HNRG 10-Q Quarter ended Sept. 30, 2023

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.

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.

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.

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):

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:

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.

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.

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.

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.

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.

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:

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.

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

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

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.

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.

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.

We own a 50 % i nterest 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.

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.

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.