# HALLADOR ENERGY CO (HNRG) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HALLADOR ENERGY CO's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/788965/000143774923006932/hnrg20221231_10k.htm
Accession: 0001437749-23-006932
Filing date: 2023-03-16
Report date: 2022-12-31
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/
Previous year: /company/HNRG/mda/fy2021/ (FY 2021)
Next year: /company/HNRG/mda/fy2023/ (FY 2023)

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.

OVERVIEW

Hallador Energy Company (the "Company" or "Hallador") is an energy company operating in the state of Indiana.  Historically, the largest portion of our business has been devoted to coal mining in the State of Indiana through Sunrise Coal, LLC (a wholly-owned subsidiary) serving the electric power generation industry.

On October 21, 2022, the Company, through its subsidiary Hallador Power Company, LLC, completed its acquisition of the  one Gigawatt ("GW") Merom Generating Station ("Merom") located in Sullivan County, Indiana pursuant to an Asset Purchase Agreement (the "Purchase Agreement") with Hoosier Energy (the "Seller").

As a result of the Merom acquisition, commencing with this Form 10-K, the Company has two reportable segments: coal operations (operated by Sunrise Coal, LLC) and electric operations (operated by Hallador Power Company, LLC).

In addition to our reportable segments, the remainder of our operations are presented as "Corporate and Other" and primarily are comprised of  unallocated corporate costs in addition to activities such as a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana, accounted for using the equity method, and our wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.

Fiscal year 2022 was a transitional year for Hallador.  The market price for coal approached all-time highs.  We were successful in signing 2.2 million tons of new coal sales contracts at an average price of ~$125 per ton in the summer of 2022, of which a small percentage of deliveries were completed in 2022 and will continue through 2025 with the majority contracted to be delivered in 2023.  To fulfill these obligations, we invested substantially in 2022 to expand our coal production capacity from ~6 million tons annually to ~7.5 million tons in 2023.

In addition to our acquisition of Merom in Q4 2022 described above, we also expanded our coal production capacity by adding more units of production at our Oaktown Mining Complex, opening a small surface mine pit near Freelandville, Indiana ("Freelandville"), and moving our Ace in the Hole production to a small surface mine pit near Petersburg, Indiana ("Prosperity").  Freelandville and Prosperity production began in Q3 2022.  Volumes from these new pits are expected to be higher cost, and our newer workforce and surface pits will require a ramp to reach peak productivity.  We will continue to evaluate the productivity of these mines in connection with market conditions to determine the appropriate operational balance.

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To help fund our investment in expanded mine production, improve our liquidity, and position us to efficiently operate Merom, we issued $29 million of convertible notes, $10 million in Q2 2022 and $19 million in Q3 2022.  The $10 million of notes issued in Q2 2022 have been converted into the Company's common stock, bringing our outstanding share count to 33.0 million shares as of December 31, 2022. If the additional notes issued in Q3 2022 were to also convert, our outstanding share count would increase to approximately 36.1 million shares, representing an approximate 17% increase in share count.   

Bank debt was reduced during the year by $26.5 million bringing the balance owed at the end of fiscal 2022 to $85.2 million, bringing the Debt to EBITDA covenant under our credit agreement to 2.05X at the end of fiscal 2022. See Note 5 to our consolidated financial statements for additional discussion about our bank debt and related liquidity.

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”) that was filed with our 2021 Annual Report on form 10-K and a subsequent update letter from John T. Boyd Company.  There were no material adjustments to the coal resources and reserves necessitating the filing of an amended or revised 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.

