Hallador Energy pany(HNRG) - 2022 Q4 - Annual Report

Part I Business The company operates in coal mining and electricity generation, with a focus on the Illinois Basin and significant regulatory oversight - On October 21, 2022, Hallador acquired the one Gigawatt Merom Generating Station from Hoosier Energy, creating a new electric operations segment[152] - The coal mining and electricity generation industries are heavily regulated, leading to significant compliance costs[12][13] - The company mines coal exclusively in the Illinois Basin (ILB) using the continuous (room-and-pillar) mining technique[68][70] - As of December 31, 2022, the company employed 980 full-time employees, with the entire workforce being union-free[72] Regulation and Laws The company's operations are subject to stringent federal and state regulations that increase costs and impact coal demand - The Inflation Reduction Act of 2022 raised the Black Lung excise tax to up to $1.10/ton for underground-mined coal and $0.55/ton for surface-mined coal[29] - The Abandoned Mine Lands Program fee was reauthorized through September 2034 at $0.224/ton for surface-mined and $0.096/ton for underground-mined coal[35] - Regulations like the Cross-State Air Pollution Rule (CSAPR) and Mercury and Air Toxic Standards (MATS) have led to retirements of coal-fired units, reducing coal demand[40][41] - Future regulation of GHG emissions could further increase costs and negatively impact demand for coal[42][43] U.S. Coal Industry The company operates exclusively in the strategically located Illinois Basin, competing with major producers in a highly competitive market - Hallador's subsidiary, Sunrise Coal, LLC, mines coal exclusively in the Illinois Basin (ILB)[68] - The company utilizes the continuous (room-and-pillar) mining technique, where rooms are cut into the coal bed[70] - Key competitors in the U.S. coal industry include Peabody Energy Corporation (BTU) and Alliance Resource Partners (ARLP)[71] Human Capital The company employs a non-union workforce and prioritizes employee health, safety, and retention through competitive benefits - At December 31, 2022, the company had 980 full-time employees, all of whom are union-free[72] - The company maintains its own private mine rescue team and provides employees access to a private health and wellness clinic[73][74] Risk Factors The company faces significant risks from customer concentration, regulatory changes, ESG pressures, and declining coal demand Risks Related to our Business Key business risks include high customer concentration, challenges integrating the Merom acquisition, and restricted access to capital from ESG pressures - In 2022, 90% of coal revenue was derived from five customers, and 100% of electric revenue came from a single customer[82] - The Merom Generating Station acquisition may not achieve expected benefits and includes environmental costs that could exceed estimates[85] - As of December 31, 2022, the company was in compliance with its debt covenants, with a debt service coverage ratio of 1.49 and a leverage ratio of 2.05[91][92] - Investor and lender focus on ESG matters could negatively impact access to capital and increase costs[95][96] Risks Related to our Industry The coal industry faces declining demand from utilities, intense competition, and costly environmental regulations targeting climate change - The domestic electric utility industry is reducing coal consumption due to competition from natural gas and renewable energy[105][106][108] - Climate change presents significant regulatory and financial risks, as ESG focus could reduce demand and funding for fossil fuels[109][110][112] - Obtaining necessary governmental permits is complex, while securing surety bonds for reclamation has become increasingly difficult and costly[121][137] - The industry faces operational challenges from inflation, which increases material costs, and a shortage of skilled labor[135][139] Unresolved Staff Comments The company reports no unresolved staff comments - None[144] Properties Information regarding the company's properties is detailed in Item 7, Management's Discussion and Analysis - The discussion of the company's properties is located in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations"[144] Legal Proceedings The company reports no material legal proceedings - None[145] Mine Safety Disclosures A detailed listing of mine safety violations is provided in Exhibit 95 of the Form 10-K - A detailed listing of mine safety violations is provided in Exhibit 95 to this Form 10-K[146] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ, with significant insider ownership and a broad base of beneficial owners - The company's common stock trades on the NASDAQ Capital Market under the symbol HNRG[147] - As of March 10, 2023, there were 249 shareholders of record, with an estimated over 5,000 street name holders[148] - Officers, directors, and their affiliates hold 31.7% of the company's common stock[147] Management's Discussion and Analysis of Financial Condition and Results of Operations The 2022 acquisition of the Merom plant created a new electric segment, driving higher cash flow and debt reduction - The company now has two reportable segments: coal operations and electric operations following the Merom power plant acquisition[153] - In summer 2022, the company signed 2.2 million tons of new coal sales contracts at an average price of ~$125 per ton[155] - Bank debt was reduced by $26.5 million during 2022, ending the year at $85.2 million[158] - Cash provided by operations increased to $54.2 million in 2022 from $48.0 million in 2021, due to higher operating margins[188] Mining Properties The Oaktown Mining Complex is the company's primary