company, which are reviewed by the Company and its Board of Directors no less than annually, normally during the 4th quarter of each year. Changes in anticipated activity levels, pricing or operating expenses can have significant effects on the ultimate value of the undiscounted cash flow analysis.
During the third quarter of 2024, the Company began a review of its Oaktown mining facilities and future mining plan related to this complex. This review will continue through the fourth quarter of 2024. Should the anticipated future mining activity related to the Company’s Oaktown mining facilities be reduced, an impairment of certain mining assets could occur. The amount of any such potential impairment, if any, is not currently estimable and will ultimately be based upon the finalized operating plans of the Company as approved by its Board of Directors, market driven pricing and cost trends, which are not known at this time. Nevertheless, the carrying amount of the Company’s mining assets is material to its condensed consolidated balance sheet at September 30, 2024 and any future impairment of such assets could therefore be material.
No material changes from the disclosure in our 2023 Annual Report on Form 10-K.
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 and CFO and 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 and CFO of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO 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, 2024, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
See Exhibit 95.1 to this Form 10-Q for a listing of our mine safety violations.
Exhibit No.
Document
10.1
Fourth Amended and Restated Credit Agreement dated as of September 27, 2024 (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed by the Company on October 3, 2024)
10.2
Second Amended to the Fourth Amended and Restated Credit Agreement dated as of October 23, 2024
31.1
SOX 302 Certification - Chief Executive Officer
31.2
SOX 302 Certification - Chief Financial Officer
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)
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.
Date: November 12, 2024
/s/ MARJORIE HARGRAVE
Marjorie Hargrave, CFO (Principal Financial Officer and Principal Accounting Officer)