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, 2022:

SUMMARY MINERAL RESERVES AT END OF THE

FISCAL YEAR ENDED DECEMBER 31, 2022

[[GREPCENT_TABLE]]
[["","","Mineral Reserves (tons in millions)"],["","","Proven","","","Probable","","","Total"],["Oaktown Mining Complex"],["Oaktown Fuels No. 1 Mine","","","36.2","","","","0.5","","","","36.7"],["Oaktown Fuels No. 2 Mine","","","28.5","","","","1.1","","","","29.6"],["Total","","","64.7","","","","1.6","","","","66.3"]]
[[/GREPCENT_TABLE]]

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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, or 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 64.7 million tons of clean coal.  The complex is configured to operate up to 7 CM sections, with an annual production target of approximately 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's processing capacity is in the process of being upgraded to 1,800 raw tons-per-hour (TPH) from its current 1,600 raw 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 $6.8 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, 2022 and 2021"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","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","","","12/31/2022","","","12/31/2021"],["Oaktown Mining Complex"],["Oaktown Fuels No. 1 Mine","","","11,522","","","","6.1","","","","\u2014","","","","100.0","","","","36.2","","","","0.5","","","","36.7","","","","40.5"],["Oaktown Fuels No. 2 Mine","","","11,534","","","","5.7","","","","\u2014","","","","100.0","","","","28.5","","","","1.1","","","","29.6","","","","30.9"],["Total","","","","","","","","","","","","","","","","","","","64.7","","","","1.6","","","","66.3","","","","71.4"]]
[[/GREPCENT_TABLE]]

Oaktown Fuels No. 1 Mine

The assigned and accessible reserve base for the Oaktown Fuels No. 1 Mine contains 36.7 million tons of recoverable Indiana V seam coal, of which 36.7 million tons are currently permitted.  The reserve contains saleable tons which average heating content of approximately 11,522 Btu per pound with approximately 6.1 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 29.7 million tons of recoverable Indiana V seam coal, of which 23.8 million tons are currently permitted.  The reserve contains saleable tons which average heating content of approximately 11,534 Btu per pound with approximately 5.7 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.

Historical production for our Oaktown Mining Complex during the years ended December 31, 2022, 2021, and 2020 is provided in the following table:

[[GREPCENT_TABLE]]
[["","","Annual Saleable Production Tons"],["","","(Million Tons)"],["Mine/Reserve","","2022","","","2021","","","2020"],["Oaktown Mining Complex"],["Oaktown Fuels No. 1 Mine","","","3.9","","","","3.5","","","","3.4"],["Oaktown Fuels No. 2 Mine","","","2.5","","","","2.1","","","","1.8"],["Total Oaktown Mining Complex Production","","","6.4","","","","5.6","","","","5.2"]]
[[/GREPCENT_TABLE]]

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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

Ace Mine is now depleted. Remaining inventory of coal and base is scheduled to be moved to our Carlisle and Oaktown wash plants in early 2023. Reclamation will resume in the Spring of 2023. We expect Phase 1 reclamation should be substantially complete by the end of 2023.

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.

Prosperity (surface) – Assigned

The Prosperity mine contains approximately 0.3 million tons of low sulfur coal needed to blend with our Oaktown coal to reduce the sulfur content to a salable level for Southeastern US markets. The mine opened in the summer of 2022. The mine is producing coal and also reclaiming the slurry pond and refuse pile left by the Prosperity underground mine. Additional reserves are in the area that may extend the life of this mine. Currently the mine is projected to produce approximately 20,000 tons per month until mid-2024.

Freelandville (surface) – Assigned

Sunrise is a contract miner at the Freelandville East Mine Center Pit, Permit No. S 358. Sunrise has an option through May 31, 2023 to assume the permit. The permit contains approximately 1.7 million tons of salable coal with an additional 0.6 million available. Mining started in the fall of 2022. Once the mine reaches full capacity in March of 2023 the mine is expected to produce approximately 40,000 salable tons per month.

Our Coal Contracts

In 2022, Sunrise sold 6.3 million tons of coal to 14 power plants in five different states across nine different customers.

During 2022, we derived 90% of our revenue from five customers (10 power plants), with each of the five customers representing at least 10% of our coal sales. 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.

Significant customers in 2022 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).

Of our 2022 sales, 74% were shipped to locations in the State of Indiana.

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In the summer of 2022, customer coal inventories and natural gas (a competitor to coal) inventory levels were lower than normal.  Customers paid near record prices in 2022 to secure limited fuel supply.  We invested in expanding our mining production to meet the demand. As discussed above we have opened the Prosperity and Freelandville surface mines to meet the demand resulting in contracts being signed raising our estimated average sales price for 2023 to $58.70 per ton.

[[GREPCENT_TABLE]]
[["","","Contracted","","","Estimated"],["","","tons","","","price"],["Year","","(millions)*","","","per ton"],["2023","","","7.5","","","$","58.70"],["2024 - 2027 (total)","","","7.3","","","","**"],["Total","","","14.8"]]
[[/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

As of December 31, 2022, we are committed to supplying our customers up to a maximum of 14.8 million tons of coal through 2027 of which 10.8 million tons are priced.

Beginning in 2024, with the acquisition of the Merom power plant, we have the optionality to sell up to 3.0 million tons of our coal directly to the Merom plant, which would be in addition to the contracted tons to our third party customers described above.  We anticipate our mines will need to produce at a 7 million-ton annualized pace for the foreseeable future to meet the Merom plant and third party market demand.

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. 

Liquidity and Capital Resources

As set forth in our Consolidated Statements of Cash Flows, cash provided by operations was $54.2 million and $48.0 million for the years ended December 31, 2022 and 2021 respectively. Operating cash flow increased primarily due to an increase in operating margins at our coal mines brought on by the addition of higher priced contracts in the summer of 2022.  Operating margin per ton at our coal mines increased in 2022 to $8.35 per ton from $7.35 per ton in 2021, increasing operating cash flow by $7.6 million.

Our capital expenditure budget for 2023 is $69 million, of which $35 million is for maintenance capex.  Of the $69 million, the budget for coal operations is $34 million and the budget for electric operations is $35 million. 

We paid down debt of $26.5 million in 2022. As of December 31, 2022, our bank debt was $85.2 million. 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. The primary purpose of the amendment is to convert $35 million of the revolver into a new term loan with a maturity of March 31, 2024 (with principal payments of $10.0 million due by June 30, 2023; $10.0 million by September 30, 2023; $10.0 million by December 31, 2023, and $5.0 million by March 31, 2024), and extend the maturity date of the revolver to May 31, 2024.  The effect of the amendment on our future cash flow is to extend the maturity date of $44.7 million of our outstanding debt as of December 31, 2022 to May 2024. In addition, the amendment reduced the total capacity under the revolver to $85.0 million (previously $120 million).  Subsequent to the amendment, the current portion of our outstanding debt as of December 31, 2022 is $35.5 million.   

We expect cash from operations generated primarily by our expected higher coal margins in 2023 to fund our capital expenditures and our debt service.

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 the present value of reclamation obligations of $20.8 million, including $7.2 million at Merom, presented as asset retirement obligations (ARO) in our accompanying balance sheets. In the event we are not able to perform reclamation, we have surety bonds in place totaling $36.9 million to cover ARO.

Capital Expenditures (capex)

For the year ended December 31, 2022, our capex was $54.0 million allocated as follows (in millions):  

[[GREPCENT_TABLE]]
[["Oaktown \u2013 maintenance capex","","$","21.0"],["Oaktown \u2013 investment","","","22.1"],["Prosperity mine","","","3.6"],["Freelandville mine","","","2.5"],["Merom plant","","","3.7"],["Other","","","1.1"],["Capex per the Consolidated Statements of Cash Flows","","$","54.0"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2022","","","2021"],["OPERATING REVENUES:","","$","293,344","","","$","246,396"],["EXPENSES:"],["Operating expenses","","","236,416","","","","198,442"],["Depreciation, depletion and amortization","","","43,612","","","","39,829"],["Asset impairment","","","\u2014","","","","1,588"],["Asset retirement obligations accretion","","","1,010","","","","1,504"],["Asset retirement obligations change in estimate","","","\u2014","","","","(3,510",")"],["Exploration costs","","","651","","","","482"],["General and administrative","","","7,919","","","","6,069"],["Total operating expenses","","","289,608","","","","244,404"],["INCOME (LOSS) FROM OPERATIONS","","","3,736","","","","1,992"]]
[[/GREPCENT_TABLE]]

Operating revenues from coal operations increased 19% over 2021 due in large part to unprecedented increases in natural gas prices. As a result, higher priced contracts sold in the summer of 2022 and delivered in Q4 of 2022 increased our average sales price by over $6 per ton from 2021. We also sold 168,000 additional tons over 2022 at the higher average price due to lower inventories and the higher gas prices.

Operating expenses increased, however, by ~$5 per ton. The addition of the higher cost Freelandville and Prosperity surface mines as well as significant inflationary pressures contributed significantly to the increased costs. We continue to experience significant onboarding of new employees which takes time provide training and gain the experience to reach maximum productivity which is also contributing to higher costs.

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Depreciation, depletion, and amortization increased 9% as a significant amount of our assets are depreciated and amortized based on production which increased approximately 13% over 2021.

Changes in asset retirement obligation accretion and change in estimate are a result of a review in 2021 that determined the liabilities we have recorded and the future liabilities were overstated due to a change in estimate when factoring time to reclamation, discount rates used, and inflationary factors used. Our review in 2022 did not result in any significant adjustments.

General and administrative expenses increased 30% over 2022 due in large part to additional professional fees related to bank refinancing and additional audit requirements. Increased wages due to bonuses and incentives to retain and attract talent also contributed to the increased costs.

Electric Operations

[[GREPCENT_TABLE]]
[["","","2022","","","2021"],["OPERATING REVENUES:","","$","66,316","","","$","\u2014"],["EXPENSES:"],["Operating expenses","","","29,608","","","","\u2014"],["Depreciation, depletion and amortization","","","3,117","","","","\u2014"],["General and administrative","","","2,086","","","","\u2014"],["Total operating expenses","","","34,811","","","","\u2014"],["INCOME (LOSS) FROM OPERATIONS","","","31,505","","","","\u2014"]]
[[/GREPCENT_TABLE]]

A comparative discussion is not relevant as the Electric Operations did not begin until the Merom Acquisition closed 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 entered into the agreement.  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 year ended December 31, 2022, we recorded $23.3 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 year ended December 31, 2022, we recorded $3.6 million in additional operating expense for coal purchased and used and an additional $11.2 million to inventory for coal purchased and unused as a result of amortizing the contract asset. 

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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, 2022, 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"],["","","2022","","","2022","","","2022","","","2022","","","Total 2022"],["SALES AND OPERATING REVENUES:"],["Coal sales","","$","57,010","","","$","64,161","","","$","83,562","","","$","84,643","","","$","289,376"],["Electric sales","","","\u2014","","","","0","","","","\u2014","","","","66,252","","","","66,252"],["Other revenues","","","1,897","","","","1,768","","","","1,522","","","","1,176","","","","6,363"],["Total revenue","","","58,907","","","","65,929","","","","85,084","","","","152,071","","","","361,991"],["EXPENSES:"],["Operating expenses","","","54,601","","","","51,394","","","","64,557","","","","96,056","","","","266,608"],["Depreciation, depletion and amortization","","","9,531","","","","11,164","","","","11,187","","","","14,993","","","","46,875"],["Asset retirement obligations accretion","","","246","","","","250","","","","255","","","","259","","","","1,010"],["Exploration costs","","","57","","","","215","","","","121","","","","258","","","","651"],["General and administrative","","","3,149","","","","3,722","","","","3,569","","","","5,977","","","","16,417"],["Total operating expenses","","","67,584","","","","66,745","","","","79,689","","","","117,543","","","","331,561"],["INCOME (LOSS) FROM OPERATIONS","","","(8,677",")","","","(816",")","","","5,395","","","","34,528","","","","30,430"],["Bank debt and other interest","","","(1,710",")","","","(1,770",")","","","(2,360",")","","","(2,438",")","","","(8,278",")"],["Amortization and swap related interest","","","(74",")","","","(567",")","","","(995",")","","","(1,098",")","","","(2,734",")"],["Equity method investment income","","","150","","","","188","","","","168","","","","(63",")","","","443"],["INCOME (LOSS) BEFORE INCOME TAXES","","","(10,311",")","","","(2,965",")","","","2,208","","","","30,929","","","","19,861"],["INCOME TAX EXPENSE (BENEFIT):"],["Current","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Deferred","","","(177",")","","","421","","","","596","","","","916","","","","1,756"],["Total income tax expense (benefit)","","","(177",")","","","421","","","","596","","","","916","","","","1,756"],["NET INCOME (LOSS)","","$","(10,134",")","","$","(3,386",")","","$","1,612","","","$","30,013","","","$","18,105"],["NET INCOME (LOSS) PER SHARE:"],["Basic","","$","(0.33",")","","$","(0.11",")","","$","0.05","","","$","0.91","","","$","0.57"],["Diluted","","$","(0.33",")","","$","(0.11",")","","$","0.05","","","$","0.83","","","$","0.55"],["WEIGHTED AVERAGE SHARES OUTSTANDING:"],["Basic","","","30,785","","","","30,785","","","","32,983","","","","32,983","","","","32,043"],["Diluted","","","30,785","","","","30,809","","","","33,268","","","","36,428","","","","33,649"]]
[[/GREPCENT_TABLE]]

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[[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 debt and other interest","","","(2,135",")","","","(2,307",")","","","(2,167",")","","","(1,901",")","","","(8,510",")"],["Amortization and swap related 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",")"]]
[[/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 2022","","","2nd 2022","","","3rd 2022","","","4th 2022","","","T4Qs"],["Tons produced","","","1,397","","","","1,762","","","","1,663","","","","1,721","","","","6,543"],["Tons sold","","","1,377","","","","1,595","","","","1,705","","","","1,664","","","","6,341"],["Coal sales","","$","57,010","","","$","64,161","","","$","83,563","","","$","84,641","","","$","289,375"],["Average price per ton","","$","41.40","","","$","40.23","","","$","49.01","","","$","50.87","","","$","45.64"],["Wash plant recovery in %","","","67","%","","","71","%","","","69","%","","","68","%"],["Operating costs","","$","54,443","","","$","50,776","","","$","63,876","","","$","67,319","","","$","236,414"],["Average cost per ton","","$","39.54","","","$","31.83","","","$","37.46","","","$","40.46","","","$","37.28"],["Margin","","$","2,567","","","$","13,385","","","$","19,687","","","$","17,322","","","$","52,961"],["Margin per ton","","$","1.86","","","$","8.39","","","$","11.55","","","$","10.41","","","$","8.35"],["Capex","","$","9,082","","","$","13,821","","","$","15,096","","","$","12,368","","","$","50,367"],["Maintenance capex","","$","4,481","","","$","7,600","","","$","6,625","","","$","5,748","","","$","24,454"],["Maintenance capex per ton","","$","3.25","","","$","4.76","","","$","3.89","","","$","3.45","","","$","3.86"]]
[[/GREPCENT_TABLE]]

[[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","","","$","243,903"],["Average price per ton","","$","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","","","$","198,548"],["Average cost per ton","","$","28.88","","","$","30.20","","","$","33.15","","","$","35.12","","","$","32.16"],["Margin","","$","11,972","","","$","12,236","","","$","11,342","","","$","9,805","","","$","45,355"],["Margin per ton","","$","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 per ton","","$","2.00","","","$","0.75","","","$","1.14","","","$","2.12","","","$","1.46"]]
[[/GREPCENT_TABLE]]

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 provision 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 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 has 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.  

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We account for business acquisitions as either asset acquisitions or business combination depending on the circumstances as outlined in ASC 805-50. For acquisitions accounted for as a business combination, we record the assets acquired, including identified intangible assets and liabilities assumed at their fair value.  For acquisitions accounted for as asset acquisitions, we allocate the fair value of consideration exchanged in the transaction to each of the acquired assets based upon their relative fair value.  Fair value in many instances involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Those estimates are subject to a high degree of uncertainty, thus we typically will retain professionals in the relevant industries of the acquiree to assist us with our analysis and valuations.  See "Item 8. Financial Statements - Note 16 - Acquisition" for more information on the Merom Acquisition.

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