Hallador Energy (HNRG) 10-Q2023 Q1 Quarterly report

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 March 31, 2023
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”		“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 May 8, 2023, we had 33,137,011 shares of common stock outstanding.

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Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS  

Hallador Energy Company 

Condensed Consolidated Balance Sheets 

(in thousands, except per share data) 

(unaudited) 

See accompanying notes to the condensed consolidated financial statements.

Hallador Energy Company 

Condensed Consolidated Statements of Operations

(in thousands, except per share data) 

(unaudited) 

See accompanying notes to the condensed consolidated financial statements.

Hallador Energy Company 

Condensed Consolidated Statements of Cash Flows 

(in thousands) 

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

 Hallador Energy Company 

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands) 

(unaudited)

See accompanying notes to the condensed consolidated financial statements.

Hallador Energy Company

Notes to Condensed Consolidated Financial Statements

(unaudited) 

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 Securities and Exchange Commission's (the "SEC") rules and regulations; accordingly, certain information and footnote disclosures normally included in generally accepted accounting principles ("GAAP") financial statements have been condensed or omitted.

The results of operations and cash flows for the three months ended March 31, 2023, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2023.

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 2022 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"), Hallador Power Company, LLC ("Hallador Power"), as well as Sunrise and Hallador Power's wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 

As the result of Hallador Power’s acquisition of the Merom one gigawatt power plant in Sullivan County, Indiana (the “Merom Power Plant”) from Hoosier Energy Rural Electric Cooperative, Inc. (“Hoosier”) on October 21, 2022 (the “Merom Acquisition”), as further described in Note 14, beginning in the fourth quarter of 2022 we began to strategically view and manage our operations through two reportable segments:  Coal Operations and Electric Operations.  The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other" and primarily are comprised of unallocated corporate costs and activities, including a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana, which we account for using the equity method, and our wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.  Prior periods have been recast to reflect Corporate and Other apart from Coal Operations, which previously were aggregated into a single reportable segment.

The Coal Operations reportable segment includes currently operating mining complexes Oaktown 1 and 2 underground mines, Prosperity surface mine, Freelandville surface mine, and Carlisle wash plant.

The Electric Operations reportable segment includes electric power generation facilities of the Merom Power Plant.

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.  For the three-month periods ended March 31, 2023 and March 31, 2022, there were no impairment charges recorded for long-lived assets.

Inventory is valued at a lower of average cost or net realizable value (NRV).  As of March 31, 2023, and December 31, 2022, coal inventory includes NRV adjustments of $3.0 million and $4.9 million, respectively.

On March 13, 2023, we executed an amendment to our credit agreement with PNC Bank, National Association (in its capacity as administrative agent, "PNC"), administrative agent for our lenders under our credit agreement, which was accounted for as a debt modification. The primary purpose of the amendment was to convert $35 million of the outstanding balance on the revolver into a new term loan with a maturity of March 31, 2024, and extend the maturity date of the revolver to May 31, 2024. The amendment reduced the total capacity under the revolver to $85 million from $120 million and waived the maximum annual capital expenditure covenant for 2022, and increased the covenant for 2023 to $75 million.

Bank debt was reduced by $10.0 million during the three months ended March 31, 2023.  Bank debt is comprised of term debt ($35.0 million as of March 31, 2023) and an $85 million revolver ($40.2 million borrowed as of March 31, 2023).  The term debt requires payments of $10 million each quarter commencing in June 2023, with final payment of $5.0 million by March 31, 2024. 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 March 31, 2023, we had additional borrowing capacity of $33.6 million and total liquidity of $36.0 million.  Our additional borrowing capacity is net of $11.2 million in outstanding letters of credit as of March 31, 2023, that were required to maintain surety bonds.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

We entered into new contracts during the three months ended June 30, 2022, with significantly higher prices, which began shipping during the three months ended September 30, 2022.  These contracts substantially increased our cash flow for the remainder of 2022 and 2023.

Fees

Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $2.5 million as of December 31, 2022. Additional costs incurred with the March 13, 2023 amendments totaled $1.6 million.  These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of March 31, 2023, and December 31, 2022, were $2.9 million and $2.5 million, respectively.

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

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:

As of March 31, 2023, our Leverage Ratio of 1.20 was in compliance with the 2.25 covenant defined in the current amendment.

Beginning December 31, 2022, the credit facility 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 1.25 to 1.00 through the maturity of the credit facility. As of March 31, 2023, our Debt Service Coverage Ratio of 2.50 was in compliance with the requirements of the credit agreement.

Interest Rate

The interest rate on the facility ranges from SOFR plus 4.00% to SOFR plus 5.00%, depending on our Leverage Ratio.  At March 31, 2023, we are paying SOFR plus 4.25% on the outstanding bank debt.

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 it is probable substantially all of the consideration will be collected. We recognize revenue when we satisfy a performance obligation by transferring control of a good or service to a customer.

Coal operations

Our coal 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 rail facility in Princeton, Indiana, 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. Our customers are typically domestic utility companies. Our coal sales agreements with our customers are fixed-priced, fixed-volume supply contracts or include a pre-determined escalation in price for each year. 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 may automatically set a new price based on the prevailing market price or, in some instances, 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. With coal quality specifications in place, the raw coal sold by us to the customer at the delivery point must be substantially free of magnetic material and other foreign material impurities and crushed to a maximum size as set forth in the respective coal sales agreement. 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, such as Btu factor, moisture, ash, and sulfur content, and can result in either increases or decreases in the value of the coal shipped.

Electric operations

The Company concluded that the definition of a contract and the criteria in ASC 606, Revenue from Contracts with Customers ("ASC 606"), is met at the time a Power Purchase Agreement ("PPA") is executed by the parties, as this is the point at which enforceable rights and obligations are established. Accordingly, the Company concluded that a PPA constitutes a valid contract under ASC 606.

The Company will recognize revenue daily for the actual capacity made available as part of any stand-ready obligations to provide electricity for contract capacity performance obligations and daily for actual delivered electricity, plus the amortization of the contract liability as a result of the Asset Purchase Agreement with Hoosier, for the delivered energy performance obligation.

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.

Coal operations

52% and 87% of our coal revenue for the years ended March 31, 2023, and 2022, respectively, was sold to customers in the State of Indiana, with the remainder sold to customers in Florida, North Carolina, Georgia, and Alabama.

Electric operations

100% of our electric revenue for the quarter ended March 31, 2023, was sold to Hoosier in the State of Indiana.

Performance Obligations

Coal operations

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 coal 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 coal sales performance obligations relating to fixed-priced contracts of approximately $511 million, which represent the average fixed prices on our committed contracts as of March 31, 2023. We expect to recognize approximately 65% of this coal sales revenue in 2023, with the remainder recognized thereafter.

We have remaining performance obligations relating to unpriced coal sales contracts of approximately $166 million, which represents our estimate of the expected price on committed contracts as of March 31, 2023. We expect to recognize all of this coal sales revenue beginning in 2024.

The coal 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.

Electric operations

The Company concluded that each megawatt-hour ("MWh") of delivered energy is capable of being distinct as a customer could benefit from each on its own by using/consuming it as a part of its operations.  The Company also concluded that the stand-ready obligation to be available to provide electricity to Hoosier is capable of being distinct as each unit of capacity provides an economic benefit to the holder and could be sold by the customer.

We have remaining delivered energy obligations through 2025 totaling $170 million as of March 31, 2023.

In addition to delivered energy, Hallador provides stand-ready obligations to provide electricity, also known as contract capacity.  We have remaining capacity obligations through 2025 totaling $100 million as of March 31, 2023.

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, electricity, or capacity. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our consolidated balance sheets. As of January 1, 2022, accounts receivable for coal sales billed to customers was $12.8 million. We do not currently have any other contracts in place where we would transfer coal, electricity, or capacity in advance of knowing the final price, and thus do not have any other contract assets recorded. Contract liabilities also arise when consideration is received in advance of performance. As of January 1, 2023, deferred revenue for payments related to coal operations in advance of performance was $8.9 million, and deferred revenue for payments related to electric operations in advance of performance was $26.6 million.  For the quarter ending March 31, 2023, we recognized revenue from coal operations of $2.5 million as tons of outstanding coal delivery obligations were fulfilled, and we recognized revenue from electric operations of $16.0 million as outstanding capacity obligations were fulfilled.

For the three months ended March 31, 2023, and 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items, and statutory rates in states in which we operate.  The effective tax rate for the three months ended March 31, 2023, and 2022 was ~13% and ~ 2%, 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.

For the three months ended March 31, 2023 and 2022, our stock compensation was $1.2 million and $0.1 million, respectively. 

Non-vested RSU grants will vest as follows:

The outstanding RSUs have a value of $9.6 million based on the March 31, 2023 closing stock price of $9.19.

As of March 31, 2023, unrecognized stock compensation expense is $6.3 million, and we had 387,049 RSUs available for future issuance.  RSUs are not allocated earnings and losses as they are considered non-participating securities.

Information related to leases was as follows (in thousands):

Future minimum lease payments under non-cancellable leases as of March 31, 2023, were as follows:

At March 31, 2023, and December 31, 2022, we had approximately $179 and $230, respectively, of right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.

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 $285 million and $280 million as of March 31, 2023, and December 31, 2022, respectively.

Restricted cash of $3.9 million and $3.4 million as of March 31, 2023, and December 31, 2022, respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments and cash collateral to provide power in the MISO grid.

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. We have no 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). We have no Level 3 instruments.

We own a 50% interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment and generates revenue from gas sales. Sunrise Energy plans to continue developing and exploring 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 March 31, 2023, and December 31, 2022, was $3.4 million and $4.0 million, respectively.

On May 2, 2022, and May 20, 2022, we issued senior unsecured convertible notes (the "Notes") to five parties, in the aggregate principal amount of $10 million, with $9 million going to related parties affiliated with independent members of our board of directors and the remainder to a non-affiliated party. The Notes were scheduled to mature on December 29, 2028, and accrue interest at 8% per annum, with interest payable on the date of maturity. Pursuant to the terms of the Notes, the holders of the Notes may convert the entire principal balance and all accrued and unpaid interest then outstanding during the period beginning June 1, 2022, and ending on May 31, 2027, into shares of the Company Common Stock (the "Conversion Shares") at a conversion price the greater of (i)$3.33 and (ii) the 30-day trailing volume-weighted average sales price for the Common Stock on the Nasdaq Capital Market ending on and including the date on which this Note is converted. At any time on or after June 1, 2025, the Company may, at its option and upon 30 days written notice provided to the Holders, elect to redeem the Notes (in whole and not in part), and the Holders shall be obligated to surrender the Notes, at a redemption price equal to 100% of the outstanding Principal Balance, together with any accrued but unpaid interest thereon to the redemption date. After receipt of such redemption notice from the Company, the Holder may, at its option, elect to convert the Principal Balance and accrued interest into Conversion Shares by giving written notice of such election to the Company no later than five days prior to the date fixed for redemption.

In June 2022, the four holders of the $9 million related party convertible notes converted them into 1,965,841 shares of common stock of the Company, and the one holder of the $1 million convertible note converted it into 231,697 shares of common stock pursuant to the terms of the notes and their related agreements.

On July 29, 2022, we issued $5 million of a senior unsecured convertible note to a related party affiliated with an independent member of our board of directors.  The note carries an interest rate of 8% per annum with a maturity date of December 29, 2028.  For the period August 18, 2022, through August 17, 2024, the holder has the option to convert the notes into shares of the Company's common stock at a conversion price of $6.254.  Beginning August 18, 2025, the Company may elect to redeem the note, and the holder shall be obligated to surrender the note at 100% of the outstanding principal balance, together with any accrued unpaid interest.  Upon receipt of the redemption notice from the Company, the holder may elect to convert the principal balance and accrued interest into the Company's common stock.

On August 8, 2022, we issued $4 million of senior unsecured convertible notes to related parties affiliated with independent members of our board of directors.  The notes carry an interest rate of 8% per annum with a maturity date of December 29, 2028.  For the period August 18, 2022, through August 17, 2024, the holder has the option to convert the notes into shares of the Company's common stock at a conversion price of $6.254.  Beginning August 8, 2025, the Company may elect to redeem the note, and the holder shall be obligated to surrender the note at 100% of the outstanding principal balance together with any accrued unpaid interest.  Upon receipt of the redemption notice from the Company, the holder may elect to convert the principal balance and accrued interest into the Company's common stock.

On August 12, 2022, we issued a $10 million senior unsecured convertible note to an unrelated party.  The note carries an interest rate of 8% per annum with a maturity date of December 31, 2026.  For the period August 18, 2022, through the maturity date, the holder has the option to convert the notes into shares of the Company's common stock at a conversion price of $6.15.  Beginning August 12, 2025, the Company may elect to redeem the note, and the holder shall be obligated to surrender the note at 100% of the outstanding principal balance together with any accrued unpaid interest.  Upon receipt of the redemption notice from the Company, the holder may elect to convert the principal balance and accrued interest into the Company's common stock.

The funds received from the Notes were used to provide additional working capital to the Company.  Each Conversion Share will consist of one share of our common stock. The conversion price and number of shares of the Company’s Common Stock issuable upon conversion of the Notes are subject to adjustment from time to time for any subdivision or consolidation of the Company’s shares and other standard dilutive events.

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

THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2022 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.

Our continued goal at Hallador is to deleverage our balance sheet and create multiple uncorrelated revenue streams that take advantage of our unique place in the energy market. The acquisition of Hoosier's Merom Generation Station ("Merom Power Plant") in Q4 2023 was a significant step forward in this pursuit as it provides us the ability to monetize our coal production through both capacity and energy sales while also providing us a platform for potential future investment, including new generation and energy storage.  While we experienced mild temperatures in Q1 less than-anticipated deliveries, we still produced a solid quarter of activity on the coal and electric side of the business.

OVERVIEW

___________

* 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 an option exists in the customer contract.

**Of the 7.5 million tons contracted for 2024 - 2027, 2.7 million tons are contracted for 2024 at an estimated price of $51 per ton, with up to an additional 3.0 million tons expected to be dispatched to the Merom Power Plant.  The remaining 4.8 million tons contracted for 2024 - 2027 are unpriced or partially priced tons.

LIQUIDITY AND CAPITAL RESOURCES

CAPITAL EXPENDITURES (capex)

For the first three months of 2023, capex was $13.5 million allocated as follows (in millions):

Results of Operations

Presentation of Segment Information

Our operations are divided into two primary reportable segments:  coal operations and electric operations.  The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other" within the Notes to the Consolidated Financial Statements and primarily are comprised of unallocated corporate costs and activities, including a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana, which we account for using the equity method, and our wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.

Coal Operations

Operating revenues from coal operations increased 63% over 2022 due in large part to an increase in the average sales price for coal. As a result, higher-priced contracts sold in the summer of 2022 and delivered in Q1 of 2023 increased our average sales price by over $14 per ton from Q1 2022. We also sold 316,000 additional tons over Q1 2022 at higher average prices.

Operating expenses also decreased by $0.73 per ton. The addition of the higher-cost Freelandville and Prosperity surface mines as well as continued significant inflationary pressures, have kept the increased costs elevated. We continue to experience significant onboarding of new employees, which takes time to provide training and gain the experience to reach maximum productivity, contributing to higher costs.

Depreciation, depletion, and amortization increased by 40% as a significant amount of our assets were depreciated and amortized based on production, which increased approximately 33% over Q1 2022.

General and administrative expenses increased 76% over Q1 2022 due to performance, production, and discretionary bonuses paid to employees, additional professional fees related to the 2022 audit, and additional IT costs related to enhanced security and compliance activities.

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.

Electric Operations

A comparative discussion is not relevant as the Electric Operations did not begin until the Merom Acquisition was completed in October 2022.

Operating revenue is derived from a power purchase agreement signed with Hoosier in conjunction with the Merom Acquisition at fixed prices which were below market prices at the date we closed the transaction.  The power purchase agreement expires in 2025 and requires us to provide a fixed amount of power over the term of the agreement.  As a result of the below-market contract, we recorded a contract liability at the close of the acquisition totaling $184.5 million that will be amortized over the term of the agreement as the contract is fulfilled.  For the quarter ended March 31, 2023, we recorded $33.3 million of revenue as a result of amortizing the contract liability.

Operating expenses include coal purchased under an agreement signed with Hoosier in conjunction with the Merom acquisition at fixed prices which were below market prices at the date we entered into the agreement.  The coal purchase agreement expires in May 2023 and requires us to purchase a fixed amount of coal over the term of the agreement.  As a result of the below-market contract, we recorded a contract asset at the close of the acquisition totaling $34.3 million that will be amortized over the term of the agreement as the contract is fulfilled.  For the quarter ended March 31, 2023, we recorded $17.8 million in additional operating expenses for coal purchased and used and a reduction of $4.4 million to inventory for coal purchased and unused as a result of amortizing the contract asset.

EARNINGS (LOSS) PER SHARE

INCOME TAXES

Our effective tax rate (ETR) is estimated at ~13% and ~2% for the three months ended March 31, 2023, and 2022, respectively.  For the three months ended March 31, 2023, and 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items, and statutory rates in states in which we operate. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis 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.

RESTRICTED STOCK GRANTS

See “Item 1. Financial Statements - Note 8. Stock Compensation Plans” for a discussion of RSUs.

CRITICAL ACCOUNTING ESTIMATES

We believe that the estimates of our coal reserves, our asset retirement obligation liabilities, our deferred tax accounts, our valuation of inventory, our treatment of business combinations, and the estimates used in our impairment analysis are our critical accounting estimates.

The reserve estimates are used in the depreciation, depletion and amortization calculations and 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 process of estimating reserves is complex, requiring significant judgment in the evaluation of all available geological, geophysical, engineering, and economic data.  The reserve estimates are prepared by professional engineers, both internal and external, and are subject to change over time as more data becomes available.  Changes in the reserves estimates from the prior year were nominal. 

We have analyzed our filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as 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.  We have not taken any significant uncertain tax positions, and our tax provisions and returns are prepared by a large public accounting firm with significant experience in energy-related industries.  Changes to the estimates from reported amounts in the prior year were not significant.

Inventory is valued at a lower of cost or net realizable value (NRV).  Anticipated utilization of low-sulfur, higher-cost coal from our Ace in the Hole, Freelandville, and Prosperity mines have the potential to create NRV adjustments as our estimated needs change.  The NRV adjustments are subject to change as our costs may fluctuate due to higher or lower production, and our NRV may fluctuate based on sales contracts we enter into from time to time.  There were no significant changes to our NRV adjustment estimates from the prior year.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes from the disclosure in our 2022 Annual Report on Form 10-K.

ITEM 4.  CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS

We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our CEO, CFO, and CAO as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO, CFO, and CAO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO, CFO, and CAO concluded that our disclosure controls and procedures are effective.

There have been no changes to our internal control over financial reporting during the quarter ended March 31, 2023, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 4.  MINE SAFETY DISCLOSURES

See Exhibit 95.1 to this Form 10-Q for a listing of our mine safety violations.

ITEM 6.  EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.