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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-07 · 164 added, 144 removed, 105 unchanged (75% of the section changed)

1 unchanged sentence

THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2023 ANNUAL REPORT ON FORM 10-K AND SHOULD BE READ IN CONJUNCTION THEREWITH.

Our condensed consolidated financial statements should be read in conjunction with this discussion.

The following analysis includes a discussion of metrics on a per mega-watt hour (MWh) and a per ton basis as 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.

Throughout the first quarter, we continued our progress on transitioning the focus of Hallador from a coal production company to an integrated independent power producer (“IPP”).

During the first three months of 2024, our Electric Operation's revenue exceeded that of our Coal Operation's revenue.

Additionally, we were successful in adding approximately $138.0 million in forward energy and capacity sales, growing our Electric Operation’s forward sales book to approximately $657.0 million as of March 31, 2024.

This represents 44% of Hallador’s $1.5 billion in total forward energy, capacity, and coal sales through 2029 (on a segment basis).

However, we truly believe future sales from our Electric Operations will soon eclipse our sales revenues from our Coal Operations.

Since January, we have evaluated and continue to evaluate several major power and capacity sales opportunities, including one proposal that if contracted would result in more than a billion dollars’ worth of potential forward power sales.

We continue to see strong indicators that demand, and pricing remain on an upward trend, and this direction is paramount to our ongoing evaluations of these sales opportunities.

Monitoring the equity markets strengthens our belief that investors in other IPPs are also anticipating similar increases in power demand, demonstrated most clearly through the more than doubling of market capitalizations of several of those IPPs across the previous twelve months.

In support of our expectation that Hallador Power sales will continue to exceed our traditional Sunrise Coal subsidiary, we anticipate changing Hallador's SIC code to 4911 (electric services) from 1220 (bituminous coal producer) in the future.

While we have seen continued weakness in spot power prices thus far in 2024, indicators for future power pricing appear much healthier.

We believe these indicators are supported by both our forward power book pricing and the most recent future power curves.

Additionally, natural gas future’s prices are in contango, meaning future gas prices exceed spot gas prices that have been depressing overall power prices for the last several quarters.

As we discussed last quarter, the dynamics of the natural gas market paired with the non-standard mild weather throughout the Midwest impacted pricing and our power plant dispatch rates.

Future prices seem to indicate easing on both these fronts which we view as a positive for our go-forward operations.

This quarter, we also launched a targeted request for proposal for power demand supporting new development at our Merom Power Plant.

Reponses are due in mid-May, but early indications point to a high level of interest.

The RFP is available on our website for any interested parties that did not already receive the information.

Our goal is for Hallador Power to generate approximately 1.5 million MWh on a quarterly basis, which equates to approximately 6 million MWh annually.

During the first quarter, Hallador Power generated 816,000 MWh, or 54% of our target, despite an average price of $41.90.

The favorable pricing is a result of experiencing sales prices as high as $250 per MWh for limited times during the quarter, balanced against several days of pricing below our variable cost to produce.

These fluctuations led to an inconsistent dispatch schedule, which we expect to level out as we anticipate demand and pricing increases with seasonal weather changes and reduced gas stores.

During the first quarter, Hallador Power generated 816,000 MWh at the following cost structure (on a segment basis):

Delivered Energy and PPA

Total Electric Revenue

Operating Expense:

Variable Cost

Total Electric Operating Expense

Hallador is on a strategic and deliberate path to transform our company and capture increased value from our products and services as we advance up the value chain by expanding our offerings from fuel production to wholesale electricity sales to powering the industrial end user.

For many years, our Sunrise Coal subsidiary was our primary asset, producing fuel to sell to third-party customers.

In the fourth quarter of 2022, we acquired the Merom Power Plant through our Hallador Power Company (“Hallador Power” or “HPC”) subsidiary enabling us the ability to convert the majority of our fuel production into wholesale electricity and capacity, which traditionally sells at higher margins than coal.

As part of this process, we issued $29.0 million of convertible debt in 2022 to improve our capital position and facilitate the acquisition of the Merom Power Plant.

In 2022, $10.0 million of these convertible notes were converted to equity and the remaining balance was converted in the first half of 2024.

Looking at the wholesale electric sales we have made since the acquisition of the Merom Power Plant, along with the prices indicated by the forward power curves, we believe that HPC has the potential to achieve gross profit margins greater than the margins we have historically seen in coal sales.

In the first quarter of this year, our sales to third-party customers from electricity exceeded those of our sales from coal.

In connection with this shift in company focus, we changed our SIC code from 1220 bituminous coal producer to 4911 electric services during the second quarter.

Additionally, in the first quarter of this year we announced the signing of a Memorandum of Understanding (“MOU”) with Hoosier Energy and WIN REMC that provides a pathway to facilitate sales of our electricity to industrial end users of power.

As we continue to transform our product offerings from fuel to wholesale electricity, to supplying power to higher value end-users, we believe we can achieve increasingly higher gross profit margins.

The recent environment for spot electricity sales has been challenging.

This past winter, record high U.S.

natural gas (“Gas”) production ran into the ninth warmest winter on record according to National Oceanic and Atmospheric Administration.

The lack of winter heating demand caused Gas inventory levels to climb as much as 38% above the 5-year average.

As Gas prices adjusted downward to encourage the market to consume excess Gas inventory, wholesale electric (“Energy”) prices also declined.

In the first six months of 2024, approximately 90% of the off-peak Energy hours at the Merom Hub and approximately 60% of the total Energy hours at the Merom Hub priced below our production cost at our Merom facility.

Our goal is for Hallador Power to generate approximately 1.5 million MWh on a quarterly basis, which equates to approximately 6.0 million MWh annually (see Hallador Power’s capacity and utilization information below).

During the first half of 2024, Hallador Power generated 1,596,000 MWh, or 53% of our target.

During the first half of the year, we experienced sales prices of nearly $261.00 per MWh for limited times, balanced against several days of pricing below our variable cost to produce.

These fluctuations led to an inconsistent dispatch schedule.

Three Months Ended June 30,

Six Months Ended June 30,

Power Capacity and Utilization

Nameplate capacity (MW) (i)

Accredited capacity for the period (MW) (ii)

Accredited capacity utilization (iii)

Nameplate capacity for the Merom Power Plant refers to the maximum electric output generated by the plant in the period presented and may not reflect actual production.

Actual production each period varies based on weather conditions, operational conditions, and other factors.

Accredited capacity is based on MISO’s average seasonal accreditations for the year.

Average seasonal accreditations were 769 MW and 860 MW per day for 2024 and 2023, respectively.

Accreditations are adjusted annually based on 3-year rolling performance metrics.

Accredited capacity utilization is measured as power produced (MWh) divided by accredited capacity for the period (MW) multiplied by 24 times the number of days for the period.

When forward selling Capacity, we target annual sales of around $65.0 million to offset our fixed annual costs at the plant of approximately $60.0 million.

Our forward sales table demonstrates that we have already sold a large portion of our future capacity, which we believe makes our forward capacity sales goals attainable.

As a condition of acquiring the Merom Power Plant, we agreed to sell 1.66 million MWh of energy in 2024 and 1.60 million MWh in 2025 at $34 per MWh to the plant seller, representing 27% of our annual 6 million MWh goal.

Since this original transaction, we have been successful in selling over 5 million MWh of energy to third parties at an average price of approximately $52 per MWh over the years 2024-2029 as illustrated in the table below.

During the first quarter, our variable costs were $31.88 per MWh.

The low energy prices during the quarter necessitated that we run our plant at slower speeds resulting in more frequent than normal starts and stops to avoid selling below cost energy.

Running in this manner is less fuel efficient than if we were able to consistently generate at a 6 million MWh pace, which could lower cost by as much as 10%.

On February 23, 2024, our Coal Operations Segment undertook an initiative designed to strengthen our financial and operational efficiency and to create significant operational savings and higher margins in our coal segment.

This step helps to advance our transition from a company primarily focused on coal production to a more resilient and diversified IPP.

As part of this initiative, we idled production at our higher cost Prosperity Mine, and substantially idled production at the Freelandville Mine with minimal production until reclamation is finished on approximately May 31, 2024.

This should reduce our capital reinvestment for coal production in 2024 by approximately $10 million.

We also focused our seven units of underground equipment on four units of our lowest cost production at our Oaktown Mine.

As part of the initiative, we reduced our workforce by approximately 110 employees.

Mining costs for the quarter were $53.38 per ton.

However, at Oaktown, we saw mining costs in March decrease into the low $30s on a per ton basis.

While there are several factors that impacted this cost reduction, we continue to monitor operations and strategic initiatives to better understand the longevity of these favorable conditions.

