Last10K.com

Hallador Energy Co (HNRG) SEC Filing 10-Q Quarterly report for the period ending Wednesday, September 30, 2020

Hallador Energy Co

CIK: 788965 Ticker: HNRG
 

 

Exhibit 99.1 

 
 

Press Release 

 

  

 

HALLADOR ENERGY COMPANY REPORTS Second QUARTER 2020

FINANCIAL AND OPERATING RESULTS 

 

  

Terre Haute, Ind., August 3, 2020 – Hallador Energy Company (NASDAQ – HNRG) today reported income of $0.25 million, $0.01 per share and adjusted EBITDA of $13.2 million.

 

Brent Bilsland, President and Chief Executive Officer, stated, "Hallador was profitable, despite the pandemic which wreaked havoc on energy markets.  We further lowered our cost structure and debt levels, while focusing on helping customers manage inventory levels.  We are cautiously optimistic as coal shipments, energy markets and hopefully the world have begun a recovery. "

 

 

● 

During Q2 2020, production costs fell to $28.94 per ton, a 9% reduction over the prior quarter, even as shipment delays resulted in lower sales volumes.

  

 

● 

In the first half of 2020, bank debt was reduced by $19 million, and operating cash flow was $17.2 million, in spite of coal inventories increasing by $13.8 million. We anticipate shipments to improve in the second half of the year and inventory levels to decline, improving operating cash flow.

 

  As of June 30, 2020, our liquidity was $52.6 million and our leverage ratio remained below 3.0X, which is comfortably within our covenant of 4.0X.

  

 

  

 

1

The following information was filed by Hallador Energy Co (HNRG) on Monday, August 3, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
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Table of Contents

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

  

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

 

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

Commission file number:001-34743

 

“COAL KEEPS YOUR LIGHTS ON”

logo.jpg

“COAL KEEPS YOUR LIGHTS ON”

HALLADOR ENERGY COMPANY

(www.halladorenergy.com)

  

  

  

Colorado

(State of incorporation)

 

84-1014610

(IRS Employer Identification No.)

 

 

 

1183 East Canvasback Drive, Terre Haute, Indiana

(Address of principal executive offices)

 

47802

(Zip Code)

  

Registrant’s telephone number, including area code: 812.299.2800

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Shares, $.01 par value

 

HNRG

 

Nasdaq

  

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, a 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.

  

Large accelerated filer

 

Accelerated filer ☑

Non-accelerated filer ☐

 

Smaller reporting company

 

 

Emerging growth company 

  

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 October 28, 2020, we had 30,465,665 shares of common stock outstanding.

 

 

 
 

TABLE OF CONTENTS 

    

  

PART I - FINANCIAL INFORMATION

 

   

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

3

   

Condensed Consolidated Balance Sheets

3

   

Condensed Consolidated Statements of Operations

4

   

Condensed Consolidated Statements of Cash Flows

5

   

Condensed Consolidated Statements of Stockholders’ Equity

6

   

Notes to Condensed Consolidated Financial Statements

7

   

Report of Independent Registered Public Accounting Firm

16

   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17

   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

   

ITEM 4. CONTROLS AND PROCEDURES

23

   

PART II - OTHER INFORMATION

24

   

ITEM 1A. RISK FACTORS

24

   

ITEM 4. MINE SAFETY DISCLOSURES

25

   

ITEM 6. EXHIBITS

25

   
SIGNATURES 26
   

  

 

  

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

  

Hallador Energy Company 

Condensed Consolidated Balance Sheets 

(in thousands, except per share data) 

(unaudited) 

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $5,302  $8,799 
Restricted cash (Note 12)  4,243   4,512 
Certificates of deposit     245 
Accounts receivable  15,846   25,580 
Prepaid income taxes     1,562 
Inventory (Note 3)  36,803   28,297 
Parts and supplies, net of allowance of $274  9,172   11,775 
Prepaid expenses  4,771   1,678 

Total current assets

  76,137   82,448 

Property, plant and equipment, at cost:

        
Land and mineral rights  115,894   114,722 
Buildings and equipment  357,498   351,614 
Mine development  89,229   84,160 

Total property, plant and equipment, at cost

  562,621   550,496 
Less - accumulated depreciation, depletion and amortization  (250,134)  (220,780)

Total property, plant and equipment, net

  312,487   329,716 
Investment in Sunrise Energy (Note 15)  3,293   3,139 
Other long-term assets (Note 4)  8,290   10,324 

Total Assets

 $400,207  $425,627 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        
Current portion of bank debt, net (Note 5) $34,311  $33,044 
Current portion of PPP note (Note 5) $2,160  $ 
Accounts payable and accrued liabilities (Note 6)  33,526   31,800 

Total current liabilities

  69,997   64,844 

Long-term liabilities:

        
Bank debt, net (Note 5)  105,885   140,594 
PPP note (Note 5)  7,840    
Deferred income taxes  2,228   4,884 
Asset retirement obligations  16,476   15,694 
Other  4,061   4,081 

Total long-term liabilities

  136,490   165,253 

Total liabilities

  206,487   230,097 

Redeemable noncontrolling interests (Note 2)

  4,000   4,000 

Stockholders' equity:

        
Preferred stock, $.10 par value, 10,000 shares authorized; none issued and outstanding      
Common stock, $.01 par value, 100,000 shares authorized; 30,466 and 30,420 issued and outstanding, respectively  305   304 
Additional paid-in capital  103,123   102,215 
Retained earnings  86,292   89,011 

Total stockholders’ equity

  189,720   191,530 

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity

 $400,207  $425,627 

    

See accompanying notes.

 

 

 

Hallador Energy Company 

Condensed Consolidated Statements of Operations

(in thousands, except per share data) 

(unaudited) 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

REVENUE:

                               

Coal sales

  $ 64,754     $ 82,883     $ 177,159     $ 239,231  

Other operating income (Note 8)

    374       213       2,588       5,488  

Total revenue

    65,128       83,096       179,747       244,719  

COSTS AND EXPENSES:

                               

Operating costs and expenses

    46,570       71,363       131,204       187,783  

Depreciation, depletion and amortization

    9,315       11,778       30,159       35,612  

Asset retirement obligations accretion

    348       320       1,024       943  

Exploration costs

    174       347       635       835  

Selling, general and administrative

    3,131       2,926       8,787       9,385  

Interest (1)

    2,329       3,558       10,877       13,546  
Asset impairment     1,799             1,799        

Total costs and expenses

    63,666       90,292       184,485       248,104  
                                 

INCOME (LOSS) BEFORE INCOME TAXES

    1,462       (7,196 )     (4,738 )     (3,385 )
                                 

INCOME TAX BENEFIT (NOTE 9):

                               

Current

    (74 )     (426 )     (598 )     (577 )

Deferred

    (387 )     (3,047 )     (2,657 )     (2,741 )

Total income tax benefit

    (461 )     (3,473 )     (3,255 )     (3,318 )
                                 

NET INCOME (LOSS)

  $ 1,923     $ (3,723 )   $ (1,483 )   $ (67 )
                                 

INCOME (LOSS) PER SHARE (NOTE 13):

                               
Basic and diluted   $ 0.06     $ (0.12 )   $ (0.05 )   $ (0.00 )
                                 

WEIGHTED AVERAGE SHARES OUTSTANDING

                               

Basic and diluted

    30,465       30,249       30,436       30,246  
                                 
                                 
(1) Bank interest     2,709       2,801       8,201       8,746  

Non-cash interest:

                               
Change in fair value of interest rate swaps valuation     (995 )     162       981       3,018  
Amortization of debt issuance costs     610       543       1,686       1,628  
Other     5       52       9       154  

Total non-cash interest

    (380 )     757       2,676       4,800  

Total interest

  $ 2,329     $ 3,558     $ 10,877     $ 13,546  

   

See accompanying notes.

 

 

 

Hallador Energy Company 

Condensed Consolidated Statements of Cash Flows 

(in thousands) 

(unaudited)  

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

OPERATING ACTIVITIES:

               

Net loss

  $ (1,483 )   $ (67 )

Deferred income taxes

    (2,657 )     (2,741 )

Equity (income) loss – Sunrise Energy

    (1,167 )     350  
Cash distribution - Sunrise Energy     1,125        

DD&A

    30,159       35,612  
Asset impairment     1,799        
Loss (gain) on sale of assets     38       (99 )

Unrealized gain on marketable securities

    (14 )     (334 )

Gain on sale of royalty interests in oil properties

          (2,949 )

Change in fair value of interest rate swaps

    981       3,018  

Change in fair value of fuel hedge

    775        

Amortization and write off of debt issuance costs

    1,686       1,628  

Accretion of ARO

    1,024       943  

Stock-based compensation

    927       1,438  
Change in current assets and liabilities:                

Accounts receivable

    9,742       (3,294 )

Inventory

    (9,247 )     (6,455 )

Parts and supplies

    2,603       (2,396 )

Prepaid income taxes

    1,562       992  

Prepaid expenses

    1,744       3,800  

Accounts payable and accrued liabilities

    (5,488 )     6,877  
Cash provided by operating activities   $ 34,109     $ 36,323  

INVESTING ACTIVITIES:

               
Investment in Sunrise Energy     (113 )      
Capital expenditures     (13,991 )     (27,269 )
Proceeds from sale of equipment     56       129  
Proceeds from sale of royalty interests in oil properties           2,949  

Proceeds from sale of marketable securities

    2,310        
Maturities of certificates of deposit     245       245  

Cash used in investing activities

    (11,493 )     (23,946 )

FINANCING ACTIVITIES:

               
Payments on bank debt     (40,475 )     (34,713 )
Borrowings of bank debt     7,250       18,250  
Proceeds from PPP note     10,000        
Payments of debt issuance costs     (1,903 )     (1,183 )
Taxes paid on vesting of restricted stock units     (18 )     (14 )
Dividends paid     (1,236 )     (3,724 )

Cash used in financing activities

    (26,382 )     (21,384 )

Decrease in cash, cash equivalents, and restricted cash

    (3,766 )     (9,007 )
Cash, cash equivalents, and restricted cash, beginning of period     13,311       20,094  

Cash, cash equivalents, and restricted cash, end of period

  $ 9,545     $ 11,087  

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH CONSIST OF THE FOLLOWING:

               
Cash and cash equivalents   $ 5,302     $ 6,361  
Restricted cash     4,243       4,726  
    $ 9,545     $ 11,087  
                 

SUPPLEMENTAL CASH FLOW INFORMATION:

               

Cash paid for interest

  $ 8,246     $ 8,900  

SUPPLEMENTAL NON-CASH FLOW INFORMATION:

               

Capital expenditures included in accounts payable and prepaid expense

  $ 968     $ 2,018  

Right-of-use assets acquired in exchange for operating lease liabilities

    645       882  

      

See accompanying notes.

 

 

 

Hallador Energy Company 

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands) 

(unaudited)

 

Three and Nine Months Ended September 30, 2020

 
                   

Additional

           

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Equity

 

Balance, June 30, 2020

    30,465     $ 305     $ 102,833     $ 84,369     $ 187,507  

Stock-based compensation

                291             291  

Stock issued on vesting of RSUs

    2                          

Taxes paid on vesting of RSUs

    (1 )           (1 )           (1 )
Dividends                              

Net income

                      1,923       1,923  

Balance, September 30, 2020

    30,466     $ 305     $ 103,123     $ 86,292     $ 189,720  
                                         

Balance, December 31, 2019

    30,420     $ 304     $ 102,215     $ 89,011     $ 191,530  

Stock-based compensation

                927             927  

Stock issued on vesting of RSUs

    72       1       (1 )            

Taxes paid on vesting of RSUs

    (26 )           (18 )           (18 )

Dividends

                      (1,236 )     (1,236 )

Net loss

                      (1,483 )     (1,483 )

Balance, September 30, 2020

    30,466     $ 305     $ 103,123     $ 86,292     $ 189,720  

  

Three and Nine Months Ended September 30, 2019

 
                   

Additional

           

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Equity

 

Balance, June 30, 2019

    30,247     $ 302     $ 101,747     $ 155,003     $ 257,052  

Stock-based compensation

                426             426  

Stock issued on vesting of RSUs

    3                          

Taxes paid on vesting of RSUs

    (1 )           (7 )           (7 )

Dividends

                      (1,241 )     (1,241 )

Net loss

                      (3,723 )     (3,723 )

Balance, September 30, 2019

    30,249     $ 302     $ 102,166     $ 150,039     $ 252,507  
                                         

Balance, December 31, 2018

    30,245     $ 302     $ 100,742     $ 153,830     $ 254,874  

Stock-based compensation

                1,438             1,438  

Stock issued on vesting of RSUs

    7                          

Taxes paid on vesting of RSUs

    (3 )           (14 )           (14 )

Dividends

                      (3,724 )     (3,724 )

Net loss

                      (67 )     (67 )

Balance, September 30, 2019

    30,249     $ 302     $ 102,166     $ 150,039     $ 252,507  

 

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 and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2020.  To maintain consistency and comparability, certain 2019 amounts have been reclassified to conform to the 2020 presentation, with no impact to cash provided by operations activities or net income (loss).

 

Our organization and business, the accounting policies we follow, and other information are contained in the notes to our consolidated financial statements filed as part of our 2019 Annual Report on Form 10-K. This quarterly report should be read in conjunction with such Annual Report on Form 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.

 

Subsequent Events

 

We have evaluated all subsequent events through the date the financial statements were issued.  No material recognized or non-recognizable subsequent events were identified.

 

 

(2)

LONG-LIVED ASSET IMPAIRMENTS

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable.  The impact of COVID-19 is being monitored closely, but for the quarter ended September 30, 2020, there were no material COVID-19 related impairment charges recorded for long-lived assets.

 

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 September 30, 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. Exit and disposal costs to close the mine were $1.1 million, which were recorded as current period costs in Q1 and Q2 of 2020.

 

7

 

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 was $1.9 million as of  December 31, 2019.  Due to the continued regression of the frac sand market, in August 2020 we ceased operations of the plant and recorded an impairment of $1.8 million for the quarter ended September 30, 2020, which included the remaining inventory and buildings and which was determined using a market approach.

 

 

(3)

INVENTORY

 

Inventory is valued at lower of average cost or net realizable value (NRV).  As of September 30, 2020, and December 31, 2019, coal inventory includes NRV adjustments of $0.5 million and $2.0 million, respectively.

 

 

(4)

OTHER LONG-TERM ASSETS (in thousands)

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Advanced coal royalties

 $6,453  $6,105 

Marketable equity securities available for sale, at fair value (restricted)*

     2,296 

Other

  1,837   1,923 

Total other assets

 $8,290  $10,324 

 


* Held by Sunrise Indemnity, Inc., our wholly-owned captive insurance company.

 

 

(5)

LONG-TERM DEBT

 

On April 15, 2020, 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.

 

In the first nine months of 2020, we reduced our bank debt by $33 million, which as of September 30, 2020 was $147 million.  Bank debt is comprised of term debt ($77 million as of September 30, 2020) and a $120 million revolver ($70 million borrowed as of September 30, 2020).  The term debt amortization concludes with the final payment in March 2023.  The revolver matures September 2023.  Our debt is recorded at amortized cost, which approximates fair value due to the variable interest rates in the agreement and is collateralized primarily by our assets.

 

Liquidity

 

As of September 30, 2020, we had additional borrowing capacity of $47.4 million and total liquidity of $52.7 million.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

 

Fees

 

Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $7.9 million as of our amendment in April 2020. These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of September 30, 2020, and December 31, 2019, were $6.7 million and $6.5 million, respectively.  Additional costs incurred with the April 15 amendment were $1.9 million.

 

8

 

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

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Current bank debt

  $ 36,750     $ 34,912  

Less unamortized debt issuance costs

    (2,439 )     (1,868 )

Net current portion

  $ 34,311     $ 33,044  
                 

Long-term bank debt

  $ 110,175     $ 145,238  

Less unamortized debt issuance costs

    (4,290 )     (4,644 )

Net long-term portion

  $ 105,885     $ 140,594  
                 

Total bank debt

  $ 146,925     $ 180,150  

Less total unamortized debt issuance costs

    (6,729 )     (6,512 )

Net bank debt

  $ 140,196     $ 173,638  

 

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:

 

Fiscal Periods Ending

 

Ratio

 

September 30, 2020 and December 31, 2020

  3.50 to 1.00  

March 31, 2021 and June 30, 2021

  3.25 to 1.00  

September 30, 2021 and December 31, 2021

  3.00 to 1.00  

March 31, 2022 and each fiscal quarter thereafter

  2.50 to 1.00  

  

As of September 30, 2020, our Leverage Ratio of 2.46 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 September 30, 2020, our Debt Service Coverage Ratio of 1.44 was in compliance with the requirements of the credit agreement.

 

Interest 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 September 30, 2020, we are paying LIBOR at the swap rate of 2.92% plus 3.50% for a total interest rate of 6.42% on the hedged amount ($130 million) and 4% on the remainder ($17 million).

 

Paycheck Protection Program

 

On April 16, 2020, we entered into an unsecured promissory note in the amount of $10 million under the Paycheck Protection Program (the “PPP Note”). The Paycheck Protection Program 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 PPP note was funded through First Financial Bank, N.A. (the “Lender”).    

  

The annual interest rate on the PPP Note is 1.00%. Monthly principal and interest payments were originally deferred for six months after the date of the loan, but the deferral has been extended to 2021. The PPP Note 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.

