HALLADOR ENERGY CO
For the period ended Jun 30, 2024. Filed Aug 7, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 7, 2024
HNRG$10.10+7.9%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-07.
0001437749-24-015139
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-07.
0001437749-24-025219
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 48 previous paragraphs and 60 current paragraphs.
24 unchanged; 9 reworded; 26 added; 15 removed; 0 previous and 1 current paragraphs rearranged.
Tables are not compared: 38 previous and 37 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (26)
Current report
Hallador is on a strategic and deliberate path to transform our company and capture increased value from our products and services as we advance up the value chain by expanding our offerings from fuel production to wholesale electricity sales to powering the industrial end user.
Current report
For many years, our Sunrise Coal subsidiary was our primary asset, producing fuel to sell to third-party customers. In the fourth quarter of 2022, we acquired the Merom Power Plant through our Hallador Power Company (“Hallador Power” or “HPC”) subsidiary enabling us the ability to convert the majority of our fuel production into wholesale electricity and capacity, which traditionally sells at higher margins than coal. As part of this process, we issued $29.0 million of convertible debt in 2022 to improve our capital position and facilitate the acquisition of the Merom Power Plant. In 2022, $10.0 million of these convertible notes were converted to equity and the remaining balance was converted in the first half of 2024.
Current report
Looking at the wholesale electric sales we have made since the acquisition of the Merom Power Plant, along with the prices indicated by the forward power curves, we believe that HPC has the potential to achieve gross profit margins greater than the margins we have historically seen in coal sales. In the first quarter of this year, our sales to third-party customers from electricity exceeded those of our sales from coal. In connection with this shift in company focus, we changed our SIC code from 1220 bituminous coal producer to 4911 electric services during the second quarter.
Current report
Additionally, in the first quarter of this year we announced the signing of a Memorandum of Understanding (“MOU”) with Hoosier Energy and WIN REMC that provides a pathway to facilitate sales of our electricity to industrial end users of power. As we continue to transform our product offerings from fuel to wholesale electricity, to supplying power to higher value end-users, we believe we can achieve increasingly higher gross profit margins.
Current report
The recent environment for spot electricity sales has been challenging. This past winter, record high U.S. natural gas (“Gas”) production ran into the ninth warmest winter on record according to National Oceanic and Atmospheric Administration. The lack of winter heating demand caused Gas inventory levels to climb as much as 38% above the 5-year average. As Gas prices adjusted downward to encourage the market to consume excess Gas inventory, wholesale electric (“Energy”) prices also declined. In the first six months of 2024, approximately 90% of the off-peak Energy hours at the Merom Hub and approximately 60% of the total Energy hours at the Merom Hub priced below our production cost at our Merom facility.
Current report
Our forward contracted energy sales position has a significant price increase in future years as illustrated in the graph below.
Current report
Lower Energy prices negatively affected both HPC’s generation model and the dispatch rates of Sunrise Coal’s utility customers. In response to dispatching less, those customers slowed coal shipments from Sunrise during the winter season and throughout the shoulder season this spring.
Current report
To match Sunrise’s production levels and cost structure to that of the market demands, we restructured Sunrise operations in the first quarter of 2024. As we have previously noted, the restructuring included a reduction in force (“RIF”) of approximately 110 people in February, and we have since allowed attrition to further reduce our workforce by approximately 130 additional people, a total workforce reduction of more than 25%. We also restructured our operations to focus on our more profitable units and to idle units with higher production costs. Transitioning our Oaktown mining facilities from 7 units of production to 4 units of production was a deliberate process which took considerable time and effort, and was completed in mid-July. We are encouraged by the early results of Sunrise’s restructuring and have seen improvement in mining costs since we made the decision to adjust our operations.
Current report
In response to lower Energy prices and our challenging mining conditions during the first half of 2024, we executed on several financing opportunities, including raising $34.5 million through an At-The-Market (“ATM”) equity offering selling 4.7 million shares at an average price of $7.38 per share and borrowing $5.0 million from several Directors on our Board. In June, we received a $45.0 million prepayment for an 11-month forward Energy sale representing approximately 22% of our annual 6.0 million MWh goal during the term of the contract.
Current report
2024 vs. 2023 (second quarter)
Current report
Operating revenues from electric operations decreased $14.1 million, or 19.8%, compared to the second quarter of 2023 due to approximately 60% of total Energy hours at the Merom Hub being priced below our production cost at our Merom Facility, low Electric Power demand due to a mild 2024 spring and summer, and higher demand for Gas as Gas prices averaged $2.08 per MBtu during the second quarter of 2024 compared to $2.16 per MBtu during the second quarter of 2023.
Current report
Fuel decreased $20.5 million, or 47.7%, compared to the second quarter of 2023 due to lower coal usage and energy production as a result of weakened demand for electricity. Electric production decreased by 263,000 MWh, or 25.2%, from the second quarter of 2023. We were also able to acquire third-party coal at prices below our production costs for coal, further reducing our fuel expense during the quarter.
Current report
Other operating and maintenance costs increased $8.7 million, or 160.8%, compared to the second quarter of 2023 primarily due to the planned maintenance outage which resulted in $6.8 million in additional costs for the period.
Current report
Income from operations decreased $2.5 million, or 26.7%, and decreased $0.13 per MWh, from the three months ended June 30, 2023. The main drivers of this change in income from operations are described in the discussion above.
Current report
2024 vs. 2023 (first six months)
Current report
Operating revenues from electric operations decreased $47.7 million, or 29.1%, compared to the first half of 2023 due to MISO pricing that was lower than our cost to produce at times during the period, low Power demand due to a mild 2024 spring and summer, and higher demand for Gas as Gas prices during the spring season of 2024 (March through May) averaged $1.74 per MBtu compared to $2.21 per MBtu in the spring season of 2023.
Current report
Fuel decreased $49.5 million, or 51.3%, compared to the first half of 2023 due to lower coal usage and production as a result of weakened demand. Production decreased by 709,000 MWh, or 30.8%, from the first six months of 2023. Gas average spot prices were down $0.30 per MMBtu decreasing the demand for Electric Power.
Current report
Other operating and maintenance costs increased $8.9 million, or 81.3%, compared to the first half of 2023 primarily due to the planned maintenance outage which resulted in $6.6 million in additional costs for the period.
Current report
Income from operations decreased $5.9 million, or 21.2%, and increased $1.68 per MWh, from the six months ended June 30, 2023. The main drivers of this change in income from operations are described in the discussion above.
Current report
2024 vs. 2023 (second quarter)
Current report
Other operating and maintenance costs decreased $14.7 million, or 40.5%, and labor decreased $9.7 million, or 33.3%, from the second quarter of 2023. These changes were driven by the Reorganization Plan disclosed in “Item 1. Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements. During the second quarter 2024, we produced 0.4 million tons less than first quarter 2024, we reduced production days from 7 days to 5 days and further reduced our coal employee headcount by 130 employees.
Current report
Income (loss) from operations decreased $37.7 million, or 142.9%, and decreased $28.71 per ton, from the three months ended June 30, 2023. The main drivers of this change in income (loss) from operations are described in the discussion above.
Current report
2024 vs. 2023 (first six months)
Current report
Segment operating revenues from coal operations decreased $95.1 million, or 45.6%, from the first half of 2023. Consolidated operating revenues from coal operations decreased $100.8 million, or 55%, from the first half of 2023. These declines were due to reductions in volume and average sales price for our coal. Our average sales price, on a segment basis, decreased $6.24 per ton and we sold 1.3 million tons less compared to the first six months of 2023. Our average sales price, on a consolidated basis, for the six months ended 2024, decreased $3.11 per ton and we sold 1.6 million tons less compared to the first six months of 2023.
Current report
Other operating and maintenance costs decreased $9.8 million, or 15.5%, and labor decreased $14.0 million, or 23.0%, from the first six months of 2023. These changes were driven by the Reorganization Plan disclosed in “Item 1. Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements. During the first six months of 2024, we produced 1.6 million tons less on a segment basis than first six months of 2023, we went from 5 mines producing to 2 mines producing and further reduced our coal employee headcount by 339 employees.
Current report
Income (loss) from operations decreased $62.2 million, or 157.7%, and decreased $22.62 per ton, from the six months ended June 30, 2023. The main drivers of this change in income from operations are described in the discussion above.
Removed paragraphs (15)
Previous report
Throughout the first quarter, we continued our progress on transitioning the focus of Hallador from a coal production company to an integrated independent power producer (“IPP”). During the first three months of 2024, our Electric Operation's revenue exceeded that of our Coal Operation's revenue. Additionally, we were successful in adding approximately $138.0 million in forward energy and capacity sales, growing our Electric Operation’s forward sales book to approximately $657.0 million as of March 31, 2024. This represents 44% of Hallador’s $1.5 billion in total forward energy, capacity, and coal sales through 2029 (on a segment basis). However, we truly believe future sales from our Electric Operations will soon eclipse our sales revenues from our Coal Operations. Since January, we have evaluated and continue to evaluate several major power and capacity sales opportunities, including one proposal that if contracted would result in more than a billion dollars’ worth of potential forward power sales. We continue to see strong indicators that demand, and pricing remain on an upward trend, and this direction is paramount to our ongoing evaluations of these sales opportunities. Monitoring the equity markets strengthens our belief that investors in other IPPs are also anticipating similar increases in power demand, demonstrated most clearly through the more than doubling of market capitalizations of several of those IPPs across the previous twelve months. In support of our expectation that Hallador Power sales will continue to exceed our traditional Sunrise Coal subsidiary, we anticipate changing Hallador's SIC code to 4911 (electric services) from 1220 (bituminous coal producer) in the future.
Previous report
While we have seen continued weakness in spot power prices thus far in 2024, indicators for future power pricing appear much healthier. We believe these indicators are supported by both our forward power book pricing and the most recent future power curves. Additionally, natural gas future’s prices are in contango, meaning future gas prices exceed spot gas prices that have been depressing overall power prices for the last several quarters. As we discussed last quarter, the dynamics of the natural gas market paired with the non-standard mild weather throughout the Midwest impacted pricing and our power plant dispatch rates. Future prices seem to indicate easing on both these fronts which we view as a positive for our go-forward operations.
Previous report
This quarter, we also launched a targeted request for proposal for power demand supporting new development at our Merom Power Plant. Reponses are due in mid-May, but early indications point to a high level of interest. The RFP is available on our website for any interested parties that did not already receive the information.
Previous report
During the first quarter, Hallador Power generated 816,000 MWh at the following cost structure (on a segment basis):
Previous report
As a condition of acquiring the Merom Power Plant, we agreed to sell 1.66 million MWh of energy in 2024 and 1.60 million MWh in 2025 at $34 per MWh to the plant seller, representing 27% of our annual 6 million MWh goal. Since this original transaction, we have been successful in selling over 5 million MWh of energy to third parties at an average price of approximately $52 per MWh over the years 2024-2029 as illustrated in the table below.
Previous report
During the first quarter, our variable costs were $31.88 per MWh. The low energy prices during the quarter necessitated that we run our plant at slower speeds resulting in more frequent than normal starts and stops to avoid selling below cost energy. Running in this manner is less fuel efficient than if we were able to consistently generate at a 6 million MWh pace, which could lower cost by as much as 10%.
Previous report
On February 23, 2024, our Coal Operations Segment undertook an initiative designed to strengthen our financial and operational efficiency and to create significant operational savings and higher margins in our coal segment. This step helps to advance our transition from a company primarily focused on coal production to a more resilient and diversified IPP. As part of this initiative, we idled production at our higher cost Prosperity Mine, and substantially idled production at the Freelandville Mine with minimal production until reclamation is finished on approximately May 31, 2024. This should reduce our capital reinvestment for coal production in 2024 by approximately $10 million. We also focused our seven units of underground equipment on four units of our lowest cost production at our Oaktown Mine. As part of the initiative, we reduced our workforce by approximately 110 employees.
Previous report
Mining costs for the quarter were $53.38 per ton. However, at Oaktown, we saw mining costs in March decrease into the low $30s on a per ton basis. While there are several factors that impacted this cost reduction, we continue to monitor operations and strategic initiatives to better understand the longevity of these favorable conditions.