We have already sold a large portion of our future Capacity, which we believe makes our forward Capacity sales goals attainable as illustrated in our "Solid Forward Sales Position" table below.

Our forward contracted energy sales position has a significant price increase in future years as illustrated in the graph below.

Lower Energy prices negatively affected both HPC’s generation model and the dispatch rates of Sunrise Coal’s utility customers.

In response to dispatching less, those customers slowed coal shipments from Sunrise during the winter season and throughout the shoulder season this spring.

To match Sunrise’s production levels and cost structure to that of the market demands, we restructured Sunrise operations in the first quarter of 2024.

As we have previously noted, the restructuring included a reduction in force (“RIF”) of approximately 110 people in February, and we have since allowed attrition to further reduce our workforce by approximately 130 additional people, a total workforce reduction of more than 25%.

We also restructured our operations to focus on our more profitable units and to idle units with higher production costs.

Transitioning our Oaktown mining facilities from 7 units of production to 4 units of production was a deliberate process which took considerable time and effort, and was completed in mid-July.

We are encouraged by the early results of Sunrise’s restructuring and have seen improvement in mining costs since we made the decision to adjust our operations.

Historically, Sunrise Coal has generated approximately six million tons of coal annually.

Following the restructuring, we expect Sunrise to produce roughly 3.5 million tons of coal on an annualized basis for 2024.

Total production for the first half of 2024 was 2.2 million tons, and we shipped 2.1 tons at an average sales price of $54.92 on a segment basis.

If market conditions warrant, our current operations are capable of producing at a 4.5-million-ton annualized pace.

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The optionality to obtain low-cost tons either internally or from third parties while capturing upward swings in the commodities markets for coal should further maximize margins while optimizing fuel costs at our Merom facility.

We continued our build out of what we consider to be a best-in-class management team as we welcomed Marjorie Hargrave as our new CFO with broad-based experience in power production and capital markets.

Adding Marjorie to our previous hires over the last two years, including expertise within the positions of our President of Hallador Power, our Chief Legal Officer (with Data communications expertise), our SVP of Power Marketing, and a Manager of Environmental Engineering, will accelerate our continued development of Hallador’s operational and future power acquisition capabilities.

These prospects and our strong future sales have us very excited about the future of our company.

In response to lower Energy prices and our challenging mining conditions during the first half of 2024, we executed on several financing opportunities, including raising $34.5 million through an At-The-Market (“ATM”) equity offering selling 4.7 million shares at an average price of $7.38 per share and borrowing $5.0 million from several Directors on our Board.

In June, we received a $45.0 million prepayment for an 11-month forward Energy sale representing approximately 22% of our annual 6.0 million MWh goal during the term of the contract.

Our condensed consolidated financial statements should be read in conjunction with this discussion.

This analysis includes a discussion of metrics on a per mega-watt hour (MWh) and a per ton basis as 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.

Q2 2024 Net Loss of $10.2 million.

1.2 million tons of coal were shipped at an average sales price of $54.40 on a segment basis during the quarter, with approximately 0.3 million tons of that being shipped to the Merom Power Plant for $16.4 million.

This is a decline of 0.2 million tons of coal from Q4 2023, primarily due to decreased demand from a mild winter and low natural gas prices.

The average sales price of coal was $55.64 per ton on a consolidated basis.

The sales price for remaining tons to ship for 2024 is expected to average $50.65 per ton on a consolidated basis (not including coal shipped to Merom).

In Q1 2024, Hallador's coal operating costs were $53.38 per ton on a segment basis, which represents a $0.41 per ton decrease from Q4 2023.

This decrease is a result of the reduction in production of our higher cost surface mines.

We recorded coal margins for the quarter at $1.02 per ton on a segment basis.

This is a decline of $7.97 per ton from Q4 2023 margins, due primarily to the reduction in contract average sales prices.

Electric Operations:

During the second quarter of 2024, we sold 780,000 MWh representing a 4.4% decline in total MWh sold and an increase of $0.90 in operating revenues per MWh from Q1 2024.

The decline in total MWh sold during Q2 2024 was driven by MISO pricing that was lower than our cost to produce for approximately two-thirds of the quarter, lower Electric Power demand due to a mild 2024 spring and summer and higher Gas utilization due to low Gas pricing.

In Q2 2024, Electric Operations operating revenues were $57.0 million, or $73.10 per MWh, on a segment basis.

In Q2 2024, Electric Operations operating expenses per MWh were $64.39, which represents an increase of $10.88 per MWh from Q1 2024.

Q2 2024 Electric Operations income from operations was $8.71 per MWh, a decline of $9.98 from Q1 2024.

Coal Operations:

During the second quarter of 2024, 0.8 million tons of coal were shipped on a segment basis during the quarter, with approximately 0.3 million tons of that being shipped to the Merom Power Plant for $13.0 million.

This is a decline of 0.4 million tons of coal shipped from Q1 2024, primarily due to decreased demand from a mild 2024 spring and summer and continued low Gas prices.

In Q2 2024, Coal Operations operating revenues were $46.4 million, or $54.69 per ton, on a segment basis.

In Q2 2024, Hallador's Coal Operations operating expenses were $68.02 per ton on a segment basis, which represents a $3.50 per ton increase from Q1 2024.

While Coal Operations operating expenses decreased $20.6 million in the second quarter of 2024 compared to the first quarter, tons sold also decreased 365,000 tons, or 30.1%, causing a higher operating expense per ton amount.

We recorded a loss from operations for the quarter of $(13.33) per ton on a segment basis.

This is a decline of $(3.89) per ton from Q1 2024 income from operations.

These declines were due primarily to the reduction in contract average sales prices and the reduction in demand for coal due to low Gas prices.

Q2 2024 Activity

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During Q2 2024, our operating cash flow was $23.5 million, and we decreased our bank debt by $31.5 million.

As of March 31, 2024, our bank debt was $77.0 million, liquidity was $39.5 million, and our leverage ratio came in at 1.58X, within our covenant of 2.25X.

During Q1 2024, we issued unsecured one-year notes from related parties affiliated with certain members of the Board of Directors in the amount of $5.0 million.

An ATM raised $6.6 million through the issuance of 0.7 million shares of our common stock.

We converted $8.0 million of senior unsecured convertible notes, including interest through August 2025 with 1,459,293 shares of our Company common stock.

We converted $0.8 million of accrued interest with 122,605 shares of our Company's common stock.

Power production was 0.8 million MWh for the quarter, an increase of 0.2 million from Q4 2023.

We initiated a Reorganization Plan in our Coal Operations designed to increase margins and adjust to current market conditions.

Our production was 1.3 million tons for the quarter, 0.1 million less than Q4 2023.

Approximately 0.3 million tons of that production were shipped to the Merom Power Plant in Q1 2024.

Solid Forward Sales Position - Segment Basis, Before Intercompany Eliminations

As of June 30, 2024, our bank debt was $45.5 million, liquidity was $60.7 million, and our leverage ratio came in at 2.12X, within our covenant of 2.25X.

During Q2 2024, we entered into an 11-month, $45.0 million prepaid physically delivered power contract in which we will provide a total of 1,302,480 MW, as discussed in “Item 1.

Footnote 7 – Revenue”.

During Q2 2024, we paid off the $5.0 million unsecured one-year notes from related parties affiliated with certain members of the Board of Directors that were issued during Q1 2024.

Our ATM offering program raised $27.9 million through the issuance of 3.9 million shares of our common stock.

We converted our remaining $11.0 million of senior unsecured convertible notes, including accrued interest with 1,840,729 shares of our Company common stock.

We also issued 249,271 shares of our Company’s common stock as additional value to the holders for converting.

Solid Forward Sales Position (unaudited)

Contracted MWh (in millions)

Contracted price per MWh

Average contracted price per MWh

Contracted revenue (in millions)

% Energy Sold*

Average monthly contracted capacity

% Capacity Contracted**

Average daily contracted capacity MWh

Average contracted capacity price per MWd

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Contracted Power revenue (in millions)

Contracted Power Revenue per MWh*

2024 average cost per MWh was $31.88 for the three months ended March 31, 2024 ($30.41 assuming intercompany sales of coal were sold at cost)

2024 Power Capex Budget (in millions) excluding ELG requirements

Priced tons - 3rd party (in millions)

Average price per ton - 3rd party

Priced tons (in millions) - Hallador Power

Average price per ton - Hallador Power

Contracted coal revenue (in millions)

Committed & unpriced tons (in millions) - 3rd party

Committed & unpriced tons (in millions) - Hallador Power

Total contracted tons (in millions)

Average cost per ton of coal was $53.38 for the three months ended March 31, 2024

2024 Coal Capex Budget (in millions)

TOTAL CONTRACTED REVENUE (IN MILLIONS)

*Based on coal production capacity of 4.5 million tons and 6.0 million MWh annually.

**Based on a MISO accreditation of 769 MW per day through 2024, up to 971 MW per day for 2025.

Accreditations are adjusted annually based on 3-year rolling performance metrics.

Avg price per ton - 3rd party

Contracted coal revenue - 3rd party (in millions)

Committed and unpriced tons - 3rd party (in millions)

Total contracted tons - 3rd party (in millions)

TOTAL CONTRACTED REVENUE (IN MILLIONS) - CONSOLIDATED

Priced tons - Merom (in millions)

Avg price per ton - Merom

Contracted coal revenue - Merom (in millions)

TOTAL CONTRACTED REVENUE (IN MILLIONS) - SEGMENT

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

As set forth in our condensed consolidated statements of cash flows, cash provided by operations was $16.4 million and $26.1 million for the three months ended March 31, 2024 and 2023, respectively.

Operating margins for electric, which we define as operating revenues less operating expenses on a segment basis, were $21.1 million.

Operating margins were $22.1 million on a consolidated basis.

Operating margins from coal sales, which we define as coal sales less operating expenses, were $1.2 million on a segment basis, during the first three months of 2024, down from $28.9 million during the first three months of 2023.

Tons shipped in the first three months of 2024 to the Merom Power Plant were sold at break-even, however due to timing of the usage of the coal in the Plant, we had negative operating margins of $1.2 million which were eliminated in consolidation.

Our operating margins from coal sales were $1.02 per ton on a segment basis in the first three months of 2024 compared to $17.07 in the first three months of 2023.

We shipped 1.2 million tons of coal in the first three months of 2024, with 0.3 million tons of that being shipped to the Merom Power Plant.

As set forth in our condensed consolidated statements of cash flows, cash provided by operations was $39.9 million and $44.2 million for the six months ended June 30, 2024 and 2023, respectively.

Our projected electric capital expenditure budget for the remainder of 2024 is $6.5 million.

Our projected coal operations capital expenditure budget for the remainder of 2024 is $16.3 million, of which approximately one-half is anticipated for maintenance capex.

We paid down bank debt of $14.5 million in the first three months of 2024.

As of March 31, 2024, our bank debt was $77.0 million.

In March of 2024, we issued unsecured promissory notes, having a 12-month maturity date and 12% per annum interest rate to related parties affiliated with certain members of our Board of Directors.

The primary purpose of this issuance was to support liquidity and accelerate strategic initiatives.

Our projected coal operations capital expenditure budget for the remainder of 2024 is $8.8 million.

We paid down bank debt of $46.0 million in the first half of 2024.

As of June 30, 2024, our bank debt was $45.5 million.

We expect cash from operations generated primarily to fund our capital expenditures and our debt service.

As of March 31, 2024, we also had an additional borrowing capacity of $37.9 million.

As of June 30, 2024, we also had an additional borrowing capacity of $54.4 million.

Material Off-Balance Sheet Arrangements

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CAPITAL EXPENDITURES (capex)

For the first three months of 2024, capex was $14.9 million allocated as follows (in millions):

For the first six months of 2024, capex was $28.0 million allocated as follows (in millions):

Oaktown – maintenance capex

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Electric Operations

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Delivered Energy

OPERATING REVENUES:

Operating expenses

Other operating and maintenance costs

Depreciation, depletion and amortization

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INCOME FROM OPERATIONS

Operating revenues from electric operations decreased $33.6 million, or 36%, compared to the first quarter of 2023 due to reduced production of power as a result of a mild winter and decreased natural gas prices.

Operating expenses decreased $29.9 million, or 44%, compared to the first quarter of 2023 due to a decrease in production as well as costs related to the coal purchase agreement signed with Hoosier related to the Merom Acquisition in 2022.

The coal purchase agreement included fixed prices which were below market prices at the date we entered into the agreement.

As a result of the below-market contract, there were $17.8 million in additional operating expenses for coal purchased as a result of amortizing the contract asset during the first quarter of 2023.

Quarterly electric sales and cost data (in thousands, except per MWh data) are provided below.

Fixed costs in the table are considered "non-GAAP" and are a component of operating expenses, the most comparable GAAP measure.

We consider fixed costs to be costs associated with the plant whether or not the plant is in operation.

Capacity revenue

Delivered energy and PPA revenue

Total electric sales

Less amortization of contract liability

Total electric sales less amortization of contract liability

Average price/MWh of delivered energy and PPA revenue less amortization of contract liability

Operating expenses (on a segment basis)

Less fixed costs

Less amortization of contract asset

Operating expenses less fixed costs and amortization of contract asset

Average variable cost/MWh of operating expenses less fixed costs and amortization of contract asset

Energy and PPA margin less fixed costs and amortization of contract asset and liabilities

Energy and PPA margin/MWh less fixed costs amortization of contract asset and liabilities

Three Months Ended June 30,

Six Months Ended June 30,

Delivered Energy

OPERATING REVENUES:

Other operating and maintenance costs

Depreciation, depletion and amortization

Asset retirement obligations accretion

General and administrative

Total operating expenses

INCOME FROM OPERATIONS:

2023 (second quarter)

Operating revenues from electric operations decreased $14.1 million, or 19.8%, compared to the second quarter of 2023 due to approximately 60% of total Energy hours at the Merom Hub being priced below our production cost at our Merom Facility, low Electric Power demand due to a mild 2024 spring and summer, and higher demand for Gas as Gas prices averaged $2.08 per MBtu during the second quarter of 2024 compared to $2.16 per MBtu during the second quarter of 2023.

Fuel decreased $20.5 million, or 47.7%, compared to the second quarter of 2023 due to lower coal usage and energy production as a result of weakened demand for electricity.

Electric production decreased by 263,000 MWh, or 25.2%, from the second quarter of 2023.

We were also able to acquire third-party coal at prices below our production costs for coal, further reducing our fuel expense during the quarter.

Other operating and maintenance costs increased $8.7 million, or 160.8%, compared to the second quarter of 2023 primarily due to the planned maintenance outage which resulted in $6.8 million in additional costs for the period.

Income from operations decreased $2.5 million, or 26.7%, and decreased $0.13 per MWh, from the three months ended June 30, 2023.

The main drivers of this change in income from operations are described in the discussion above.

2023 (first six months)

Operating revenues from electric operations decreased $47.7 million, or 29.1%, compared to the first half of 2023 due to MISO pricing that was lower than our cost to produce at times during the period, low Power demand due to a mild 2024 spring and summer, and higher demand for Gas as Gas prices during the spring season of 2024 (March through May) averaged $1.74 per MBtu compared to $2.21 per MBtu in the spring season of 2023.

Fuel decreased $49.5 million, or 51.3%, compared to the first half of 2023 due to lower coal usage and production as a result of weakened demand.

Production decreased by 709,000 MWh, or 30.8%, from the first six months of 2023.

Gas average spot prices were down $0.30 per MMBtu decreasing the demand for Electric Power.

Other operating and maintenance costs increased $8.9 million, or 81.3%, compared to the first half of 2023 primarily due to the planned maintenance outage which resulted in $6.6 million in additional costs for the period.

Income from operations decreased $5.9 million, or 21.2%, and increased $1.68 per MWh, from the six months ended June 30, 2023.

The main drivers of this change in income from operations are described in the discussion above.

Coal Operations

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

OPERATING REVENUES:

Operating expenses

Other operating and maintenance costs

Depreciation, depletion and amortization

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Total operating expenses

(LOSS) INCOME FROM OPERATIONS

Operating revenues from coal operations decreased $28.4 million, or 30%, from the first quarter of 2023 due to reductions in volume and average sales price for our coal.

Our average sales price decreased $1.48 per ton and we sold 0.5 million tons less compared to the first quarter of 2023.

Operating revenues for the first quarter of 2024 include $16.4 million in sales to the Merom plant which were eliminated in the consolidation.

Operating expenses increased by $14.57 per ton sold over the first quarter of 2023.

This increase was due to one-time termination benefits of $1.1 million related to the Reorganization Plan disclosed in “Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements, the addition of the higher-cost Prosperity surface mine, poor temporary mining conditions at Oaktown, and continued significant inflationary pressures that have continued to elevate the costs.

Depreciation, depletion, and amortization decreased $2.5 million, or 19%, from the first quarter of 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.

INCOME (LOSS) FROM OPERATIONS

Three Months Ended June 30,

Six Months Ended June 30,

OPERATING REVENUES:

Other operating and maintenance costs

Depreciation, depletion and amortization

Asset retirement obligations accretion

Exploration costs

General and administrative

Total operating expenses

INCOME (LOSS) FROM OPERATIONS:

2023 (second quarter)

Segment operating revenues from coal operations decreased $66.7 million, or 58.9%, from the second quarter of 2023.

Consolidated operating revenues from coal operations decreased $56.0 million, or 63%, from the second quarter of 2023.

These declines were due to reductions in volume and average sales price for our coal.

Our average sales price, on a segment basis, decreased $11.29 per ton and we sold 0.9 million tons less compared to the second quarter of 2023.

Our average sales price on a consolidated basis decreased $7.21 per ton and we sold 0.8 million tons less compared to the second quarter of 2023.

Operating revenues for the second quarter of 2024 include $12.9 million in sales to the Merom plant which were eliminated in the consolidation.

Other operating and maintenance costs decreased $14.7 million, or 40.5%, and labor decreased $9.7 million, or 33.3%, from the second quarter of 2023.

These changes were driven by the Reorganization Plan disclosed in “Item 1.

Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements.

During the second quarter 2024, we produced 0.4 million tons less than first quarter 2024, we reduced production days from 7 days to 5 days and further reduced our coal employee headcount by 130 employees.

Depreciation, depletion, and amortization decreased $3.5 million, or 28.4%, from the second quarter of 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.

Income (loss) from operations decreased $37.7 million, or 142.9%, and decreased $28.71 per ton, from the three months ended June 30, 2023.

The main drivers of this change in income (loss) from operations are described in the discussion above.

2023 (first six months)

Segment operating revenues from coal operations decreased $95.1 million, or 45.6%, from the first half of 2023.

Consolidated operating revenues from coal operations decreased $100.8 million, or 55%, from the first half of 2023.

These declines were due to reductions in volume and average sales price for our coal.

Our average sales price, on a segment basis, decreased $6.24 per ton and we sold 1.3 million tons less compared to the first six months of 2023.

Our average sales price, on a consolidated basis, for the six months ended 2024, decreased $3.11 per ton and we sold 1.6 million tons less compared to the first six months of 2023.

Other operating and maintenance costs decreased $9.8 million, or 15.5%, and labor decreased $14.0 million, or 23.0%, from the first six months of 2023.

These changes were driven by the Reorganization Plan disclosed in “Item 1.

Note 16 — Organizational Restructuring” to the Condensed Consolidated Financial Statements.

During the first six months of 2024, we produced 1.6 million tons less on a segment basis than first six months of 2023, we went from 5 mines producing to 2 mines producing and further reduced our coal employee headcount by 339 employees.

Depreciation, depletion, and amortization decreased $6.1 million, or 23.6%, from the first half of 2023 due to decreases in coal production and the remaining useful lives of the mine development assets.

Income (loss) from operations decreased $62.2 million, or 157.7%, and decreased $22.62 per ton, from the six months ended June 30, 2023.

The main drivers of this change in income from operations are described in the discussion above.

Quarterly coal sales and cost data on a segment basis are as follows (in thousands, except per ton data and wash plant recovery percentage):

Tons produced

Average price per ton

Wash plant recovery in %

Operating costs

Average cost per ton

Margin per ton

Maintenance capex

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Tons produced

Average price per ton

Wash plant recovery in %

Operating costs

Average cost per ton

Margin per ton

Maintenance capex

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EARNINGS (LOSS) PER SHARE

Our effective tax rate (ETR) is estimated at ~26% and ~13% for the three months ended March 31, 2024, and 2023, respectively.

For the three months ended March 31, 2024, 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 effective tax rate (ETR) is estimated at ~23% and ~11% for the six months ended June 30, 2024, and 2023, respectively.

For the six months ended June 30, 2024, 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.

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RESTRICTED STOCK GRANTS

Financial Statements - Note 9.

Stock Compensation Plans ” for a discussion of RSUs.

Financial Statements - Note 9 - Stock Compensation Plans ” for a discussion of RSUs.

CRITICAL ACCOUNTING ESTIMATES

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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.

As of June 30, 2024, and December 31, 2023, coal inventory includes NRV adjustments of $0.9 million and $2.0 million, respectively.

Long-lived assets used in operations are depreciated and assessed for impairment annually or whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows is expected to be generated by an asset group.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis