HALLADOR ENERGY CO MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

THE FOLLOWING DISCUSSION UPDATE THE MD&A SECTION OF OUR 2021 ANNUAL REPORT ON FORM 10-K AND SHOULD BE READ IN CONJUNCTION WITH IT.

Our condensed consolidated financial statements should also be read in conjunction with this analysis. The following analysis includes a discussion of the per tonne measures derived from the condensed consolidated financial statements, which are considered non-GAAP measures. These measures are important factors in evaluating our operating results and profitability.

Thermal coal demand and prices remain strong due to increased demand for electricity and limited growth in thermal coal generation. Labor shortages, global supply chain disruptions, and environmental and political pressures limit operators’ ability to scale up thermal coal production to meet domestic and international demand. In addition, rising natural gas prices and Russian coal boycotts caused by the war in Ukraine are further amplifying tensions in the thermal coal markets. Due to these factors, the near-term outlook for thermal coal prices is positive.



OVERVIEW



  I.   Q1 2022 Net Loss $10.1 million.




        a.   The world is in the middle of an energy crisis, which has increased
             the prices of most everything related to energy.  In Q1, Hallador was
             in the unfortunate position of having its sales price hedged, so we
             could not take advantage of significantly higher market prices, while
             our input costs increased significantly year over year due to supply
             disruption and inflationary pressure.  Additionally, our productivity
             was low as we integrated an expanded, but newer, workforce.




        b.   Our margins were reduced to a point where our debt to adjusted EBITDA
             ratio came in at 3.03X, causing us to work with our banking group to
             gain covenant relief through Q2.




        c.   1.4 million tons were shipped at an average sales price of $41.40
             during the quarter.




        d.   Production:  Q1 2022 production costs were $39.54 per ton, which
             represents a $4.42 per ton increase over Q4 2021.




        e.   Cash Flow & Debt:  During Q1, we generated $3.0 million in operating
             cash flow and increased our bank debt by $8.3 million.




          i.   As of March 31, 2022, our bank debt was $120.1 million, liquidity
               was $16.3 million, and our leverage ratio came in at 3.03X, a
               violation of our 3.00X covenant.




  II.   Q2 2022 Activity




  a.   Financing




          i.   The Company was successful in executing an amendment with our
               banks loosening our debt to EBITDA covenant for Q1 and Q2, as
               disclosed in Note 5 to our condensed consolidated financial
               statements.




          ii.   In May, we issued $10 million in convertible notes to add to our
                March 31, 2022 liquidity of $20.6 million.  The notes were
                purchased by parties affiliated with four of our board members and
                one unrelated party.




  b.   Sales




          i.   We modified existing sales contracts, resulting in our average
               sales price increasing for the balance of 2022 - 2025. As the
               sales market is the strongest it has been in decades, we
               anticipate negotiating additional price increases for 2022-2023
               later in the year.




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  Table of Contents



  c.   Production




           i   We expect the production cost improvements we have experienced
               that started in the second quarter 2022, coupled with our
               anticipated sales price increases, to increase our margins from Q1
               and return them to our historical >$10 per margins in June.




  III.   Q3 & Q4 2022 Activity




  a.   Merom Generating Station




          i.   We anticipate closing on the acquisition of the Merom Power Plant
               in Q3 2022, subject to certain regulatory and financial approvals.




          ii.   Merom is expected to significantly add to the profitability of our
                company in 2022 and beyond.




  IV.   2023




  a.   Coal & Power




          i.   Our current 2023 average sales price is ~$4 per ton higher than
               2022.  Additionally, we reopen on price for ~25% of our coal
               production in 2023.  We assume we will be shipping these tons to
               our newly acquired Merom Plant in 2023, as this is our highest
               value use of these tons.  However, as a fallback position, these
               tons could be sold on the open market at margins in excess of
               $50/ton.




          ii.   Traditionally, Hallador has generated $50 million of adjusted
                EBITDA annually. In 2023, we expect our adjusted EBITDA to grow to
                over $150 million.




  V.    Solid Sales Position Through 2023




                     Contracted       Estimated
                        tons            price
      Year          (millions)*        per ton
  2022 (Q2-Q4)               5.7           41.30
  2023 (annual)              5.6           45.10
2024-2027 (total)            6.8              **
                            18.1


___________

* The tons under contract are subject to adjustment in the event of force majeure and the exercise of the customer’s options to take additional tons or reduce the tonnage if such an option exists in the customer’s contract.

**Unpriced or partially priced tons.

IMPAIRMENT REVIEW OF LONG-LIVED ASSETS


See   Note 2   to our condensed consolidated financial statements.



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Contents

CASH AND CAPITAL RESOURCES

  I.   Liquidity and Capital Resources




        a.   As set forth in our condensed consolidated statements of cash flows,
             cash provided by operations was $3.0 million for the three months
             ended March 31, 2022 and 2021.




           i.   Operating margins from coal decreased during the first three
                months of 2022 by $9.4 million when compared to the first three
                months of 2021.




              1.   Our operating margins were $1.86 per ton in the first three
                   months of 2022 compared to $10.20 in the first three months
                   of 2021 as a direct result of increased operating costs.




  2.   We expect to ship 6.5 to 7.0 million tons in 2022.




        b.   Our projected capex budget for the remainder of 2022 is $18 million,
             of which approximately $10 million is for maintenance capex.  We also
             have scheduled payments on long-term debt totaling $16.5 million over
             the last nine months of the year. We were in violation of our debt to
             EBITDA covenant as of March 31, 2022 but obtained a bank amendment
             that cured the violation.  However, as of March 31, 2022, all bank
             debt is classified as current as we may have future covenant
             violations within the next 12 months.  See Note 1 to the condensed
             consolidated financial statements for discussion of the violations
             and managements plans to address them.




        c.   We expect cash provided by operations and additional borrowing either
             from our revolver or other sources, if necessary, to fund our
             maintenance capital expenditures and debt service.




        d.   In Q1 2022, we generated lower than expected EBITDA due to elevated
             cash costs related to: i) a temporary decrease in efficiency, as new
             hires were integrated into the workforce to support more shifts
             required to fulfill the increase in contracted tonnage, and ii)
             supply constraints and vendor cost increases. We amended our bank
             agreement in May 2022 to provide covenant relief to maintain our
             liquidity levels as costs are anticipated to improve over the
             remainder of 2022.




        e.   See Note 5 to our condensed consolidated financial statements for
             additional discussion about our bank debt, related liquidity, and our
             projected covenant violations.  See Note 1 to our condensed
             consolidated financial statements for management's plans to address
             the anticipated violations.




  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 $23.4 million to pay for ARO.

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