HALLADOR ENERGY CO - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

Commission file number:001‑34743

 

 

 

 

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.

 

 

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 ☑

 

 

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

 

 

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)

 

 

See accompanying notes.

 

 

Hallador Energy Company

Condensed Consolidated Statements of Income (Loss)

For the Three Months Ended March 31,

(in thousands, except per share data)

(unaudited)

 

 

 

 

See accompanying notes.

Hallador Energy Company

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

(in thousands)

(unaudited)

 

 

 

 

See accompanying notes.

 

 

Hallador Energy Company

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

 

See accompanying notes.

 

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.

 

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)

* 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.

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

Covenants

The credit facility includes a Maximum Leverage Ratio (consolidated funded debt / trailing twelve months adjusted EBITDA), calculated as of the end of each fiscal quarter for the trailing twelve months, not to exceed the amounts below:

 

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%.

 

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

 

 

(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.

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)

 

(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

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

 

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:

 

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):

 

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

 

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):

 

(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):

 

 

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):

 

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

 

(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.

 

 

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

 

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.

OVERVIEW

 

 

 

 

 

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 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.

 

 

 

 

 

 

LONG-LIVED ASSET IMPAIRMENT REVIEW

See Note 2 to our condensed consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES