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Section 1: 10-Q (10-Q)

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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: March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number:001‑34743

 

 

 

 

 

 

“COAL KEEPS YOUR LIGHTS ON”

 

Picture 1

 

“COAL KEEPS YOUR LIGHTS ON”

HALLADOR ENERGY COMPANY

(www.halladorenergy.com)

 

 

 

Colorado

(State of incorporation)

 

84-1014610

(IRS Employer

Identification No.)

 

 

 

1183 East Canvasback Drive, Terre Haute, Indiana

(Address of principal executive offices)

 

 

47802

(Zip Code)

 

Registrant’s telephone number: 303.839.5504

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, 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 ☑

 

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

 

As of May 11, 2020, we had 30,419,967 shares outstanding.

 

 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

PART I - FINANCIAL INFORMATION 

3

ITEM 1. FINANCIAL STATEMENTS  

3

Condensed Consolidated Balance Sheets 

3

Condensed Consolidated Statements of Income (Loss) 

4

Condensed Consolidated Statements of Cash Flows 

5

Consolidated Statements of Stockholders’ Equity 

6

Notes to Condensed Consolidated Financial Statements 

7

Report of Independent Registered Public Accounting Firm 

16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

22

ITEM 4. CONTROLS AND PROCEDURES 

22

PART II - OTHER INFORMATION 

23

ITEM 1A. RISK FACTORS 

23

ITEM 4. MINE SAFETY DISCLOSURES 

23

ITEM 6. EXHIBITS  

24

 

 

 

2

Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Hallador Energy Company

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

ASSETS

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

7,918

 

$

8,799

Restricted cash (Note 12)

 

 

4,734

 

 

4,512

Certificates of deposit

 

 

 —

 

 

245

Accounts receivable

 

 

12,703

 

 

25,580

Prepaid income taxes

 

 

981

 

 

1,562

Inventory (Note 3)

 

 

37,410

 

 

28,297

Parts and supplies, net of allowance of $274 

 

 

10,886

 

 

11,775

Prepaid expenses

 

 

1,519

 

 

1,678

Total current assets

 

 

76,151

 

 

82,448

Property, plant and equipment, at cost:

 

 

  

 

 

  

Land and mineral rights

 

 

114,994

 

 

114,722

Buildings and equipment

 

 

358,488

 

 

351,614

Mine development

 

 

86,165

 

 

84,160

Total property, plant and equipment, at cost

 

 

559,647

 

 

550,496

Less - accumulated DD&A

 

 

(231,370)

 

 

(220,780)

Total property, plant and equipment, net

 

 

328,277

 

 

329,716

Investment in Sunrise Energy (Note 15)

 

 

3,306

 

 

3,139

Other long-term assets (Note 4)

 

 

7,955

 

 

10,324

Total Assets

 

$

415,689

 

$

425,627

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Current portion of bank debt, net (Note 5)

 

$

34,882

 

$

33,044

Accounts payable and accrued liabilities (Note 6)

 

 

38,247

 

 

31,800

Total current liabilities

 

 

73,129

 

 

64,844

Long-term liabilities:

 

 

  

 

 

  

Bank debt, net (Note 5)

 

 

127,123

 

 

140,594

Deferred income taxes

 

 

3,233

 

 

4,619

Asset retirement obligations (ARO)

 

 

15,993

 

 

15,694

Other

 

 

5,258

 

 

4,346

Total long-term liabilities

 

 

151,607

 

 

165,253

Total liabilities

 

 

224,736

 

 

230,097

Redeemable noncontrolling interests (Note 2)

 

 

4,000

 

 

4,000

Stockholders' equity:

 

 

  

 

 

  

Preferred stock, $.10 par value, 10,000 shares authorized; none issued

 

 

 —

 

 

 —

Common stock, $.01 par value, 100,000 shares authorized; 30,420 and 30,245 outstanding, respectively

 

 

304

 

 

304

Additional paid-in capital

 

 

102,534

 

 

102,215

Retained earnings

 

 

84,115

 

 

89,011

Total stockholders’ equity

 

 

186,953

 

 

191,530

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity

 

$

415,689

 

$

425,627

 

See accompanying notes.

3

Table of Contents

 

 

Hallador Energy Company

Condensed Consolidated Statements of Income (Loss)

For the Three Months Ended March 31,

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

2020

    

2019

 

REVENUE:

 

 

  

 

 

  

 

Coal sales

 

$

61,932

 

$

85,235

 

Other operating income (Note 8)

 

 

606

 

 

4,078

 

Total revenue

 

 

62,538

 

 

89,313

 

COSTS AND EXPENSES:

 

 

 

 

 

  

 

Operating costs and expenses

 

 

48,469

 

 

62,419

 

DD&A

 

 

10,627

 

 

11,738

 

ARO accretion

 

 

333

 

 

309

 

Exploration costs

 

 

253

 

 

280

 

SG&A

 

 

2,978

 

 

2,984

 

Interest (1)

 

 

5,714

 

 

4,619

 

Total costs and expenses

 

 

68,374

 

 

82,349

 

 

 

 

  

 

 

  

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(5,836)

 

 

6,964

 

 

 

 

  

 

 

  

 

INCOME TAX EXPENSE (BENEFIT) (NOTE 9):

 

 

  

 

 

  

 

Current

 

 

(524)

 

 

(229)

 

Deferred

 

 

(1,652)

 

 

193

 

Total income tax expense (benefit)

 

 

(2,176)

 

 

(36)

 

 

 

 

  

 

 

  

 

NET INCOME (LOSS)

 

$

(3,660)

 

$

7,000

 

 

 

 

  

 

 

  

 

NET INCOME (LOSS) PER SHARE (NOTE 13):

 

 

  

 

 

  

 

Basic and diluted

 

$

(0.12)

 

$

0.23

 

 

 

 

 

 

 

  

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

  

 

Basic and diluted

 

 

30,420

 

 

30,245

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

(1)  Bank interest

 

$

2,654

 

$

3,012

 

Non-cash interest:

 

 

 

 

 

 

 

Change in interest rate swap valuation

 

 

2,593

 

 

1,013

 

Amortization of debt issuance costs

 

 

467

 

 

543

 

Other

 

 

 —

 

 

51

 

Total non-cash interest

 

 

3,060

 

 

1,607

 

Total interest

 

$

5,714

 

$

4,619

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4

Table of Contents

Hallador Energy Company

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

2020

    

2019

 

OPERATING ACTIVITIES:

 

  

 

 

  

 

 

Net income (loss)

 

$

(3,660)

 

$

7,000

 

Deferred income taxes

 

 

(1,652)

 

 

193

 

Equity (income) loss – Sunrise Energy

 

 

(55)

 

 

34

 

DD&A

 

 

10,627

 

 

11,738

 

Unrealized gain on marketable securities

 

 

(14)

 

 

(303)

 

Gain on sale of royalty interests in oil properties

 

 

 —

 

 

(2,500)

 

Change in fair value of interest rate swaps

 

 

2,593

 

 

1,013

 

Change in fair value of fuel hedge

 

 

1,311

 

 

 —

 

Amortization and write off of deferred financing costs

 

 

467

 

 

543

 

Accretion of ARO

 

 

333

 

 

309

 

Stock-based compensation

 

 

319

 

 

494

 

Change in current assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

12,885

 

 

2,823

 

Inventory

 

 

(9,113)

 

 

(2,674)

 

Parts and supplies

 

 

889

 

 

(1,084)

 

Prepaid income taxes

 

 

581

 

 

1,340

 

Prepaid expenses

 

 

159

 

 

1,701

 

Accounts payable and accrued liabilities

 

 

(1,691)

 

 

2,325

 

Other

 

 

2,277

 

 

(2,105)

 

Cash provided by operating activities

 

$

16,256

 

$

20,847

 

INVESTING ACTIVITIES:

 

 

  

 

 

  

 

Investment in Sunrise Energy

 

 

(112)

 

 

 —

 

Capital expenditures

 

 

(6,022)

 

 

(8,840)

 

Proceeds from sale of royalty interests in oil properties

 

 

 —

 

 

2,500

 

Proceeds from sale of marketable securities

 

 

2,310

 

 

 —

 

Proceeds from maturities of certificates of deposit

 

 

245

 

 

 —

 

Cash used in investing activities

 

 

(3,579)

 

 

(6,340)

 

FINANCING ACTIVITIES:

 

 

  