asset, with 66.3 million tons of reserves and 6.4 million tons of production in 2022 Summary Mineral Reserves (as of Dec 31, 2022) | Mine | Proven (M tons) | Probable (M tons) | Total (M tons) | | :--- | :--- | :--- | :--- | | Oaktown Fuels No. 1 | 36.2 | 0.5 | 36.7 | | Oaktown Fuels No. 2 | 28.5 | 1.1 | 29.6 | | Total | 64.7 | 1.6 | 66.3 | Oaktown Mining Complex Production (Saleable Tons) | Year | Million Tons | | :--- | :--- | | 2022 | 6.4 | | 2021 | 5.6 | | 2020 | 5.2 | Our Coal Contracts Revenue is highly concentrated among five customers, with 7.5 million tons contracted for 2023 and options to supply its own power plant - In 2022, 90% of coal revenue came from five customers, including subsidiaries of CenterPoint Energy, Alcoa, AES Corp, and Duke Energy[181][182] - Beginning in 2024, the company has the option to sell up to 3.0 million tons of its coal annually to its Merom power plant[185] Forward Contracted Sales (as of Dec 31, 2022) | Year | Contracted Tons (millions) | Est. Price per Ton | | :--- | :--- | :--- | | 2023 | 7.5 | $58.70 | | 2024 - 2027 (total) | 7.3 | Unpriced/Partially Priced | | Total | 14.8 | | Liquidity and Capital Resources Operating cash flow of $54.2 million funded debt reduction and capex, with a $69 million capex budget planned for 2023 - Cash provided by operations was $54.2 million in 2022, compared to $48.0 million in 2021[188] - The 2023 capital expenditure budget is $69 million, allocated as $34 million for coal and $35 million for electric operations[189] - Bank debt was reduced to $85.2 million as of December 31, 2022, with a subsequent maturity extension to May 2024[190] Results of Operations The company shifted to a net income of $18.1 million in 2022, driven by higher coal margins and the new electric segment Quarterly Coal Margin Analysis (2022) | Metric | 1st 2022 | 2nd 2022 | 3rd 2022 | 4th 2022 | | :--- | :--- | :--- | :--- | :--- | | Avg Price/Ton | $41.40 | $40.23 | $49.01 | $50.87 | | Avg Cost/Ton | $39.54 | $31.83 | $37.46 | $40.46 | | Margin/Ton | $1.86 | $8.39 | $11.55 | $10.41 | Quarterly Net Income (Loss) (2022, in thousands) | Quarter | Net Income (Loss) | | :--- | :--- | | Q1 2022 | $(10,134) | | Q2 2022 | $(3,386) | | Q3 2022 | $1,612 | | Q4 2022 | $30,013 | Financial Statements and Supplementary Data The company's financials reflect a major transformation in 2022, with assets and revenues growing significantly after the Merom acquisition Consolidated Balance Sheets Total assets grew to $630.6 million and liabilities to $415.5 million, driven by the Merom power plant acquisition Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $138,519 | $39,239 | | Total Property, Plant and Equipment, net | $480,462 | $302,824 | | Total Assets | $630,554 | $353,980 | | Total Current Liabilities | $239,602 | $64,626 | | Total Long-term Liabilities | $175,928 | $103,119 | | Total Liabilities | $415,530 | $167,745 | | Total Stockholders' Equity | $215,024 | $182,235 | Consolidated Statements of Operations The company achieved a net income of $18.1 million in 2022, a turnaround from a $3.8 million loss in 2021 Consolidated Statement of Operations Highlights (in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Sales and Operating Revenues | $361,991 | $247,666 | | Income (Loss) from Operations | $30,430 | $(6,044) | | Net Income (Loss) | $18,105 | $(3,754) | | Diluted EPS | $0.55 | $(0.12) | Consolidated Statements of Cash Flows Net cash from operations was $54.2 million, primarily used for capital expenditures and significant debt repayments Consolidated Cash Flow Highlights (in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $54,169 | $47,974 | | Net cash used in investing activities | $(53,365) | $(27,525) | | Net cash used in financing activities | $(207) | $(26,691) | | Increase (decrease) in cash | $597 | $(6,242) | Notes to Consolidated Financial Statements Notes detail the Merom asset acquisition accounting, credit agreement amendments, and issuance of convertible notes - The Merom power plant acquisition was accounted for as an asset acquisition with total consideration of $181.1 million[339][341] - The company issued a total of $29 million in senior unsecured convertible notes in 2022, with $10 million converted to equity[342][343] - As of Dec 31, 2022, the company had remaining coal sales performance obligations of approximately $593 million under fixed-price contracts[304][305] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2022 - Management concluded that disclosure controls and procedures were effective as of the end of the period[353] - Management's evaluation of ICFR excluded the recently acquired Hallador Power Company, LLC (Merom plant)[355] - Management concluded that ICFR was effective as of December 31, 2022, with an unqualified opinion from Grant Thornton LLP[356] Other Information A March 2023 credit agreement amendment converted debt, extended maturities, and increased the 2023 capex covenant - On March 13, 2023, the company amended its credit agreement to convert $35 million of its revolver into a term loan and extend maturities[367] - The amendment increased the 2023 capital expenditure covenant to $75 million and transitioned interest rates from LIBOR to SOFR[367][368] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Certain Relationships Required information for Items 10-14 is incorporated by reference from the company's forthcoming definitive proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement[372] Part IV Exhibits and Financial Statement Schedules This section provides an index to financial statements and a list of all exhibits filed with the Form 10-K - This section contains the index to financial statements and a list of exhibits filed with the report[374][375]