Two of the customers of Hallador Energy’s (NASDAQ: HNRG) Sunrise Coal LLC have advised the company that their coal stockpiles are increasing and have asked Sunrise Coal to consider storing their coal on Sunrise property.
In April, Sunrise Coal entered into an agreement with one unnamed customer to store 250,000 tons for a minimum of one year and up to a maximum of two years, Hallador noted in its May 7 Form 10-Q quarterly report. “We will continue to sell the coal as contracted to this customer,” the company added. “The risks and rewards of ownership will pass from us to them as coal is placed into storage. We will be paid a storage fee in addition to our contracted price at the time the coal is placed in storage. We are in discussions with a second customer to store a similar amount of coal under similar terms.”
For the first quarter of 2012, Sunrise Coal was behind about 52,000 tons on shipments to customers. It expects the shortfall to be made up by the end of June or July of this year. The negative effect on its coal sales for the first quarter was about $2.8m.
Sunrise Coal runs the Carlisle underground mine located in western Indiana, about 30 miles south of Terre Haute. In 2012, the company is contracted for 2.9 million tons of coal at an average of $42.74/ton, with another 2.9 million tons contracted in 2013 at $40.01/ton and 1.1 million tons contracted in 2014 at $46.64/ton.
“In the short-run, the market for thermal coal in the United States faces a number of challenges,” Hallador said in the Form 10-Q. “Unusually mild winter weather has reduced electricity generation from both coal burn and gas burn, resulting in a rapid build in coal inventories. The mild weather, burgeoning inventories and prolific production of nat gas has recently driven the price of nat gas to decade lows, which has increased fuel switching in favor of gas and forced the price of thermal coals lower across all production basins. Regulatory uncertainties, particularly surrounding the recently delayed Cross-State Air Pollution Rule (CSAPR), and Maximum Achievable Control Technology (MACT), are causing utilities to defer coal purchasing decisions, and in some cases to retire coal-fired generating facilities.”
For the first quarter of 2012, Sunrise Coal sold 701,000 tons at an average price of $42.24/ton. For the first quarter of 2011, it sold 816,000 tons at an average price of $41.62/ton. The lower average price for first quarter 2011 is due to the mix of various contracts and corresponding prices.
Operating costs and expenses averaged $26.30/ton in the 2012 first quarter compared to $22.92 in 2011. The increase was due primarily to poor mining conditions in the month of March. These poor conditions persisted into part of April, but conditions are improving. Sunrise Coal is also operating the Carlisle mine on reduced hours due to slack customer demand, which has a detrimental effect on productivity which translates to higher per-ton costs. The company expects costs to average $25-$26/ton for the remainder of 2012.
The Form 10-Q didn’t identify any coal customers, but the company’s March 2 Form 10-K annual report said: “Over the past three years we sold over 90% of our coal to three investment-grade customers. We have close relationships with these customers: Duke Energy Corporation (NYSE: DUK), Hoosier Energy, an electric cooperative, and Indianapolis Power & Light Company, a wholly-owned subsidiary of The AES Corporation (NYSE: AES).” The kind of high-sulfur coal produced at Carlisle is mostly burned by in-state utilities.