 

 

  

 

Payments on bank debt

 

 

(12,100)

 

 

(20,013)

 

Dividends

 

 

(1,236)

 

 

(1,241)

 

Cash used in financing activities

 

 

(13,336)

 

 

(21,254)

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(659)

 

 

(6,747)

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

13,311

 

 

20,094

 

Cash, cash equivalents, and restricted cash, end of period

 

$

12,652

 

$

13,347

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH CONSIST OF THE FOLLOWING:

 

 

  

 

 

  

 

   Cash and cash equivalents

 

$

7,918

 

$

8,690

 

   Restricted cash

 

 

4,734

 

 

4,657

 

 

 

$

12,652

 

$

13,347

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,707

 

$

3,058

 

Cash received from income taxes

 

 

1,105

 

 

1,569

 

SUPPLEMENTAL NON-CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable and prepaid expense

 

$

3,516

 

$

3,250

 

Right-of-use assets acquired by operating lease

 

 

 

 

426

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

5

Table of Contents

 

 

Hallador Energy Company

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

 

Common Stock Issued

 

Paid-in

 

Retained

 

Stockholders'

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Equity

 

Balance, December 31, 2018

 

30,245

 

$

302

 

$

100,742

 

$

153,830

 

$

254,874

 

Stock-based compensation

 

 —

 

 

 —

 

 

494

 

 

 —

 

 

494

 

Dividends

 

 —

 

 

 —

 

 

 —

 

 

(1,241)

 

 

(1,241)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

7,000

 

 

7,000

 

Balance, March 31, 2019

 

30,245

 

$

302

 

$

101,236

 

$

159,589

 

$

261,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

30,420

 

$

304

 

$

102,215

 

$

89,011

 

$

191,530

 

Stock-based compensation

 

 —

 

 

 —

 

 

319

 

 

 —

 

 

319

 

Dividends

 

 —

 

 

 —

 

 

 —

 

 

(1,236)

 

 

(1,236)

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(3,660)

 

 

(3,660)

 

Balance, March 31, 2020

 

30,420

 

$

304

 

$

102,534

 

$

84,115

 

$

186,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

6

Table of Contents

 

Hallador Energy Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1)GENERAL BUSINESS

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 SEC’s rules and regulations; accordingly, certain information and footnote disclosures normally included in GAAP financial statements have been condensed or omitted.

The results of operations and cash flows for the three months ended March 31, 2020, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2020.

Our organization and business, the accounting policies we follow, and other information are contained in the notes to our condensed consolidated financial statements filed as part of our 2019 Form 10‑K. This quarterly report should be read in conjunction with such 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) and Hourglass Sands, LLC (Hourglass), and Sunrise’s wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Sunrise is engaged in the production of steam coal from mines located in western Indiana.

New Accounting Standards Issued and Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The amendments in this update modify the disclosure requirements for fair value measurements. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted ASU 2018-13 effective January 1, 2020. Adoption of ASU 2018-13 did not have a material impact on the Company’s condensed consolidated financial statements.

(2)LONG-LIVED ASSET IMPAIRMENTS 

Carlisle Mine

We recorded an impairment of $65.7 million as of December 31, 2019 due to our decision to idle the Carlisle Mine during Q4 2019.  The impairment included buildings, land, rail, mine development, equipment, and advanced royalties. Buildings, land, and rail were impaired to their estimated salvage value. The remaining salvage value of land and buildings at the Carlisle Mine is estimated at $1.8 million as of March 31, 2020 and December 31, 2019.

Subsequent to year end during late Q1 2020, we determined that it was economically prudent to permanently close the Carlisle Mine. Equipment totaling  $23  million is being redeployed and will be utilized at the Oaktown mines. No additional impairment costs were recorded during Q1 2020 as a result of the decision to close the Carlisle Mine. We anticipate exit and disposal costs to close the mine to be $3.0 million, which will be recorded as current period costs in Q1 and Q2 of 2020.  The exit and disposal costs during Q1 2020 were $0.5 million.

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Bulldog Reserves

As a result of the Carlisle Mine impairment, we determined that an impairment of the Bulldog Reserves was also necessary.  With the closure of the Carlisle Mine, it became apparent that the likelihood of construction and opening of Bulldog was reduced.  Based on our review, we recorded an impairment of $9.2  million as of December 31, 2019, which included land and advanced royalties, and was a complete impairment of all assets.

Hourglass Sands

We recorded an impairment of $2.9 million as of December 31, 2019, due to softness in the pricing of the frac sand market.  The impairment included inventory, land, mine development, buildings and equipment and was determined using a market approach.  The remaining fair market value of inventory, equipment, and buildings at Hourglass Sands is $1.9   million as of March 31, 2020 and December 31, 2019.

(3)INVENTORY

Inventory is valued at lower of average cost or net realizable value (NRV).  As of March 31, 2020, and December 31, 2019, coal inventory includes NRV adjustments of $1.1 million and $2.0 million, respectively.

(4)OTHER LONG-TERM ASSETS (in thousands)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

2020

    

2019

Advanced coal royalties

 

$

6,060

 

$

6,105

Marketable equity securities available for sale, at fair value (restricted)*

 

 

 —

 

 

2,296

Other

 

 

1,895

 

 

1,923

Total other assets

 

$

7,955

 

$

10,324


* Held by Sunrise Indemnity, Inc., our wholly-owned captive insurance company.

(5)BANK DEBT

On April 15, we executed an amendment to our credit agreement with PNC, administrative agent for our lenders.  The primary purpose of the amendment was to modify the allowable leverage ratio over the term of the loan to increase available liquidity.  As a result of the amendment, our maximum annual capital expenditures are limited to $30 million for 2020, and our dividend is suspended until our leverage ratio falls below 2.0X.

Our bank debt at March 31, 2020 was $168 million.  Bank debt is comprised of term debt ($96  million as of March 31, 2020) and a  $120 million revolver ($72 million borrowed as of March 31, 2020).  The term debt amortization concludes with a final payment in March 2023.  The revolver matures September 2023.  Our debt is recorded at cost, which approximates fair value due to the variable interest rates in the agreement and is collateralized primarily by our assets.

Liquidity

As of March 31, 2020, under the new leverage ratio, we had additional borrowing capacity of $47.5 million and total liquidity of $55.4 million.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.  Prior to the amendment, our additional borrowing capacity was $4.2 million.

Fees

Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled  $7.2 million as of our amendment in September 2019. These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of March 31, 2020, and December 31, 2019, were $6.0 million and $6.5 million, respectively.  Additional costs incurred with the April 15 amendment total approximately $1.9 million.

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Bank debt, less debt issuance costs, is presented below (in thousands):

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2020

 

2019

Current bank debt

 

$

36,750

 

$

34,912

Less unamortized debt issuance cost

 

 

(1,868)

 

 

(1,868)

Net current portion

 

$

34,882

 

$

33,044

 

 

 

 

 

 

 

Long-term bank debt

 

$

131,300

 

$

145,238

Less unamortized debt issuance cost

 

 

(4,177)

 

 

(4,644)

Net long-term portion

 

$

127,123

 

$

140,594

 

 

 

 

 

 

 

Total bank debt

 

$

168,050

 

$

180,150

Less total unamortized debt issuance cost

 

 

(6,045)

 

 

(6,512)

Net bank debt

 

$

162,005

 

$

173,638

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:

 

 

 

Fiscal Periods Ending

    

Ratio

March 31, 2020 and June 30, 2020

 

4.00 to 1.00

September 30, 2020 and December 31, 2020

 

3.50 to 1.00

March 31, 2021 and June 30, 2021

 

3.25 to 1.00

September 30, 2021 and December 31, 2021

 

3.00 to 1.00

March 31, 2022 and each fiscal quarter thereafter

 

2.50 to 1.00

 

As of March 31, 2020, our Leverage Ratio of 2.93 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 1.05 to 1.00 through December 31, 2021, at which time it increases to 1.25 to 1.00 through the maturity of the credit facility.

As of March 31, 2020, our Debt Service Coverage Ratio of 1.48 was in compliance with the requirements of the credit agreement.

