HALLADOR ENERGY COMPANY THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2021 ANNUAL REPORT ON 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. These metrics are significant factors in assessing our operating results and profitability.
Thermal coal demand and pricing remain strong due to the increased demand for
electricity and constrained growth in thermal coal production. Labor shortages,
global supply chain interruptions, and environmental and political pressures are
limiting the ability of operators to increase thermal coal production to meet
domestic and international demand. In addition, higher natural gas prices and
boycotts on Russian coal 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$41.40 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 ofMarch 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 ourMarch 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. 16
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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
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* Contracted tons 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.
**Unpriced or partially priced tons.
LONG-LIVED ASSET IMPAIRMENT REVIEW
See Note 2 to our condensed consolidated financial statements.
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LIQUIDITY 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.© Edgar Online, source
