# HALLADOR ENERGY CO (HNRG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HALLADOR ENERGY CO's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/788965/000143774922007411/hnrg20211231_10k.htm
Accession: 0001437749-22-007411
Filing date: 2022-03-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HNRG/
All MD&A years: /company/HNRG/mda/
Next year: /company/HNRG/mda/fy2022/ (FY 2022)

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our consolidated financial statements should 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.

COVID-19

In the first quarter of 2020, COVID-19 emerged as a global 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. We continue to monitor the ongoing pandemic and note that if conditions deteriorate in the future, it could negatively impact our results of operations, financial position, and liquidity.

We have instituted many policies and procedures, in alignment with CDC guidelines along with state and local mandates, to protect our employees during the COVID-19 outbreak. We plan to keep these policies and procedures in place, in accordance with CDC, state, and local guidelines, and continually evaluate further enhancements for as long as necessary. We recognize that the COVID-19 outbreak, and responses thereto, will also impact both our customers and suppliers. As world economies have emerged from both the global pandemic and the power outages in Texas last winter, supplies have become more challenging to secure.  At times we have paid premiums for supplies to ensure no interruptions to our production.

As vaccines for COVID-19 continue to become readily available, we intend to continue encouraging our workforce to get vaccinated, and we are hopeful that the case rate of our employees will continue to decline, and economic activity in general will continue to accelerate.  We continue to offer cash incentives to employees who show proof of vaccination.

OVERVIEW

The largest portion of our business is devoted to coal mining in the State of Indiana through Sunrise Coal, LLC (a wholly-owned subsidiary) serving the electric power generation industry. We also own a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana, which we account for using the equity method.

On February 15th, 2022, Hallador Energy announced its new wholly-owned subsidiary, Hallador Power Company, LLC, will acquire Hoosier Energy’s 1-Gigawatt Merom Generating Station ("Merom"), located in Sullivan County, Indiana, in return for assuming certain decommissioning costs and environmental responsibilities. The transaction, which includes a 3.5-year power purchase agreement (PPA), is scheduled to close in mid-July 2022 upon obtaining required governmental and financial approvals. 

Per the agreement, Hoosier will purchase 100% of the plant’s energy and capacity through May 2023, reducing purchases to 22% of energy output and 32% of its capacity beginning in June 2023 and through 2025. The existing renewable PPA – signed in May 2021 and representing 150 MW of solar generation and 50 MW of battery storage – will be retained, with its start date delayed until Merom’s eventual retirement. 

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Going forward, Hallador Energy will have two primary subsidiaries:  Sunrise Coal, LLC and Hallador Power Company, LLC.  All coal production assets will remain with Sunrise Coal.  Hallador Power Company will hold assets associated with electricity production, including, but not limited to, the Merom Generating Station, Power Purchase Agreements and Interconnection rights.

We anticipate operating Merom post-closing in mid-July of 2022.  Hallador will provide little coal to the plant in 2022 but anticipates increasing Sunrise Coal’s sales to Merom in 2023 and beyond. 

We expect Hallador Power to contribute little to Hallador Energy profits in 2022.  However, this acquisition is significant starting in 2023, and we believe Hallador Power will double Hallador Energy’s EBITDA. 

Mining Properties

The following information concerning our mining properties has been prepared in accordance with the requirements of subpart 1300 of Regulation S-K, which first became applicable to us for the fiscal year ended December 31, 2021.  These requirements differ from the previously applicable disclosure requirements of SEC Industry Guide 7.  Among other differences, subpart 1300 of Regulation S-K requires us to disclose our mineral (coal) resources, which we have none, in addition to our mineral (coal) reserves, as of the end of our most recently completed fiscal year both in the aggregate and for each of our individually material mining properties.

As used in this Annual Report on Form 10-K, the terms “mineral resources,” “mineral reserve,” “proven mineral reserve” and “probable mineral reserve” are defined and used in accordance with subpart 1300 of Regulation S-K.  Under subpart 1300 of Regulation S-K, mineral resources may not be classified as “mineral reserves” unless the determination has been made by a qualified person (QP) that the mineral resources can be the basis of an economically viable project.  You are specifically cautioned not to assume that any part or all of the mineral deposits (including any mineral resources) in these categories will ever be converted into mineral reserves, as defined by the SEC.

Internal qualified person(s) have estimated the Company’s mineral reserves and mineral resources based on geologic data, coal ownership (control) information, and current and/or proposed operating plans.  Periodic updates occur to mineral reserve and mineral resource estimates attributableto revised mine plans, new exploration data, depletion from coal production, property acquisitions or dispositions, and/or other geologic or mining data.  Sunrise’s estimates of mineral reserves are proven and probable reserves that could be extracted or produced at the time of the reserve determination, economically, legally, and after considering all material modifying factors.  Modifications or updates of the estimates of the Company’s mineral reserves is limited to qualified geologists and mining engineers.  All modifications or updates of the estimates of recoverable coal reserves are documented.  The John T. Boyd Company, a qualified person firm, has assessed the Company’s estimates of mineral reserves and mineral resources and supporting information.  Based upon the review, John T. Boyd Company provided modification to the Company’s estimates of mineral reserves where warranted.

The information that follows is derived, for the most part, from, and in some instances is extracted from, the Oaktown Mining Complex technical report summary (“TRS”).  The Oaktown Mining Complex is the Company’s individually material property.  Sections of the following information provided herein do not fully describe assumptions, qualifications, and procedures.  Reference should be made to the full text of the TRS which is made a part of this Annual report on Form 10-K and incorporated hereby by reference.  The Oaktown Mining Complex TRS was prepared by the John T. Boyd Company in compliance with the Item 60(b)(96) and subpart 1300 of Regulation S-K.

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The following table provides a summary of all of the Company’s mineral reserves determined by the John T. Boyd Company as of the end of the fiscal year ended December 31, 2021:

SUMMARY MINERAL RESERVES AT END OF THE

FISCAL YEAR ENDED DECEMBER 31, 2021

[[GREPCENT_TABLE]]
[["","","Mineral Reserves (tons in millions)"],["","","Proven","","Probable","","Total"],["Oaktown Mining Complex"],["Oaktown Fuels No. 1 Mine","","40.1","","0.4","","40.5"],["Oaktown Fuels No. 2 Mine","","29.7","","1.2","","30.9"],["Total","","69.8","","1.6","","71.4"]]
[[/GREPCENT_TABLE]]

Oaktown Mining Complex

The Oaktown Mining Complex is a coal mining and processing operation located in Knox and Sullivan counties, Indiana, and Crawford and Lawrence counties, Illinois.  The following figure shows the general location of the Oaktown Mining Complex:

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Comprising 118 square miles within the ILB coal-producing region of the mid-western United States, the Oaktown Mining Complex is one of the largest underground Room-and-Pillar (R&P) coal mining complexes in North America.  The Oaktown Mining Complex operations currently consist of two active underground mines - Oaktown Fuels No. 1 Mine and Oaktown Fuels No. 2 Mine - and related infrastructure.  Geographically, the Oaktown Complex Coal Preparation Plant is located at approximately 28°51’24.7” N latitude and 87°25’30.9” W longitude.  Within the Oaktown Mining Complex area and immediate vicinity, our Company controls approximately 75,000 acres of mineral rights.  This control exists as a complex collection of leases that apply to more than 2,000 tracts.  Each of which range from less than an acre to several hundred acres in size.  Ownership of the surface rights and the mineral rights is often severed for the properties and the estates are often fractions, in which mineral rights are split between several owners.  The Company and its predecessors have acquired the necessary rights to support development and operations through purchase or lease agreements with predominately private owners or entities. As part of the Oaktown Mining Complex, the Company controls surface rights through fee simple ownership for over 1,700 permitted acres.  Upon those acres resides the surface facilities for mine accesses, processing, storing, shipping, and refuse disposal facilities (i.e., refuse impoundment site and fine refuse injection sites).  Our involvement with the Oaktown Mining Complex dates to 2014 with the acquisition of Oaktown Fuels No. 1 and No. 2 Mines from Vectren Fuels.

Each mine of the Oaktown Mining Complex utilizes R&P mining (employing Continuous Miners [CM]) for primary production.  This mining method is highly productive and commercially demonstrated; it has been one of the primary approaches to underground mining the Indiana V Seam for decades.  Oaktown Mining Complex has utilized this mining method since the inception of each operation.  To date, Oaktown Mining Complex has produced a combined 58.3 million tons of clean coal.  The complex is configured to operate up to 7 CM sections, with an annual production target of approximately 6-7 million product tons.  The Oaktown Complex Coal Preparation Plant serves as the coal washing and shipment facility for the Oaktown Mining Complex’s two R&P mines.  The plant was commissioned in 2009 to wash coal by the Oaktown Fuels No. 1 Mine.  The Oaktown Complex Coal Preparation Plant has a current processing capacity of 1,600 raw tons-per-hour (TPH).  Product coal from the Oaktown Mining Complex is transported to its customer base via rail, truck, or a combination of both.  The Oaktown Complex Coal Preparation Plant is served by both the CSX Railroad and Indiana Railroad (INRD) via a rail spur and rail loop that connects the complex with the mainline rail just north of Oaktown, Indiana. 

Additionally, the Oaktown Complex Coal Preparation Plant can facilitate the loading of trucks for direct transport to select customers, or to our transload facility in Princeton, Indiana serviced by the Norfolk Southern (NS) Railroad.

Sources of electrical power, water, supplies, and materials are readily available.  Electrical power is provided to the mines and facilities by regional utility companies.  Water is supplied by public water services, surface impoundments, or water wells.

Multiple permits are required by federal and state law for underground mining, coal preparation and related facilities, and other incidental activities.  All necessary permits to support current operations are in place or pending approval.  New permits or permit revisions may be necessary from time to time to facilitate future operations.  Given sufficient time and planning, we should be able to secure new permits, as required, to maintain our planned operations within the context of the current regulations.

Permits generally require that the Company post a performance bond in an amount established by the regulator program to: (1) provide assurance that any disturbance or liability created during mining operation is properly mitigated, and (2) assure that all regulation requirements of the permit are fully satisfied. We hold surety bonds to cover obligations relating to mining and reclamation, road repair, etc. Those obligations are currently estimated at $5.8 million.

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Additional information is provided in the following table regarding the Oaktown Mining Complex mineral reserves:

[[GREPCENT_TABLE]]
[["OAKTOWN MINING COMPLEX"],["Recoverable Coal Reserves as of December 31, 2021 and 2020"],["","","As Received","","As Received"],["","","Heat","","SO2"],["","","Value","","Content"],["","","(Btu/lb)","","(lbs/MMBtu)","","Owned","","Leased","","Recoverable Coal Reserves (As-Received)"],["Mine/Reserve","","Approximate","","Approximate","","(%)","","(%)","","Proven","","Probable","","12/31/2021","","12/31/2020"],["Oaktown Mining Complex"],["Oaktown Fuels No. 1 Mine","","11,519","","6.0","","\u2014","","100.0","","40.1","","0.4","","40.5","","45.3"],["Oaktown Fuels No. 2 Mine","","11,540","","5.6","","\u2014","","100.0","","29.7","","1.2","","30.9","","34.9"],["Total Recoverable Coal Reserves","","","","","","","","","","69.8","","1.6","","71.4","","80.2"]]
[[/GREPCENT_TABLE]]

Oaktown Fuels No. 1 Mine

The assigned and accessible reserve base for the Oaktown Fuels No. 1 Mine contains 40.5 million tons of recoverable Indiana V seam coal, of which 40.5 million tons are currently permitted.  The reserve contains saleable tons which average heating content of approximately 11,519 Btu per pound with approximately 6.0 pounds of sulfur dioxide per MMBtu on an as-received basis.  Access to the Oaktown Fuels No. 1 Mine is via a 90-foot-deep box cut and a 2,200-foot slope, which facilitates the egress of coals being mined in excess of 375 feet below the surface.  Since beginning first commercial coal production in 2009, the mine workings have substantially grown, and an additional mine access (elevator) was constructed for employee and supply ingress/egress closer to the active production faces.

Oaktown Fuels No. 2 Mine

The assigned and accessible reserve base for the Oaktown Fuels No. 2 Mine contains 30.9 million tons of recoverable Indiana V seam coal, of which 25.6 million tons are currently permitted.  The reserve contains saleable tons which average heating content of approximately 11,540 Btu per pound with approximately 5.6 pounds of sulfur dioxide per MMBtu on an as-received basis.  Access to the Oaktown Fuels No. 2 Mine is via an 80-foot-deep box cut and 2,600-foot slope, which facilitates the egress of coals being mined in excess of 400 feet below the surface.  Since beginning first commercial coal production in 2013 the mines workings have substantially grown and, during 2021, an additional mine access (elevator) has been constructed for employee and supply ingress/egress closer to the active production faces.

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Historical production for our Oaktown Mining Complex during the years ended December 31, 2021, 2020, and 2019 is provided in the following table:

[[GREPCENT_TABLE]]
[["","","Annual Saleable Production Tons"],["","","(Million Tons)"],["Mine/Reserve","","2021","","2020","","2019"],["Oaktown Mining Complex"],["Oaktown Fuels No. 1 Mine","","3.5","","3.4","","4.2"],["Oaktown Fuels No. 2 Mine","","2.1","","1.8","","2.3"],["Total Oaktown Mining Complex Production","","5.6","","5.2","","6.5"]]
[[/GREPCENT_TABLE]]

Other Properties

The Company holds other recoverable coal reserves in the ILB, which are not deemed individually material.

Ace in the Hole Mine (Ace) (surface) – Assigned

We have 0.05 million controlled, saleable tons at our Ace mine. The Ace mine is near Clay City, Indiana in Clay County and 50 road miles northeast of the Oaktown Mine. The two primary seams are low sulfur coal (~2# SO2), which make up the vast majority of the tons controlled. Mine development began in late December 2012, and we began shipping coal in late August 2013. We truck low sulfur coal from Ace to Oaktown toblend with high sulfur coal. Many utilities in the southeastern U.S. have scrubbers with lower sulfur limits (4.5# SO2) which cannot accept the higher sulfur contents of the ILB (4.5# - 6.5# SO2). Blending high sulfur coal to a lower sulfur specification enables us to market our high sulfur coals to more customers.

The Ace mine is a multi-seam open pit strip mine. The majority of the seams are sold raw, but some of the seams will be washed prior to sales, depending on quality. To convert the tons sold raw, the in-place tonnage is multiplied by a pit recovery of 95% based on seam thickness. To convert the tons sold washed, the in-place tonnage is multiplied by a pit recovery based on seam thickness then reduced by the projected wash plant recovery of 78% to 100% depending on the seam.

We will complete mining operations at Ace in the Hole Mine in 2022.

Ace in the Hole Mine #2 Reserves (surface) – Unassigned

In 2018, we leased property giving us 1.0 million controlled, saleable tons at a new location 2 miles southwest of our Ace in the Hole mine. Future mine development is being reviewed along with other opportunities.

Asset Impairment Review

See Note 2 to our consolidated financial statements.

Our Coal Contracts

In 2021, Sunrise sold 6.2 million tons of coal to 14 power plants in four different states across nine different customers.

During 2021, we derived 95% of our revenue from five customers (10 power plants), with each of the five customers representing at least 10% of our coal sales. During 2020, we derived 79% of our revenue from four customers (6 power plants), with each of the four customers representing at least 10% of our coal sales.

Significant customers in 2021 include Vectren Corporation, a wholly-owned subsidiary of CenterPoint Energy (NYSE: CNP), Orlando Utility Commission (OUC), Alcoa Power Generating, Inc., a subsidiary of Alcoa Corporation (NYSE:  AA), Indianapolis Power & Light Company (IPL), a wholly-owned subsidiary of The AES Corporation (NYSE: AES), and Duke Energy Corporation (NYSE: DUK).

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Of our 2021 sales, 73% were shipped to locations in the State of Indiana.

Upon closing the purchase of the Merom Power Plant, we anticipate Hallador Power Company consuming 45% of Sunrise Coal’s production by 2024.

In Q4 2021, customer coal inventories and natural gas (a competitor to coal) inventory levels were both lower than normal.  Customers returned to market this year, and we are increasing production to meet the increasing demand. We are increasing production to 7 million clean tons annually starting in 2022 and expect to maintain that pace into the foreseeable future.

[[GREPCENT_TABLE]]
[["","","Contracted","","","Estimated"],["","","tons","","","price"],["Year","","(millions)*","","","per ton"],["2022","","","6.8","","","$","39.81"],["2023","","","5.3","","","$","43.10"],["2024 - 2027","","","6.3","","","","**"],["Total","","","18.4"]]
[[/GREPCENT_TABLE]]

*     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

Of significant note, both the reopening of the economy post Covid-19 related lockdowns and the supply disruption created by the conflict between Russia and Ukraine have significantly increased demand for U.S. steam coal. This has led to higher pricing both for coal and electricity.  All of our 2022 coal and electricity supply is priced, but we anticipate participating in higher coal and electricity prices in 2023.

We expect to continue selling a significant portion of our coal under supply agreements with terms of one year or longer. Typically, customers enter into coal supply agreements to secure reliable sources of coal at predictable prices while we seek stable sources of revenue to support the investments required to open, expand and maintain, or improve productivity at the mines needed to supply these contracts. The terms of coal supply agreements result from competitive bidding and extensive negotiations with customers.

Some utility customers have proposed shuttering certain plant units or entire plants in the coming years.  It remains to be seen whether these plans will be implemented. Upon completion of the acquisition of the Merom Power Plant from Hoosier Energy, we anticipate our mines will need to produce at a 7 million-ton annualized pace for several years.

Liquidity and Capital Resources

As set forth in our Consolidated Statements of Cash Flows, cash provided by operations was $48.0 million and $52.6 million for the years ended December 31, 2021 and 2020 respectively. Operating cash flow decreased primarily due to a reduction in operating margins brought on by lower pricing and increased costs.  Operating margin per ton decreased in 2021 to $7.35/ton from $9.49/ton in 2020, reducing operating cash flow by $11.3 million.  This reduction was offset by changes in certain working capital items, specifically our significant inventory reduction from 2020.

Our capital expenditure budget for 2022 is $25 million, of which $15 million is for maintenance capex.  We also have scheduled payments on long-term debt totaling $25.7 million. We expect cash from operations for 2022 and the utilization of our revolver, if necessary, to fund our maintenance capital expenditures and our debt service.

In 4Q21, 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 significant increase in contracted tonnage, and ii) a lower yield on coal mined due to mining of a coal face ~10.5 miles away from the slope. We amended our bank agreement in March 2022 to provide covenant relief to maintain our liquidity levels as costs are anticipated to improve in 2022.

See Note 5 to our consolidated financial statements for additional discussion about our bank debt and related liquidity.

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Off-Balance Sheet Arrangements

Other than our surety bonds for reclamation, we have no material off-balance sheet arrangements. We have recorded reclamation obligations of $14.1 million, with the long-term portion presented as asset retirement obligations (ARO) and the remainder in accounts payable and accrued liabilities in our accompanying balance sheets. In the event we are not able to perform reclamation, we have surety bonds in place totaling $23.5 million to cover ARO.

Capital Expenditures (capex)

For the year ended December 31, 2021, our capex was $28.1 million allocated as follows (in millions):  

[[GREPCENT_TABLE]]
[["Oaktown \u2013 maintenance capex","","$","9.0"],["Oaktown \u2013 investment","","","19.0"],["Other","","","0.1"],["Capex per the Consolidated Statements of Cash Flows","","$","28.1"]]
[[/GREPCENT_TABLE]]

Results of Operations

[[GREPCENT_TABLE]]
[["I.","2021 Net Loss of $3.8 million."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","a.","Sales: We shipped 6.2 million tons during 2021, an increase over the 6.0 million tons shipped in 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","i.","Coal inventory was reduced by $17.0 million during the year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","b.","Production: 2021 production costs were $32.16/ton. 2020 costs were slightly better at $31.07/ton. Oaktown costs over that same period were $30.34 and $29.84, respectively."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","i.","In November 2021, we completed construction and put into service an employee and supply hoist closer to the operating face reducing travel time and related labor costs."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","ii.","We experienced supply chain disruptions with some vendors, causing us to pay premium prices for some of our inputs. We expect these increases to dissipate throughout 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","c.","Cash Flow & Debt: We generated $48.0 million in operating cash flow during the year, which we utilized to pay down our bank debt by $26.0 million. The Small Business Administration notified us in the third quarter of 2021 that the entire $10 million borrowed under the Paycheck Protection Program had been completely forgiven."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","i.","As of December 31, 2021, our bank debt was $111.7 million, bringing our liquidity to $33.4 million and our leverage ratio to 2.34X, within our covenant of 3.0X."]]
[[/GREPCENT_TABLE]]

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The following tables presenting our quarterly results of operations should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Form 10-K. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year. The tables present our unaudited quarterly results of operations for the eight quarters ended December 31, 2021, and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair presentation of our consolidated operating results for the quarters presented.

[[GREPCENT_TABLE]]
[["","","Mar-31","","","Jun-30","","","Sep-30","","","Dec-31"],["","","2021","","","2021","","","2021","","","2021","","","Total 2021"],["SALES AND OPERATING REVENUES:"],["Coal sales","","$","45,879","","","$","54,600","","","$","79,036","","","$","64,388","","","$","243,903"],["Other revenues","","","816","","","","1,038","","","","786","","","","1,123","","","","3,763"],["Total revenue","","","46,695","","","","55,638","","","","79,822","","","","65,511","","","","247,666"],["EXPENSES:"],["Operating expenses","","","34,009","","","","42,456","","","","67,792","","","","54,583","","","","198,840"],["Depreciation, depletion and amortization","","","10,307","","","","9,715","","","","9,842","","","","10,109","","","","39,973"],["Asset impairment","","","\u2014","","","","\u2014","","","","\u2014","","","","1,588","","","","1,588"],["Asset retirement obligations accretion","","","363","","","","373","","","","380","","","","388","","","","1,504"],["Asset retirement obligations change in estimate","","","\u2014","","","","\u2014","","","","\u2014","","","","(3,510",")","","","(3,510",")"],["Exploration costs","","","58","","","","159","","","","96","","","","169","","","","482"],["General and administrative","","","2,821","","","","3,383","","","","3,067","","","","5,562","","","","14,833"],["Total operating expenses","","","47,558","","","","56,086","","","","81,177","","","","68,889","","","","253,710"],["LOSS FROM OPERATIONS","","","(863",")","","","(448",")","","","(1,355",")","","","(3,378",")","","","(6,044",")"],["Bank interest","","","(2,135",")","","","(2,307",")","","","(2,167",")","","","(1,901",")","","","(8,510",")"],["Non-cash interest","","","237","","","","125","","","","59","","","","41","","","","462"],["Gain on extinguishment of debt","","","\u2014","","","","\u2014","","","","10,000","","","","\u2014","","","","10,000"],["Equity method investment income","","","\u2014","","","","63","","","","90","","","","211","","","","364"],["INCOME (LOSS) BEFORE INCOME TAXES","","","(2,761",")","","","(2,567",")","","","6,627","","","","(5,027",")","","","(3,728",")"],["INCOME TAX EXPENSE (BENEFIT):"],["Current","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Deferred","","","(1,729",")","","","397","","","","(1,359",")","","","2,717","","","","26"],["Total income tax expense (benefit)","","","(1,729",")","","","397","","","","(1,359",")","","","2,717","","","","26"],["NET INCOME (LOSS)","","$","(1,032",")","","$","(2,964",")","","$","7,986","","","$","(7,744",")","","$","(3,754",")"],["NET INCOME (LOSS) PER SHARE:"],["Basic and diluted","","$","(0.03",")","","$","(0.10",")","","$","0.26","","","$","(0.25",")","","$","(0.12",")"],["WEIGHTED AVERAGE SHARES OUTSTANDING:"],["Basic and diluted","","","30,611","","","","30,613","","","","30,613","","","","30,618","","","","30,614"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","Mar-31","","","Jun-30","","","Sep-30","","","Dec-31"],["","","2020","","","2020","","","2020","","","2020","","","Total 2020"],["SALES AND OPERATING REVENUES:"],["Coal sales","","$","61,932","","","$","50,473","","","$","64,754","","","$","64,925","","","$","242,084"],["Other revenues","","","551","","","","377","","","","493","","","","736","","","","2,157"],["Total revenue","","","62,483","","","","50,850","","","","65,247","","","","65,661","","","","244,241"],["EXPENSES:"],["Operating expenses","","","48,469","","","","36,165","","","","46,570","","","","54,753","","","","185,957"],["Depreciation, depletion and amortization","","","10,627","","","","10,217","","","","9,315","","","","9,485","","","","39,644"],["Asset Impairment","","","\u2014","","","","\u2014","","","","1,799","","","","\u2014","","","","1,799"],["Asset retirement obligations accretion","","","333","","","","343","","","","348","","","","357","","","","1,381"],["Exploration costs","","","253","","","","208","","","","174","","","","133","","","","768"],["General and administrative","","","2,978","","","","2,678","","","","3,131","","","","2,807","","","","11,594"],["Total operating expenses","","","62,660","","","","49,611","","","","61,337","","","","67,535","","","","241,143"],["INCOME (LOSS) FROM OPERATIONS","","","(177",")","","","1,239","","","","3,910","","","","(1,874",")","","","3,098"],["Bank interest","","","(2,654",")","","","(2,842",")","","","(2,714",")","","","(2,443",")","","","(10,653",")"],["Non-cash interest","","","(3,060",")","","","8","","","","385","","","","290","","","","(2,377",")"],["Equity method investment income (loss)","","","55","","","","1,231","","","","(119",")","","","(113",")","","","1,054"],["INCOME (LOSS) BEFORE INCOME TAXES","","","(5,836",")","","","(364",")","","","1,462","","","","(4,140",")","","","(8,878",")"],["INCOME TAX EXPENSE (BENEFIT):"],["Current","","","(524",")","","","\u2014","","","","(74",")","","","\u2014","","","","(598",")"],["Deferred","","","(1,652",")","","","(618",")","","","(387",")","","","597","","","","(2,060",")"],["Total income tax expense (benefit)","","","(2,176",")","","","(618",")","","","(461",")","","","597","","","","(2,658",")"],["NET INCOME (LOSS)","","$","(3,660",")","","$","254","","","$","1,923","","","$","(4,737",")","","$","(6,220",")"],["NET INCOME (LOSS) PER SHARE:"],["Basic and diluted","","$","(0.12",")","","$","0.01","","","$","0.06","","","$","(0.15",")","","$","(0.20",")"],["WEIGHTED AVERAGE SHARES OUTSTANDING:"],["Basic and diluted","","","30,420","","","","30,423","","","","30,465","","","","30,475","","","","30,446"]]
[[/GREPCENT_TABLE]]

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Quarterly coal sales and cost data follow (in 000’s, except for per ton data and wash plant recovery percentage):

[[GREPCENT_TABLE]]
[["All Mines","","1st 2021","","","2nd 2021","","","3rd 2021","","","4th 2021","","","T4Qs"],["Tons produced","","","1,592","","","","1,292","","","","1,440","","","","1,447","","","","5,771"],["Tons sold","","","1,174","","","","1,403","","","","2,042","","","","1,554","","","","6,173"],["Coal sales","","$","45,879","","","$","54,600","","","$","79,036","","","$","64,388","","","$","243,903"],["Average price/ton","","$","39.08","","","$","38.92","","","$","38.71","","","$","41.43","","","$","39.51"],["Wash plant recovery in %","","","74","%","","","69","%","","","73","%","","","70","%"],["Operating costs","","$","33,907","","","$","42,364","","","$","67,694","","","$","54,583","","","$","198,548"],["Average cost/ton","","$","28.88","","","$","30.20","","","$","33.15","","","$","35.12","","","$","32.16"],["Margin","","$","11,972","","","$","12,236","","","$","11,342","","","$","9,805","","","$","45,355"],["Margin/ton","","$","10.20","","","$","8.72","","","$","5.55","","","$","6.31","","","$","7.35"],["Capex","","$","5,720","","","$","5,117","","","$","7,238","","","$","9,975","","","$","28,050"],["Maintenance capex","","$","2,343","","","$","1,049","","","$","2,324","","","$","3,302","","","$","9,018"],["Maintenance capex/ton","","$","2.00","","","$","0.75","","","$","1.14","","","$","2.12","","","$","1.46"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["All Mines","","1st 2020","","","2nd 2020","","","3rd 2020","","","4th 2020","","","T4Qs"],["Tons produced","","","1,701","","","","1,468","","","","1,234","","","","1,233","","","","5,636"],["Tons sold","","","1,526","","","","1,244","","","","1,585","","","","1,613","","","","5,968"],["Coal sales","","$","61,932","","","$","50,473","","","$","64,754","","","$","64,925","","","$","242,084"],["Average price/ton","","$","40.58","","","$","40.57","","","$","40.85","","","$","40.25","","","$","40.56"],["Wash plant recovery in %","","","74","%","","","76","%","","","71","%","","","68","%"],["Operating costs","","$","48,334","","","$","36,001","","","$","46,444","","","$","54,640","","","$","185,419"],["Average cost/ton","","$","31.67","","","$","28.94","","","$","29.30","","","$","33.87","","","$","31.07"],["Margin","","$","13,598","","","$","14,472","","","$","18,310","","","$","10,285","","","$","56,665"],["Margin/ton","","$","8.91","","","$","11.63","","","$","11.55","","","$","6.38","","","$","9.49"],["Capex","","$","5,999","","","$","4,006","","","$","3,995","","","$","6,661","","","$","20,661"],["Maintenance capex","","$","3,470","","","$","2,578","","","$","1,365","","","$","2,342","","","$","9,755"],["Maintenance capex/ton","","$","2.27","","","$","2.07","","","$","0.86","","","$","1.45","","","$","1.63"]]
[[/GREPCENT_TABLE]]

2021 v. 2020

For 2021, we sold 6,173,000 tons at an average price of $39.51/ton. For 2020, we sold 5,968,000 tons an average price of $40.56/ton. The decrease in average price per ton results from our changing contract mix caused by the expiration of contracts and the acquisition of new contracts.  2022 pricing is expected to be comparable to 2021 at approximately $40 per ton.  2023 pricing is expected to improve as we take advantage of the higher pricing environment and is projected at just over $43 per ton based on the current tons under contract.

