HNRG 10-Q Quarter ended June 30, 2024

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. 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.

We strategically view and manage our operations through two 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, 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.

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 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 six months ended June 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.

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 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 six -month periods ended June 30, 2024 and June 30, 2023, no impairment charges were recorded for long-lived assets.

Inventory is valued at a lower of cost or net realizable value (NRV).  As of June 30, 2024 , and December 31, 2023 , coal inventory includes NRV adjustments of $ 0.9 million and $ 2.0 million, respectively.

At June 30, 2024, the Company had term debt of $ 45.5 million. 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.

Bank debt was reduced by $ 46.0 million during the six months ended June 30, 2024.

Liquidity

As of June 30, 2024 , we had additional borrowing capacity of $ 54.4 million and total liquidity of $ 60.7 million. Our additional borrowing capacity utilizes our $ 75.0 million revolver availability and reduces it by $ 20.6 million for outstanding letters of credit that we were required to maintain for surety bonds.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

Fees

Unamortized bank fees related to our term debt as of June 30, 2024 , and December 31, 2023 , were $ 2.8 million and $ 3.6 million, respectively.  These unamortized bank fees were deferred and are being amortized over the term of the loan.

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 2.25 to 1.00. As of June 30, 2024 , our Leverage Ratio of 2.12 was in compliance with the requirements of the credit agreement.

The credit facility also 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 June 30, 2024, our Debt Service Coverage Ratio of 1.56 was in compliance with the requirements of the credit agreement.

As of June 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 June 30, 2024 , we were paying SOFR plus 5.00 % on the outstanding bank debt which equates to an all-in rate of 10.49 %.

Accounts payable and accrued liabilities consist of the following for the indicated dates (in thousands):

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.

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.

Electric operations

Coal operations

Performance Obligations

Electric operations

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 $ 83.9 million through 2025 as of June 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 June 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 $ 30.0 million as of June 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 June 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 Hoosier, through 2029 totaling $ 152.0 million and $ 151.1 million, respectively, as of June 30, 2024 . We have $ 45.0 million and $ 39.8 million of deferred revenue as of June 30, 2024 , related to the prepaid physically delivered power contract and other capacity obligations outside of the Hoosier APA, respectively.

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 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 $ 207.7 million, which represents the average fixed prices on our committed contracts as of June 30, 2024. We expect to recognize approximately 30.3 % of this coal sales revenue in 2024, with the remainder recognized through 2027 .

We have remaining performance obligations relating to coal sales contracts with price reopeners of approximately $ 154.5 million, which represents our estimate of the expected reopener price on committed contracts as of June 30, 2024. We expect to recognize all of this coal sales revenue 2025 through 2027.

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.

For the six months ended June 30, 2024 and 2023, 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 six months ended June 30, 2024 and 2023, was ~23% and ~11%, 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 six months ended June 30, 2024 our stock compensation was $ 1.6 million and $ 2.2 million, respectively. For the three and six months ended June 30, 2023, our stock compensation was $ 0.8 million and $ 2.0 million, respectively.

Non-vested RSU grants will vest as follows:

The outstanding RSUs have a value of $ 8.1 million based on the June 28, 2024 closing stock price of $ 7.77 .

As of June 30, 2024, unrecognized stock compensation expense is $ 5.7 million, and we had 48,761 RSUs available for future issuance.  RSUs are not allocated earnings and losses as they are considered non-participating securities.

Future minimum lease payments under non-cancellable leases as of June 30, 2024, were as follows:

The following are reflected within the indicated condensed consolidated balance sheet line items:

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 June 30, 2024 and December 31, 2023, respectively. The historical cost of such equipment was approximately $ 250.4 million and $ 262.0 million as of June 30, 2024 , and December 31, 2023 .

We also self-insure for workers’ compensation claims.  Restricted cash of $ 4.3 million as of June 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.

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 $ 10.7 million and $ 7.1 million as of June 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.

We own a 50 % i nterest 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 June 30, 2024 , and December 31, 2023 , was $ 2.3 million and $ 2.8 million, respectively.

On July 29, 2022, we issued a $ 5.0 million senior unsecured convertible note (the “July 29 ^th Note”) to a related party affiliated with an independent member of our board of directors.  The July 29 ^th 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 July 29 ^th 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 29 ^th 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 six months ended June 30, 2024. As of June 30, 2024, the entire July 29 ^th Note had been converted to shares of common stock of the Company.

On August 8, 2022, we issued an additional $ 4.0 million of senior unsecured convertible notes (the “August 8 ^th Notes”) to related parties affiliated with independent members of our board of directors.  The August 8 ^th 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, we may elect to redeem the August 8 ^th Notes and the holder shall be 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 may elect 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 8 ^th 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 8 ^th 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 June 30, 2024, the entire August 8 ^th Note had been converted to shares of common stock of the Company.