Previous report
We continued our build out of what we consider to be a best-in-class management team as we welcomed Marjorie Hargrave as our new CFO with broad-based experience in power production and capital markets. Adding Marjorie to our previous hires over the last two years, including expertise within the positions of our President of Hallador Power, our Chief Legal Officer (with Data communications expertise), our SVP of Power Marketing, and a Manager of Environmental Engineering, will accelerate our continued development of Hallador’s operational and future power acquisition capabilities. These prospects and our strong future sales have us very excited about the future of our company.
Previous report
*Based on coal production capacity of 4.5 million tons and 6.0 million MWh annually.
Previous report
**Based on a MISO accreditation of 769 MW per day through 2024, up to 971 MW per day for 2025. Accreditations are adjusted annually based on 3-year rolling performance metrics.
Previous report
Operating revenues from electric operations decreased $33.6 million, or 36%, compared to the first quarter of 2023 due to reduced production of power as a result of a mild winter and decreased natural gas prices.
Previous report
Operating expenses decreased $29.9 million, or 44%, compared to the first quarter of 2023 due to a decrease in production as well as costs related to the coal purchase agreement signed with Hoosier related to the Merom Acquisition in 2022. The coal purchase agreement included fixed prices which were below market prices at the date we entered into the agreement. As a result of the below-market contract, there were $17.8 million in additional operating expenses for coal purchased as a result of amortizing the contract asset during the first quarter of 2023.
Previous report
Quarterly electric sales and cost data (in thousands, except per MWh data) are provided below. Fixed costs in the table are considered "non-GAAP" and are a component of operating expenses, the most comparable GAAP measure. We consider fixed costs to be costs associated with the plant whether or not the plant is in operation.
Previous report
Operating expenses increased by $14.57 per ton sold over the first quarter of 2023. This increase was due to one-time termination benefits of $1.1 million related to the Reorganization Plan disclosed in “Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements, the addition of the higher-cost Prosperity surface mine, poor temporary mining conditions at Oaktown, and continued significant inflationary pressures that have continued to elevate the costs.
Reworded paragraphs (9)
Previous wording
Our goal is for Hallador Power to generate approximately 1.5 million MWh on a quarterly basis, which equates to approximately 6 million MWh annually. During the first quarter, Hallador Power generated 816,000 MWh, or 54% of our target, despite an average price of $41.90. The favorable pricing is a result of experiencing sales prices as high as $250 per MWh for limited times during the quarter, balanced against several days of pricing below our variable cost to produce. These fluctuations led to an inconsistent dispatch schedule, which we expect to level out as we anticipate demand and pricing increases with seasonal weather changes and reduced gas stores.
Current wording
Our goal is for Hallador Power to generate approximately 1.5 million MWh on a quarterly basis, which equates to approximately 6.0 million MWh annually (see Hallador Power’s capacity and utilization information below). During the first half of 2024, Hallador Power generated 1,596,000 MWh, or 53% of our target. During the first half of the year, we experienced sales prices of nearly $261.00 per MWh for limited times, balanced against several days of pricing below our variable cost to produce. These fluctuations led to an inconsistent dispatch schedule.
Previous wording
When forward selling capacity, we target annual sales of around $65 million to offset our fixed annual costs at the plant of approximately $60 million. Our forward sales table demonstrates that we have already sold a large portion of our future capacity, which we believe makes our forward capacity sales goals attainable.
Current wording
When forward selling Capacity, we target annual sales of around $65.0 million to offset our fixed annual costs at the plant of approximately $60.0 million. We have already sold a large portion of our future Capacity, which we believe makes our forward Capacity sales goals attainable as illustrated in our "Solid Forward Sales Position" table below.
Previous wording
Historically, Sunrise Coal has generated approximately six million tons of coal annually. Following the restructuring, we expect Sunrise to produce roughly 3.5 million tons of coal on an annualized basis for 2024. If market conditions warrant, our current operations are capable of producing at a 4.5 million ton annualized pace. In 2024, we have also secured supplemental coal from third party suppliers at favorable prices. This allows us to diversify self-production supply risk and provides us with additional flexibility in our sales portfolio. The optionality to obtain low-cost tons either internally or from third parties while capturing upward swings in the commodities markets for coal should further maximize margins while optimizing fuel costs at our Merom facility.
Current wording
Historically, Sunrise Coal has generated approximately six million tons of coal annually. Following the restructuring, we expect Sunrise to produce roughly 3.5 million tons of coal on an annualized basis for 2024. Total production for the first half of 2024 was 2.2 million tons, and we shipped 2.1 tons at an average sales price of $54.92 on a segment basis. If market conditions warrant, our current operations are capable of producing at a 4.5-million-ton annualized pace. In 2024, we have also secured supplemental coal from third party suppliers at favorable prices. This allows us to diversify self-production supply risk and provides us with additional flexibility in our sales portfolio. The optionality to obtain low-cost tons either internally or from third parties while capturing upward swings in the commodities markets for coal should further maximize margins while optimizing fuel costs at our Merom facility.
Previous wording
Our condensed consolidated financial statements should be read in conjunction with this discussion. The following analysis includes a discussion of metrics on a per mega-watt hour (MWh) and a per ton basis as derived from the condensed consolidated financial statements, which are considered non-GAAP measurements. These metrics are significant factors in assessing our operating results and profitability.
Current wording
Our condensed consolidated financial statements should be read in conjunction with this discussion. This analysis includes a discussion of metrics on a per mega-watt hour (MWh) and a per ton basis as derived from the condensed consolidated financial statements, which are considered non-GAAP measurements. These metrics are significant factors in assessing our operating results and profitability.
Previous wording
For the first three months of 2024, capex was $14.9 million allocated as follows (in millions):
Current wording
For the first six months of 2024, capex was $28.0 million allocated as follows (in millions):
Previous wording
Operating revenues from coal operations decreased $28.4 million, or 30%, from the first quarter of 2023 due to reductions in volume and average sales price for our coal. Our average sales price decreased $1.48 per ton and we sold 0.5 million tons less compared to the first quarter of 2023. Operating revenues for the first quarter of 2024 include $16.4 million in sales to the Merom plant which were eliminated in the consolidation.
Current wording
Segment operating revenues from coal operations decreased $66.7 million, or 58.9%, from the second quarter of 2023. Consolidated operating revenues from coal operations decreased $56.0 million, or 63%, from the second quarter of 2023. These declines were due to reductions in volume and average sales price for our coal. Our average sales price, on a segment basis, decreased $11.29 per ton and we sold 0.9 million tons less compared to the second quarter of 2023. Our average sales price on a consolidated basis decreased $7.21 per ton and we sold 0.8 million tons less compared to the second quarter of 2023. Operating revenues for the second quarter of 2024 include $12.9 million in sales to the Merom plant which were eliminated in the consolidation.
Previous wording
Depreciation, depletion, and amortization decreased $2.5 million, or 19%, from the first quarter of 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.
Current wording
Depreciation, depletion, and amortization decreased $3.5 million, or 28.4%, from the second quarter of 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.
Previous wording
Our effective tax rate (ETR) is estimated at ~26% and ~13% for the three months ended March 31, 2024, and 2023, respectively. For the three months ended March 31, 2024, 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. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis and changes in the valuation allowance. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.
Current wording
Our effective tax rate (ETR) is estimated at ~23% and ~11% for the six months ended June 30, 2024, and 2023, respectively. For the six months ended June 30, 2024, 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. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis and changes in the valuation allowance. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.
Previous wording
Inventory is valued at a lower of cost or net realizable value (NRV). Anticipated utilization of low sulfur, higher-cost coal from our Freelandville, and Prosperity mines has the potential to create NRV adjustments as our estimated needs change. The NRV adjustments are subject to change as our costs may fluctuate due to higher or lower production and our NRV may fluctuate based on sales contracts we enter into from time to time. There were no significant changes to our NRV adjustment estimates from the prior year.
Current wording
Inventory is valued at a lower of cost or net realizable value (NRV). Anticipated utilization of low sulfur, higher-cost coal from our Freelandville, and Prosperity mines has the potential to create NRV adjustments as our estimated needs change. The NRV adjustments are subject to change as our costs may fluctuate due to higher or lower production and our NRV may fluctuate based on sales contracts we enter into from time to time. As of June 30, 2024, and December 31, 2023, coal inventory includes NRV adjustments of $0.9 million and $2.0 million, respectively.
Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
Depreciation, depletion, and amortization decreased $6.1 million, or 23.6%, from the first half of 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.