Rate

The interest rate on the facility ranges from LIBOR plus 2.75% to LIBOR plus 4.00%, depending on our Leverage Ratio, with a LIBOR floor of 0.50%.  We entered into swap agreements to fix the LIBOR component of the interest rate at 2.92% on the declining term loan balance and on $53 million of the revolver. At March 31, 2020, we are paying LIBOR at the swap rate of 2.92% plus 3.50% for a total interest rate of 6.42%.  As a condition of the amendment, effective April 15, 2020, we are paying LIBOR at the swap rate of 2.92% plus 4.00% for a total interest rate of 6.92% until such time we submit our quarterly compliance certificate.  At such time, our rate will drop back to LIBOR at the swap rate of 2.92% plus 3.50% for a total interest rate of 6.42%.

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(6)ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (in thousands)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

Accounts payable

 

$

20,584

 

$

16,115

Accrued property taxes

 

 

3,183

 

 

2,835

Accrued payroll

 

 

2,373

 

 

2,151

Workers' compensation reserve

 

 

3,898

 

 

3,446

Group health insurance

 

 

2,400

 

 

2,500

Other

 

 

5,809

 

 

4,753

Total accounts payable and accrued liabilities

 

$

38,247

 

$

31,800

 

 

(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 collectability of consideration is probable. We recognize revenue when we satisfy a performance obligation by transferring control of a good or service to a customer.

Our 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 Princeton Loop, 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. Nearly all our customers are domestic utility companies. Our coal sales agreements with our customers are fixed-priced, or include price re-openers, fixed-volume supply contracts. 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 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, including BTUs, ash, moisture, and sulfur content among other qualities. 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 and can result in either increases or decreases in the value of the coal shipped.

Disaggregation of Revenue

Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. 78% and 72% of our coal revenue for the three months ended March 31, 2020, and March 31, 2019, respectively, was sold to customers in the State of Indiana with the remainder sold to customers in Florida, Georgia, North Carolina, Kentucky, Tennessee, and South Carolina.

Performance Obligations

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 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.

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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 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 performance obligations relating to fixed priced contracts of approximately $508 million, which represent the average fixed prices on our committed contracts as of March 31, 2020. We expect to recognize approximately 74% of this revenue through 2021, with the remainder recognized thereafter. 

We have remaining performance obligations relating to contracts with price reopeners of approximately $266 million, which represents our estimate of the expected re-opener price on committed contracts as of March 31, 2020. We expect to recognize all of this revenue beginning in 2021.

The 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 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. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our condensed consolidated balance sheets. We do not currently have any contracts in place where we would transfer coal in advance of knowing the final price of the coal sold, and thus do not have any contract assets recorded. Contract liabilities arise when consideration is received in advance of performance. This deferred revenue is included in accounts payable and accrued liabilities in our condensed consolidated balance sheets when consideration is received, and revenue is not recognized until the performance obligation is satisfied. We are rarely paid in advance of performance and do not currently have any deferred revenue recorded in our condensed consolidated balance sheets.

(8)OTHER OPERATING INCOME (in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

    

Equity income (loss) - Sunrise Energy

 

$

55

 

$

(34)

 

MSHA reimbursements

 

 

100

 

 

150

 

Gain on sale of royalty interests in oil properties

 

 

 —

 

 

2,500

 

Miscellaneous

 

 

451

 

 

1,462

 

 

 

$

606

 

$

4,078

 

 

(9)INCOME TAXES

For the three months ended March 31, 2020, the Company utilized a discrete period method to calculate taxes, as it does not believe the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding COVID-19.   Our effective tax rate for the three months ended March 31, 2020, and 2019 was ~37% and ~ 0%, 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.

 

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic

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and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit  (“AMT”) refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, the CARES Act, (i) eliminates the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 or 2020, (ii) increases the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning January 1, 2019 and 2020 and (iv) allows taxpayers with AMT credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act in 2017.  The Company has completed its review of the different aspects of the CARES Act and has recorded an additional $0.5 million to prepaid income taxes for the quarter ended March 31, 2020.

(10)STOCK COMPENSATION PLANS

 

 

 

Non-vested grants at December 31, 2019

    

488,500

Granted – share price on grant date was $0.98

 

30,000

Vested – average weighted share price on vesting date was  

 

 —

Forfeited

 

(6,500)

Non-vested grants at March 31, 2020

 

512,000

 

No shares vested during the three months ended March 31, 2020.

 

For the three months ended March 31, 2020, and 2019, our stock-based compensation was $0.3 million and $0.5 million, respectively.

