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
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 $41.40during the quarter. d. Production: Q1 2022 production costs were $39.54per ton, which represents a $4.42per ton increase over Q4 2021. e. Cash Flow & Debt: During Q1, we generated $3.0 millionin 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 millionin convertible notes to add to our March 31, 2022liquidity 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. 16
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 >
$10per 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 ~$4per 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 millionof 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. 17
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 millionfor the three months ended March 31, 2022and 2021. i. Operating margins from coal decreased during the first three months of 2022 by $9.4 millionwhen compared to the first three months of 2021. 1. Our operating margins were $1.86per ton in the first three months of 2022 compared to $10.20in 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 millionis for maintenance capex. We also have scheduled payments on long-term debt totaling $16.5 millionover the last nine months of the year. We were in violation of our debt to EBITDA covenant as of March 31, 2022but 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 2022to 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 millionto pay for ARO.
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