Hallador Energy pany(HNRG) - 2021 Q4 - Annual Report

PART I Business Overview Hallador Energy Company primarily engages in coal mining in the Illinois Basin through its subsidiary, Sunrise Coal, LLC, serving the electric power generation industry - The company's main business is coal mining in Indiana through its wholly-owned subsidiary, Sunrise Coal, LLC, primarily supplying the electric power generation industry[166] - The coal mining industry is heavily regulated in areas such as employee health and safety, environmental standards (air and water quality), and mine permitting, which significantly impacts operating costs[14][17] - As of December 31, 2021, the company employed 805 full-time employees and temporary miners, with the entire workforce being union-free[81] - The company competes with major producers like Peabody Energy Corporation and Alliance Resource Partners, primarily within the Illinois Basin (ILB)[76][80] Regulation and Laws The company is subject to extensive and costly federal, state, and local regulations covering environmental protection, mine safety, and employee health - The company is subject to extensive regulations from authorities like the Mine Safety and Health Administration (MSHA) and the Environmental Protection Agency (EPA), which impose significant compliance costs[14][15] - The Surface Mining Control and Reclamation Act (SMCRA) requires the company to meet comprehensive environmental protection and reclamation standards, including restoring land to its approximate original contours[38][39] - Regulations on air emissions, such as the Clean Air Act (CAA), and greenhouse gas (GHG) emissions directly and indirectly impact operations by regulating coal-fired power plants, potentially reducing demand for coal[45][48] - The company must secure surety bonds for reclamation obligations, which have become increasingly difficult and costly to obtain, posing a potential risk to operations[44] Human Capital The company maintains a union-free workforce, emphasizing a strong safety culture and comprehensive employee benefits - As of December 31, 2021, Hallador Energy and its subsidiaries employed 805 full-time employees and temporary miners, with 760 directly involved in coal mining or washing processes[81] - The company maintains a robust safety program, with standards exceeding mandated guidelines, and operates its own private mine rescue team, achieving safety metrics at or below national averages in 2021[82] - To mitigate the spread of COVID-19, the company has implemented policies aligned with CDC guidelines and offers cash incentives to employees who provide proof of vaccination[85] Risk Factors The company faces significant risks related to its business and the broader coal industry, including market volatility, regulatory burdens, and competition Risks Related to our Business Business-specific risks include pandemic impacts, customer concentration, restrictive covenants, and challenges in accessing capital markets due to ESG focus - The COVID-19 pandemic has created significant volatility and uncertainty, impacting global economic activity, coal demand, and operational continuity[87] - In 2021, 95% of revenue was derived from five customers, making the loss of any significant customer a material risk to the business[94] - The company's credit agreement contains restrictive covenants, including a Minimum Debt Service Coverage Ratio and a Maximum Leverage Ratio, which if breached, could lead to default[102] - Increased investor and lender focus on Environmental, Social, and Governance (ESG) matters may negatively impact the company's reputation, stock price, and access to capital[106][107] Risks Related to our Industry Industry-wide risks include coal price volatility, intense competition from alternative fuels, and extensive environmental regulations that could reduce long-term coal demand - The company's results are highly dependent on coal prices, which are influenced by factors beyond its control, including supply and demand, weather, and governmental regulations[110] - Competition from other fuels, particularly natural gas, has the potential to displace a significant amount of coal-fired electric power generation[115] - Extensive and evolving environmental laws, especially those targeting greenhouse gas emissions and climate change, could increase operating costs and reduce demand for coal[118][119] - Obtaining and renewing necessary governmental permits for mining operations is a complex and lengthy process that can be subject to delays and public challenges, potentially reducing production[133] Properties This section refers to Item 7, Management's Discussion and Analysis, for a detailed discussion of the company's mining properties - A detailed discussion of the company's properties is provided in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations"[155] Mine Safety Disclosures The company emphasizes that safety is a core value and directs stakeholders to Exhibit 95 of the Form 10-K for a detailed listing of its mine safety violations - A comprehensive list of the company's mine safety violations is available in Exhibit 95 to this Form 10-K[157] PART II Market for Registrant's Common Equity and Related Matters Hallador Energy's common stock is traded on the NASDAQ Capital Market under the symbol HNRG, with officers, directors, and their affiliates holding 30.7% of the outstanding shares as of March 23, 2022 - The company's common stock trades on the NASDAQ Capital Market under the symbol HNRG[159] - As of March 23, 2022, there were 30,785,067 shares outstanding, with officers, directors, and their affiliates holding 30.7%[6][159] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2021, Hallador Energy reported a net loss of $3.8 million, an improvement from 2020, with increased coal sales volume and a strategic acquisition of the Merom Generating Station expected to significantly boost future earnings - The company announced the acquisition of Hoosier Energy's 1-Gigawatt Merom Generating Station, a transaction expected to close in mid-July 2022 and significantly increase future earnings[167][171] - For 2021, the company reported a net loss of $3.8 million, an improvement from the $6.2 million net loss in 2020[214][249] - Operating cash flow was $48.0 million in 2021, which was used to pay down bank debt by $26.0 million, and the company's $10 million PPP loan was fully forgiven[206][214] - The