  

 

9

 

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the 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 used all proceeds from the PPP Loan to maintain payroll and utility payments.

 

At September 30, 2020, the PPP loan totaling $10 million is presented as current and long-term liabilities on the condensed consolidated balance sheets based upon the schedule of repayments and excluding any possible forgiveness of the loan.  See Part II Item 1A.Risk Factors of this Quarterly Report on Form 10-Q for discussion of significant risk factors related to our participation in the Paycheck Protection Program.

 

 

(6)

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (in thousands)

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Accounts payable

  $ 14,223     $ 16,115  

Accrued property taxes

    2,898       2,835  

Accrued payroll

    3,030       2,151  

Workers' compensation reserve

    3,824       3,446  

Group health insurance

    1,800       2,500  
Fair value of interest rate swaps     3,021       1,714  

Other

    4,730       3,039  
Total accounts payable and accrued liabilities   $ 33,526     $ 31,800  

  

 

(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. 75% of our coal revenue for the three and nine months ended September 30, 2020, and 67% and 69% for three and nine months ended September 30, 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.

 

 

10

 

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 $494 million, which represent the average fixed prices on our committed contracts as of September 30, 2020. We expect to recognize approximately 57% of this revenue through 2021, with the remainder recognized thereafter. 

 

We have remaining performance obligations relating to contracts with price reopeners of approximately $237 million, which represents our estimate of the expected re-opener price on committed contracts as of September 30, 2020. We expect to recognize all of this revenue from 2022-2027.

 

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, but we currently are carrying $0.4 million in deferred revenue recorded in our condensed consolidated balance sheets as of September 30, 2020.

 

 

(8)

OTHER OPERATING INCOME (in thousands)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Equity income (loss) - Sunrise Energy

  $ (119 )   $ (184 )   $ 1,167     $ (350 )
Government imposition reimbursements     100       150       300       450  
Gain on sale of royalty interests in oil properties                       2,949  
Coal storage     127             211        
Miscellaneous     266       247       910       2,439  
    $ 374     $ 213     $ 2,588     $ 5,488  

 

 

(9)

INCOME TAXES

 

For the three and nine months ended September 30, 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 and nine months ended September 30, 2020 and 2019 was ~69% and ~98%, 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.

  

 

11

 

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.

 

 

(10)

STOCK COMPENSATION PLANS

 

Non-vested grants at December 31, 2019

  488,500 

Granted – average weighted share price on grant date was $0.90

  40,000 

Vested – average weighted share price on vesting date was $0.68

  (72,000)

Forfeited

  (9,500)

Non-vested grants at September 30, 2020

  447,000 

 

For the three and nine months ended September 30, 2020, our stock compensation was $0.3 million and $0.9 million, respectively. For the three and nine months ended September 30, 2019, our stock-based compensation was $0.4 million and $1.4 million, respectively.

  

Non-vested RSU grants will vest as follows:

 

Vesting Year

 

RSUs Vesting

 

2020

    106,250  

2021

    306,750  

2022

    24,000  
2023     10,000  
      447,000  

  

The outstanding RSUs have a value of $0.3 million based on the September 30, 2020, closing stock price of $0.65.

 

At September 30, 2020 we had 1,379,650 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):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Operating lease information:

                               
Operating cash outflows from operating leases   $ 50     $ 77     $ 184     $ 234  
Weighted average remaining lease term in years     3.43       4.11       3.43       4.11  

Weighted average discount rate

    6.0 %     6.0 %     6.0 %     6.0 %

 

12

 

Future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows:

 

Year

 

Amount

 
   

(In thousands)

 

2020

  $ 50  

2021

    203  

2022

    206  

2023

    174  

2024

    60  

Total minimum lease payments

  $ 693  

Less imputed interest

    (48 )
         

Total operating lease liabilities

  $ 645  
         

As reflected on balance sheet:

       

Other long-term liabilities

  $ 645  

 

At September 30, 2020, and December 31, 2019, we had approximately $645,000 and $800,000, respectively, of 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 $273 million as of September 30, 2020, and December 31, 2019.

 

Restricted cash of $4.2 million and $4.5 million as of September 30, 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)

INCOME (LOSS) PER SHARE

 

We compute income (loss) per share using the two-class method, which is an allocation formula that determines income (loss) per share for common stock and participating securities, consisting of outstanding RSUs.

 

The following table sets forth the computation of net income (loss) allocated to common shareholders (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Numerator:

                               
Net income (loss)   $ 1,923     $ (3,723 )   $ (1,483 )   $ (67 )
Less loss (income) allocated to RSUs     (28 )     93       23        

Net income (loss) allocated to common shareholders

  $ 1,895     $ (3,630 )   $ (1,460 )   $ (67 )

  

13

 
 

(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 $86 million as of September 30, 2020, both with maturities of May 2022.  Fuel hedges include 1.4 million gallons of diesel fuel that are subject to pricing fluctuations with a minimum of $1.79/gallon and a maximum of $2.00/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 September 30, 2020 and December 31, 2019 by the respective level of the fair value hierarchy (in thousands):

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 

December 31, 2019

                               

Assets:

                               

Fuel hedge

  $     $     $ 25     $ 25  

Marketable securities - restricted

    2,296                   2,296  
    $ 2,296     $     $ 25     $ 2,321  

Liabilities:

                               

Interest rate swaps

  $     $     $ 3,825     $ 3,825  
                                 

September 30, 2020

                               

Liabilities:

                               

Fuel hedge

                750       750  

Interest rate swaps

                4,806       4,806  
    $     $     $ 5,556     $ 5,556  

    

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):

 

Ending balance, December 31, 2019*

 $(3,800)

Change in estimated fair value

  (1,756)

Ending balance, September 30, 2020*

 $(5,556)

 


*Recorded in accounts payable and accrued liabilities and other liabilities in the Condensed Consolidated Balance Sheets.

 

14

 
 

(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 September 30, 2020, and December 31, 2019, was $3.3 million and $3.1 million, respectively.

 

  

15

 
 

 

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 sheet of Hallador Energy Company (the "Company") and subsidiaries as of September 30, 2020, and 2019, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2020 and 2019, the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2020 and 2019, the condensed consolidated statement of stockholders’ equity for the three-month and nine-month periods ended September 30, 2020 and 2019, and the related notes (collectively referred to as the "interim financial statements"). Based on our review, 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

 

November 2, 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 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.

 

IMPACT OF COVID-19

 

We continue to face uncertainty regarding the evolving impact of the COVID-19 pandemic.  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 as a supplier to critical power infrastructure. Below is an outline of some of the actions we have taken to address the challenges the COVID-19 pandemic has brought. We continue to monitor the ongoing pandemic and note that if conditions deteriorate in the future, it could result in further negative impact on our results of operations, financial position, and liquidity.

 

 

I.

 

Sales – The global shelter in place response to the COVID–19 pandemic led to an unexpected and dramatic reduction in power demand, primarily during the second quarter 2020.  As expected, we experienced shipment delays in the second quarter as our customers adjusted their inventory levels.  We have worked closely with all of our customers and feel comfortable that all will honor their contracts, most of which have increased shipments in the third quarter and are expected to continue to do so in the fourth quarter.

 

 

II.

 

Production – To date, our operations have performed well considering the additional burdens of operating while working to comply with CDC health and safety guidelines. However, we may experience production interruptions should a significant number of our employees or our suppliers' employees become infected with COVID-19. Our inventory levels rose in the first half of the year, but shipments have increased, and our inventory levels are beginning to decline.

 

  III.   Liquidity and financial flexibility - In Q2 2020, to enhance our liquidity and financial flexibility in response to COVID-19, we amended our credit facility, suspended our quarterly dividend, and borrowed $10 million under the Paycheck Protection Program as described below.

 

  a.   As of September 30, 2020, our liquidity was $52.7 million and our leverage ratio of 2.46X is comfortably within our covenant of 3.50X.

 

  IV.   Supply chain and distribution network - To date, we have not seen a material disruption in our access to supplies and equipment needed in the production of coal.  In the second and third quarter, we experienced delays in rail services that have started to improve at the end of the third quarter.

 

OVERVIEW

 

Considering the challenges we have faced during this unprecedented time, Hallador has performed well. Below are some highlights for the quarter and first nine months of 2020:

 

  I.

 

Q3 2020 Net Income of $1.9 million, Adjusted EBITDA of $17.1 million

 

 

a.

 

Sales:  During Q3 2020, shipments improved versus Q2 levels.  Looking forward, we expect to defer up to 400,000 tons of 2020 shipments to 2021.  As part of these agreements, we anticipate extending the term of multiple contracts for three additional years. 

  

 

i.

  Coal inventory was reduced by $4.5 million during the quarter.

 

  b.   Production:  Q3 production costs were $29.30 per ton.  Looking out for the health and safety of our employees, and out of an abundance of caution, we experienced weeks during the quarter where up to 25% of our workforce was quarantined at home due to COVID-19 exposure. In spite of those challenges, costs remained within our guidance.

 

  c.  

Cash Flow & Debt:  During Q3, we generated $15.8 million in operating cash flow which we utilized to pay down our bank debt by $14 million. 

 

  i.   As of September 30, 2020, our bank debt was $147 million, bringing our liquidity to $53 million and reducing our leverage ratio to 2.46X, comfortably within our covenant of 3.5X.

 

 

Table of Contents

 

Reconciliation of GAAP “net income” to non-GAAP “adjusted EBITDA” (in thousands), the most comparable GAAP financial measure.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income (loss)

  $ 1,923     $ (3,723 )   $ (1,483 )   $ (67 )

Income tax benefit

    (461 )     (3,473 )     (3,255 )     (3,318 )

Loss from Hourglass Sands

    64       47       205       438  

(Income) loss from equity method investments

    119       184       (1,167 )     350  

DD&A

    9,313       11,774       30,151       35,598  
Asset impairment     1,799             1,799        

ARO accretion

    348       320       1,024       943  
Loss (gain) on disposal of assets     38       1       38       (99 )

Loss (gain) on marketable securities

          14       (14 )     (334 )

Interest Expense

    2,329       3,558       10,877       13,546  

Other amortization

    1,452       1,323       4,274       3,614  

Change in fair value of fuel hedges

    (138 )     -       775        

Stock-based compensation

    291       426       927       1,438  

Adjusted EBITDA

  $ 17,077     $ 10,451     $ 44,151     $ 52,109  

 

 

Management believes that the presentation of such additional financial measures provides useful information to investors regarding our performance and results of operations because these measures when used in conjunction with related GAAP financial measures, (i) provide additional information about our core operating performance and ability to generate and distribute cash flow, (ii) provide investors with the financial and analytical framework upon which management bases financial, operation, compensation, and planning decisions, and (iii) present measurements that investors, rating agencies, and debt holders have indicated are useful in assessing our results.

 

 

  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

   

Estimated

 
   

tons

   

Priced

 

Year

 

(millions)*

   

per ton

 

2020 (Q4)

    2.1     $ 40.00  

2021

    5.0     $ 39.30  

2022

    5.3     $ 40.20  
      12.4          

_____________

* 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.  Our actual shipments for the remainder of 2020 are estimated to be 1.7 million tons as we expect our customers to defer or carryover 400,000 tons from 2020 to 2021 from the contracted tons noted above. 

 

 

  

 

III.

 

Amended Credit Facility to Improve Liquidity

 

 

a.

 

In an effort to improve liquidity, on April 15, 2020, we executed an amendment to our credit agreement with PNC, administrative agent for our lenders. The amendment modified our leverage ratios, as disclosed in Note 5 to our condensed consolidated financial statements. The new leverage ratios provided us additional liquidity as the economic uncertainty of the next few months and quarters has the potential to dramatically reduce our liquidity.

 

 

i.

 

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.

 

 

IV.

 

Paycheck Protection Program and Payroll Tax Deferral

 

 

a.

 

Due to economic uncertainty as a result of COVID-19, 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”).

  

 

i.

 

As noted previously, uncertainty was created as a result of unexpected sales delays due to the impacts of COVID-19.

  

 

1.

 

Starting in March and continuing through Q2, sales were 30% lower than expected.

 

  2.   The receipt of funds under the PPP loan allowed the Company to avoid workforce reduction measures amidst a steep decline in revenue and operating margins.

  

 

b.

 

Prior to the COVID-19 pandemic taking root in the United States, we idled and permanently closed the Carlisle Mine resulting in a reduction in force in Q1 2020.

  

 

i.

 

At September 30, 2020, the PPP loan totaling $10 million is presented as current and long-term liabilities on the condensed consolidated balance sheets based upon the schedule of repayments and excluding any possible forgiveness of the loan. Based on the terms of the loan, after factoring in the reduction in force prior to our application, we expect a portion of the loan to be forgiven following a successful audit by the Small Business Administration (SBA).  We anticipate applying for forgiveness in Q4 2020 with the decision from the SBA as to the amount of forgiveness coming in Q1 or Q2 of 2021. 

 

  c.   In June 2020, we started to take advantage of the payroll tax deferral offered by the CARES act.  Through September 2020, we have deferred $0.8 million, but expect to defer approximately $1.6 million for the full year 2020, which will be due and payable in two annual installments at the end of 2021 and 2022.

 

  V.   Signs of Improvement for the Coal Market

 

  a.    Gas prices are increasing

 

  i.   Thus far, Henry Hub natural gas prices have averaged $1.88 for 2020. Looking to next year, the NYMEX gas 2021 forward strip is $3.11. Next year's gas prices are higher as the market anticipates less gas production and stronger LNG exports in 2021. One indicator of less future gas production is the dramatic slowdown in oil and gas drilling. 

 

  ii.   Oil and gas rig counts as of October 23, 2020 are 287 vs. the 2018/2019 peak of 1,085, a 74% decline.

 

  iii.   Gas targeted rigs as of October 23, 2020 are 73 vs. the 2018/2019 peak of 198, a 63% decline.

 

  b.   Coal export prices are improving

 

  i.   API 4 is above $60 now and throughout 2021

 

  ii.   API 2 is above $60 in Q4 2021

 

 

LONG-LIVED ASSET IMPAIRMENT REVIEW

 

See Note 2 to our condensed consolidated financial statements.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

I.

 

Cash Provided by Operations

 

 

a.

 

As set forth in our condensed consolidated statements of cash flows, cash provided by operations was $34.0 million and $36.3 million for the nine months ended September 30, 2020 and 2019, respectively.

 

 

i.

 

Operating margins from coal decreased during the first nine months of 2020 by $5.3 million when compared to the first nine months of 2019.

 

 

1.

 

Our operating margins were $10.65 per ton in the first nine months of 2020 compared to $8.53 in the first nine months of 2019.

 

 

2.

 

Due in part to the effects of COVID-19, we experienced lower demand in the first nine months of 2020, resulting in sales of 4.4 million tons compared to sales in the first nine months of 2019 of 6.1 million tons.

 

 

ii.

 

The combination of the lower margins offset by changes in working capital items contributed substantially to our decrease in cash from operations compared to 2019.

 

 

b.

 

Our projected capex budget for the remainder of 2020 is $6 million, of which approximately $3.0 million is for maintenance capex.

 

 

c.

 

Cash provided by operations for the remainder of the year is expected to fund our maintenance capital expenditures and debt service, especially as we continue to reduce coal inventories throughout the balance of 2020.

 

 

d.

 

As we continue to monitor the effects of COVID-19, we continue to proactively manage costs and capital expenditures to ensure adequate liquidity until there is more of a sense of economic certainty in the markets in which we operate.

 

 

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 $27 million to pay for ARO.

  

 

CAPITAL EXPENDITURES (capex)

 

For the nine months of 2020, capex was $14.0 million allocated as follows (in millions):

 

Oaktown – maintenance capex

  $ 7.3  

Oaktown – investment

    6.3  

Other

    0.4  

Capex per the Condensed Consolidated Statements of Cash Flows

  $ 14.0  

  

Quarterly coal sales and cost data (in thousands, except per ton and percentage data) are provided below. Per ton calculations below are based on tons sold.

 

All Mines

 

4th 2019

   

1st 2020

   

2nd 2020

   

3rd 2020

   

T4Qs

 

Tons produced

    2,122       1,701       1,468       1,234       6,525  

Tons sold

    2,015       1,526       1,244       1,585       6,370  

Coal sales

  $ 78,205     $ 61,932     $ 50,473     $ 64,754     $ 255,364  

Average price/ton

  $ 38.81     $ 40.58     $ 40.57     $ 40.85     $ 40.09  

Wash plant recovery in %

    74 %     74 %     76 %     71 %        

Operating costs

  $ 60,082     $ 48,334     $ 36,001     $ 46,444     $ 190,861  

Average cost/ton

  $ 29.82     $ 31.67     $ 28.94     $ 29.30     $ 29.96  

Margin

  $ 18,123     $ 13,598     $ 14,472     $ 18,310     $ 64,503  

Margin/ton

  $ 8.99     $ 8.91     $ 11.63     $ 11.55     $ 10.13  

Capex

  $ 8,264     $ 5,999     $ 4,006     $ 3,995     $ 22,264  

Maintenance capex

  $ 4,115     $ 3,470     $ 2,578     $ 1,365     $ 11,528  

Maintenance capex/ton

  $ 2.04     $ 2.27     $ 2.07     $ 0.86     $ 1.81  

 

All Mines

 

4th 2018

   

1st 2019