Operating expenses for our coal mines averaged $32.16/ton and $31.07/ton for the years ended December 31, 2021 and 2020, respectively.  Oaktown costs over the periods were $30.34 and $29.84, respectively. The majority of our production cost increase was a result of approaching the end of our Ace in the Hole Mine’s reserve life.  We anticipate the Ace reserve reaching its end in mid-2022 and being replaced with a new reserve.  At Oaktown, we added 17% to our workforce as we begin to increase production from a 6.2 million-ton pace to over 7 million tons annually.  It will take time and training for our new workforce to reach top efficiency and productivity.  Additionally, as expected and announced, adding a new production unit required mining through challenging conditions during Q4 2021 and completed in Q1 2022. We expect operating costs for our coal mines to be elevated in Q1 2022, but to average $29-$31 per ton for the full year 2022.

Operating expenses associated with the idled Prosperity mine were $1.0 million for both years ended December 31, 2021 and 2020.  We expect operating costs to be $1.0 million in 2022. 

Other revenues increased $1.6 million in 2021.  Coal storage contracts and deferral fees charged for tons carried over from 2020 account for $0.8 million.  The remainder represents royalty income on owned minerals that we began collecting in mid-2020.

General and administrative expenses increased $3.2 million in 2021 as a result of increased legal and financing costs associated with the Merom Power Plant acquisition and other projects.  We expect general and administrative expenses for 2022 to remain elevated at $13 - $14 million while we complete the Merom Power Plant acquisition.

Our Sunrise Coal employees and contractors totaled 797 at December 31, 2021, compared to 682 at December 31, 2020.  As previously stated, the significant increase is due to increased demand for our coal going forward.

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Signs of Improvement for the Coal Market

[[GREPCENT_TABLE]]
[["I.","Natural Gas - Forward Nymex gas prices (a competitor to coal) average $5.11 for the remainder of 2022, $4.05 for 2023 and $3.51 for 2024. These gas prices cause coal plants to dispatch prior to gas especially in Indiana where ~80% of our coal is sold. Gas prices are significantly higher than recent history and should remain strong until additional production occurs."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["II.","Coal Exports - U.S. export prices are significantly higher than recent history due to energy shortfalls in Asia and Europe, resulting in very strong exports in comeing years."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","a.","API 4 (Asia)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2021:","Mid $80s / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2022:","$202 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2023:","$151 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2024:","$106 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2025:","$95 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","b.","API 2 (Europe)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2021:","Mid $60s / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2022:","$228 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2023:","$170 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2024:","$116 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2025:","$98 / tonne"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["III.","Utility Coal Inventories - Coal inventories at power plants remain well below historical averages. As coal demand stays strong and coal supply is limited, inventories should remain low for the foreseeable future."]]
[[/GREPCENT_TABLE]]

MSHA Reimbursements

Some of our legacy coal contracts allow us to pass on to our customers certain costs incurred resulting from changes in costs to comply with mandates issued by MSHA or other government agencies. After applying the provisions of ASU 2014-09, as of December 31, 2021, we do not consider unreimbursed costs from our customers related to these compliance matters to be material and have constrained such amounts and will recognize them when they can be estimated with reasonable certainty.

Income Taxes

Our effective tax rate (ETR) for 2021 was (1%) compared to 30% for 2020. The tax rate for the years ended December 31, 2021 and 2020 are not predictive of future tax rates.  Our ETR differs from the statutory rate due to statutory depletion in excess of tax basis, PPP loan forgiveness, return to provision adjustments, and changes in the valuation allowance. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.

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Critical Accounting Estimates

We believe that the estimates of our coal reserves, our interest rate swaps, our asset retirement obligation liabilities, our deferred tax accounts, and the estimates used in our impairment analysis are our only critical accounting estimates.

The reserve estimates are used in the depreciation, depletion and amortization calculations and in our internal cash flow projections. If these estimates turn out to be materially under or over-stated, our depreciation, depletion and amortization expense and impairment test may be affected.

The fair value of our interest rate swaps and asset retirement obligation liabilities is determined using a discounted future cash flow model based on the key assumption of anticipated future interest rates and related credit adjustment considerations.

We have analyzed our filing positions in all federal and state jurisdictions where we are required to file income tax returns, and all open tax years in these jurisdictions. We identified our federal tax return and our Indiana state tax return as “major” tax jurisdictions. We believe that our income tax filing positions and deductions would be sustained on audit and do not anticipate any adjustments that will result in a material change to our consolidated financial position

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