company is increasing production to 7 million tons annually starting in 2022 to meet rising demand, driven by favorable market conditions including high natural gas prices and strong export markets[202][225] Mining Properties The Oaktown Mining Complex, consisting of two active underground mines in Indiana and Illinois, represents the company's individually material property Summary of Mineral Reserves as of December 31, 2021 | Mine/Complex | Proven (million tons) | Probable (million tons) | Total (million tons) | | :--- | :--- | :--- | :--- | | Oaktown Mining Complex | | | | | Oaktown Fuels No. 1 Mine | 40.1 | 0.4 | 40.5 | | Oaktown Fuels No. 2 Mine | 29.7 | 1.2 | 30.9 | | Total | 69.8 | 1.6 | 71.4 | - The Oaktown Mining Complex is the company's individually material property, consisting of two active underground mines, Oaktown Fuels No. 1 and No. 2, located in Indiana and Illinois[175][179] Oaktown Mining Complex Historical Production (Million Tons) | Mine | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Oaktown Fuels No. 1 Mine | 3.5 | 3.4 | 4.2 | | Oaktown Fuels No. 2 Mine | 2.1 | 1.8 | 2.3 | | Total | 5.6 | 5.2 | 6.5 | Our Coal Contracts In 2021, 95% of revenue came from five key customers, with future contracted volumes extending through 2027 and the Merom Power Plant acquisition expected to significantly increase internal consumption - In 2021, 95% of revenue came from five customers operating 10 power plants, including Vectren, Orlando Utility Commission, Alcoa, Indianapolis Power & Light, and Duke Energy[198][199] Contracted Coal Sales Volume and Pricing | Year | Contracted Tons (millions) | Estimated Price per Ton | | :--- | :--- | :--- | | 2022 | 6.8 | $39.81 | | 2023 | 5.3 | $43.10 | | 2024 - 2027 | 6.3 | Unpriced/Partially Priced | | Total | 18.4 | | - Following the acquisition of the Merom Power Plant, Hallador Power Company is expected to consume 45% of Sunrise Coal's production by 2024[202] Liquidity and Capital Resources The company generated $48.0 million in operating cash flow in 2021, with a 2022 capital expenditure budget of $25 million, and amended its bank agreement in March 2022 to provide covenant relief Cash Flow and Capital Expenditure Summary | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Cash Provided by Operations | $48.0 million | $52.6 million | | 2022 Capital Expenditure Budget | $25 million | N/A | - The 2022 capital expenditure budget is $25 million, with $15 million allocated for maintenance capex, and scheduled long-term debt payments for 2022 total $25.7 million[207] - The company amended its bank agreement in March 2022 to provide covenant relief after experiencing lower-than-expected EBITDA in Q4 2021 due to elevated costs[208] Results of Operations In 2021, coal sales volume increased to 6.17 million tons, but average price per ton decreased, and operating costs rose due to mining challenges and workforce expansion Annual Operational Performance Comparison | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Tons Sold (millions) | 6.17 | 5.97 | | Average Price/Ton | $39.51 | $40.56 | | Average Cost/Ton | $32.16 | $31.07 | | Margin/Ton | $7.35 | $9.49 | - Operating costs per ton increased in 2021 to $32.16 from $31.07 in 2020, primarily due to mining challenges at the Ace in the Hole Mine and costs associated with hiring and training a larger workforce at Oaktown[220] - General and administrative expenses rose by $3.2 million in 2021, driven by legal and financing costs related to the Merom Power Plant acquisition[222] - The workforce increased to 797 employees and contractors at year-end 2021 from 682 at year-end 2020 to support a production increase to over 7 million tons annually[223] Financial Statements and Supplementary Data The consolidated financial statements for 2021 and 2020, audited by Plante & Moran, PLLC, show a net loss of $3.8 million in 2021, with decreases in total assets and liabilities, and initial going concern doubt alleviated by a March 2022 credit agreement amendment Key Financial Data (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $247,666 | $244,241 | | Income (Loss) from Operations | $(6,044) | $3,098 | | Net Loss | $(3,754) | $(6,220) | | Net Loss Per Share | $(0.12) | $(0.20) | | Total Assets | $353,980 | $384,130 | | Total Liabilities | $167,745 | $194,870 | | Total Stockholders' Equity | $182,235 | $185,260 | Notes to Consolidated Financial Statements Key notes detail the alleviation of going concern doubt, asset impairments, bank debt compliance, PPP loan forgiveness, and remaining performance obligations - Management identified substantial doubt about the company's ability to continue as a going concern due to likely financial covenant violations, but this doubt was alleviated by a credit agreement amendment executed in March 2022 (Note 1)[261][264] - The company recorded a $1.6 million impairment on assets at the idled Prosperity Mine in 2021 and a $1.8 million impairment on its Hourglass Sands frac sand operation in 2020 (Note 2)[289][290] - As of December 31, 2021, total bank debt was $111.7 million, and the company was in compliance with its leverage ratio (2.34 vs. 3.00 limit) and debt service coverage ratio (1.11 vs. 1.05 limit) covenants (Note 5)[296][300][302] - The company's $10 million Paycheck Protection Program (PPP) loan was fully forgiven by the SBA in July 2021, resulting in a $10 million gain on extinguishment of debt (Note 5)[307] - As of December 31, 2021, the company had remaining performance obligations of approximately $588 million for fixed-price contracts and $166 million for contracts with price reopeners (Note 7)[318][319] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and its internal control over financial reporting (ICFR) were effective as of December 31, 2021, with no significant changes in ICFR during Q4 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[359] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting (ICFR) was effective as of December 31, 2021[361] PART IV Exhibits and Financial Statement Schedules This section provides an index of the financial statements included in Item 8 and lists all exhibits filed with the Form 10-K, including credit agreements, compensation plans, certifications, and mine safety disclosures - This section contains an index of all exhibits filed with the annual report, including key agreements, certifications, and other required disclosures[371][372]