 

Non-vested RSU grants will vest as follows:

 

 

 

Vesting Year

    

RSUs Vesting

2020

 

176,250

2021

 

311,750

2022

 

24,000

 

 

512,000

 

The outstanding RSUs have a value of $0.35 million based on the May 8, 2020, closing stock price of $0.69.

At May 8, 2020, we had 1,360,348 RSUs available for future issuance.

(11)LEASES

We have operating leases for office space and processing facilities with remaining lease terms ranging from less than one year to approximately five 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. We currently do not have any finance leases outstanding.

Information related to leases was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

    

2020

 

    

2019

 

Operating lease information:

 

 

 

 

 

 

 

 

Operating cash outflows from operating leases

 

$

87

 

 

$

79

 

Weighted average remaining lease term in years

 

 

3.92

 

 

 

4.26

 

Weighted average discount rate

 

 

6.0

%

 

 

6.0

%

 

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Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:

 

 

 

 

Year

    

Amount

 

 

 (In thousands)

2020

 

$

148

2021

 

 

201

2022

 

 

206

2023

 

 

174

2024

 

 

59

Total minimum lease payments

 

$

788

Less imputed interest

 

 

(65)

 

 

 

 

Total operating lease liability

 

$

723

 

 

 

 

As reflected on balance sheet:

 

 

 

Other long-term liabilities

 

$

723

 

 

 

 

 

At March 31, 2020, and December 31, 2019, respectively, we had approximately $723,000 and $800,000, right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.

(12)SELF-INSURANCE

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 $271 million and $273 million as of March 31, 2020, and December 31, 2019, respectively.

Restricted cash of $4.7 million and $4.5 million as of March 31, 2020, and December 31, 2019, respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments.

(13)NET INCOME (LOSS) PER SHARE

We compute net income (loss) per share using the two-class method, which is an allocation formula that determines net income (loss) per share for common stock and participating securities, which for us are our outstanding RSUs.

The following table sets forth the computation of net income(loss) allocated to common shareholders (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2020

    

2019

Numerator:

 

 

  

 

 

  

Net income (loss)

 

$

(3,660)

 

$

7,000

Less loss (earnings) allocated to RSUs

 

 

59

 

 

(180)

Net income (loss) allocated to common shareholders

 

$

(3,601)

 

$

6,820

 

 

 

 

 

 

 

 

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(14)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. Our marketable securities are Level 1 instruments.

Level 2: Quoted prices in markets that are not active, or inputs which 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). Our Level 3 instruments are comprised of fuel hedges and interest rate swaps.  The fair values of our hedges and swaps were estimated using discounted cash flow calculations based upon forward fuel prices and interest-rate yield curves.  The notional values of our two interest rate swaps were $53 million and $58 million as of March 31, 2020, both with maturities of May 2022.  Fuel hedges include 2,160 gallons of diesel fuel that are subject to pricing fluctuations with a minimum of $1.79/gallon and a maximum of $2.40/gallon through December 2021.  Although we utilize third-party broker quotes to assess the reasonableness of our prices and valuation, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.

The following table summarizes our financial assets and liabilities measured on a recurring basis at fair value at March 31, 2020 and December 31, 2019 by respective level of the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

December 31, 2019

 

 

  

 

 

  

 

 

  

 

 

  

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Fuel hedge

 

$

 —

 

$

 —

 

$

25

 

$

25

Marketable securities - restricted

 

 

2,296

 

 

 —

 

 

 —

 

 

2,296

 

 

$

2,296

 

$

 —

 

$

25

 

$

2,321

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps

 

$

 —

 

$

 —

 

$

3,825

 

$

3,825

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

  

 

 

  

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Fuel hedge

 

 

 —

 

 

 —

 

 

1,286

 

 

1,286

Interest rate swaps

 

 

 —

 

 

 —

 

 

6,418

 

 

6,418

 

 

$

 —

 

$

 —

 

$

7,704

 

$

7,704

 

The table below highlights the change in fair value of the fuel hedges and interest rate swaps which are based on a discounted future cash flow model (in thousands):

 

 

 

 

 

Ending balance, December 31, 2019

    

$

(3,800)

Change in estimated fair value

 

 

(3,904)

Ending balance, March 31, 2020*

 

$

(7,704)


*Recorded in accounts payable and accrued liabilities and other liabilities in the Balance Sheet to these Condensed Consolidated Financial Statements.

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(15)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 also plans to develop and explore 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 March 31, 2020, and December 31, 2019, was $3.3 million and $3.1 million, respectively.

 

(16)SUBSEQUENT EVENTS

On April 16, 2020, we entered into a promissory note evidencing an unsecured loan in the amount of $10 million made to the Company under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan to the Company is being made through First Financial Bank, N.A. (the “Lender”).

 

The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan, the Company is required to make 24 monthly payments of principal and interest. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan Documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining a judgment against the Company.

 

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any covered payments of mortgage interest, rent, and utilities. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. The Company intends to use all proceeds from the PPP Loan to maintain payroll and make lease, mortgage interest, and utility payments.

 

 

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Picture 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

Hallador Energy Company

RESULTS OF REVIEW OF INTERIM CONDENSED FINANCIAL STATEMENTS

We have reviewed the condensed consolidated balance sheets of Hallador Energy Company (the "Company") and subsidiaries as of March 31, 2020 and 2019, and the related condensed consolidated statements of income (loss), the condensed consolidated statements of cash flows and the condensed consolidated statements of stockholders’ equity for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

BASIS FOR REVIEW RESULTS

These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Oversight Board (United States) ("PCAOB"). We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 

A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

/s/ Plante & Moran, PLLC

 

Denver, Colorado

May 11, 2020

Picture 3

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2019 FORM 10‑K AND SHOULD BE READ IN CONJUNCTION THEREWITH.

Our condensed consolidated financial statements should also be read in conjunction with this discussion. The following analysis includes a discussion of metrics on a per ton basis derived from the condensed consolidated financial statements, which are considered non-GAAP measurements.

IMPACT OF COVID-19

COVID-19 has had a significant impact on our customers, which is, in turn, delaying our sales. The Midwest Independent System Operator (MISO), the regional system operator 78% of our customers sell power to, is estimating a 10% decline in power demand for 2020. The State of Indiana, where our operations are located, issued a shelter in place order from March 24, 2020, to May 4, 2020. The State deemed our operations necessary and essential, and we were allowed to operate. However, several of our customers have had difficulty accepting contracted minimum shipments. This has caused our inventory levels to rise and our sales to decline. We expect more shipment delays in the second quarter.

1.

Duration – Though we are encouraged by the State of Indiana largely reopening for business on May 4, 2020, it is unknown how quickly power demand will return.

2.

Sale Delays – We believe most of our shipments will be made up later in the year. However, these shipment delays increase our coal inventory and postpone our revenue. We have worked diligently to increase our liquidity to allow for expected future shipment delays.  We are currently developing an agreement with one customer to store their coal inventory on our property.

3.

Production – To date, our operations have performed well considering the additional burdens of operating while working to comply with CDC health and safety guidelines. However, we may experience production interruptions should a significant number of our employees or our supplier’s employees become infected with COVID-19.

OVERVIEW

I.

Q1 2020 Net Loss of $3.7 Million, ($0.12) Per Share

a.

As stated, the severe impacts of COVID-19 have caused unexpected shipment delays in Q1, resulting in lower sales, decreased production, and higher costs per ton.

 

i.

Additionally, the idling and permanent closure of the Carlisle Mine contributed to increased operating costs per ton.

 

ii.

The events experienced in Q1 increased our costs $2.43/ton over Q1 2019 for all mines. We believe these events are temporary and thus anticipate our cost structure at our operating Oaktown mines continuing at our historical sub $30/ton cost structure for the remainder of the year.

 

b.

Net income was reduced by $3.9 million in non-cash interest rate swap and fuel hedge adjustments.

 

 

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II.Solid Sales Position Through 2022

 

COVID-19 has created a lot of uncertainty in the world, but we are comforted by our strong sales position through 2022.

 

 

 

 

 

 

 

 

 

 

Contracted

 

 

Estimated

 

 

 

tons

 

 

Priced

Year

 

 

(millions)*

 

 

per ton

2020 (Q2 – Q4)

 

 

5.0

 

 

$ 40.25

2021

 

 

5.1

 

 

$ 39.65

2022

 

 

5.3

 

 

$ 40.25

 

 

 

15.4

 

 

 

_____________

* Contracted tons are subject to adjustment due to the exercise of customer options to either take additional tons or reduce tonnage if such options exist in the customer contract.

 

III.

Amended Credit Facility To Improve Liquidity

a.

In an effort to improve liquidity, on April 15, we executed an amendment to our credit agreement with PNC, administrative agent for our lenders. The amendment modified our leverage ratios, as disclosed in Note 5 to our condensed consolidated financial statements. The new leverage ratios provided us additional liquidity as the economic uncertainty of the next few months and quarters has the potential to dramatically reduce our liquidity.

a.

As a result of the amendment, our maximum annual capital expenditures are limited to $30 million for 2020, and our dividend is suspended until our leverage ratio falls below 2.0X.

IV.

Paycheck Protection Program

a.

Due to economic uncertainty as a result of COVID-19, on April 16, 2020, we entered into a promissory note evidencing an unsecured loan in the amount of $10 million made to the Company under the Paycheck Protection Program (the “Loan”).

 

i.

As noted previously, uncertainty was created as a result of unexpected sales delays due to the impacts of COVID-19.

 

1.

March and April sales were 30% lower than expected.

 

b.

Prior to the COVID-19 pandemic taking root in the United States, we idled and permanently closed the Carlisle Mine resulting in a reduction in force in Q1 2020.

 

i.

Based on the terms of the loan, factoring in the reduction in force prior to our application, we expect a portion of the loan to be forgiven following a successful audit by the Small Business Administration sometime after June 30, 2020.

 

LONG-LIVED ASSET IMPAIRMENT REVIEW

See Note 2 to our condensed consolidated financial statements.

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LIQUIDITY AND CAPITAL RESOURCES

I.

Cash Provided By Operations

a.

As set forth in our condensed consolidated statements of cash flows, cash provided by operations was $16.3 million and $20.8 million for the three months ended March 31, 2020, and 2019, respectively.

i.

Operating margins from coal decreased during the first three months of 2020 by $9.4 million when compared to the first three months of 2019 due a combination of increased costs as a result of lower production and lower tons sold.

i.

Our operating margins were $8.91 per ton in Q1 2020 compared to $10.78 in Q1 2019.Q1 2019 was an exceptional quarter, where we produced over 2.2 million tons of coal compared to 1.7 million tons this year.

ii.

Due to the effects of COVID-19, we also experienced lower demand in Q1 2020, resulting in sales of 1.5 million tons compared to sales in Q1 2019 of 2.1 million tons.

ii.

The combination of the lower margins offset by changes in working capital items contributed substantially to our decrease in cash from operations compared to 2019.

i.

The most significant changes to the working capital items were an increase in inventory of $9.1 million and a decrease in accounts receivable of $12.9 million, a result of a decrease in customer demand due in large part to the effects of COVID-19.

b.

Our projected capex budget for the remainder of 2020 is $14 million, of which approximately $7.0 million is for maintenance capex.

c.

Cash provided by operations for the remainder of the year is expected to fund our maintenance capital expenditures and debt service.

d.

As we continue to monitor the effects of COVID-19, we continue to pro-actively manage costs and capital expenditures to ensure adequate liquidity until there is more of a sense of economic certainty in the markets in which we operate.

II.

Material Off-Balance Sheet Arrangements

a.

Other than our surety bonds for reclamation, we have no material off-balance sheet arrangements. In the event we are not able to perform reclamation, which is presented as asset retirement obligations (ARO) in our accompanying condensed consolidated balance sheets, we have surety bonds totaling $27 million to pay for ARO.

 

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CAPITAL EXPENDITURES (capex)

For the three months of 2020, capex was $6.0 million allocated as follows (in millions):

 

 

 

 

Oaktown – maintenance capex

 

$

3.5

Oaktown – investment

 

2.4

Other

 

 

0.1

Capex per the Condensed Consolidated Statements of Cash Flows

 

$

6.0

 

Quarterly coal sales and cost data (in thousands, except per ton and percentage data) are provided below. Per ton calculations below are based on tons sold.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Mines

 

2nd 2019

 

3rd 2019

 

4th 2019

 

1st 2020

 

T4Qs

 

Tons produced

 

 

2,003

 

 

1,891