Note 6 - Revenue

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

(6) REVENUE 

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 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 for a Power Purchase Agreement (“PPA”) that is not determined to be a lease or derivative, the definition of a contract and the criteria in ASC 606, Revenue from Contracts with Customers ("ASC 606"), is met at the time a 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 that is not determined to be a lease or derivative constitutes a valid contract under ASC 606.

The Company will recognize revenue daily, based on an output method of capacity made available as part of any stand-ready obligations for contract capacity performance obligations and daily, based on an output method of MWh of electricity delivered.

For the delivered energy performance obligation in the PPA with Hoosier, the Company will recognize revenue daily for actual delivered electricity plus the amortization of the contract liability as a result of the Asset Purchase Agreement with Hoosier.

Disaggregation of Revenue

Revenue is disaggregated by primary geographic markets for our coal operations and by revenue source for our electric operations, 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

51% and 52% of our coal revenue for the three and nine months ended September 30, 2023, was sold to customers in the State of Indiana, with the remainder sold to customers in Florida, North Carolina, Georgia, and Alabama.  70% and 79% of our coal revenue for the three and nine months ended September 30, 2022, respectively, was sold to customers in the State of Indiana, with the remainder sold to customers in Florida, Georgia, and North Carolina.

Electric operations

100% of our electric revenue for the three and nine months ended September 30, 2023, was sold to Hoosier or the Midcontinent Independent System Operator ("MISO") wholesale market.  MISO is the independent system operator managing the flow of high-voltage electricity across 15 U.S. states and the Canadian province of Manitoba.  100% of our electric revenue through May 31, 2023, was sold to Hoosier in the state of Indiana.  32% of our electric revenue for the months of June 2023 to September 2023 was sold to Hoosier.  For the three and nine months ended September 30, 2023, revenue from delivered energy was $54.4 million and $184.7 million, respectively.  For the three and nine months ended September 30, 2023, revenue from capacity payments was $13.0 million and $46.1 million, respectively.

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 during the contract's fulfillment. 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 $426.1 million, which represent the average fixed prices on our committed contracts as of September 30, 2023. Approximately 31% of this relates to committed obligations in 2023, with the remainder committed in 2024 through 2027.

We have remaining performance obligations relating to 3.0 million tons of unpriced coal sales contracts of approximately $155 million, which represents our estimate of the expected price on committed contracts as of September 30, 2023. We expect to recognize all of this coal sales revenue beginning in 2025.

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 an 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 2028 totaling $312 million as of September 30, 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 2028 totaling $204 million as of September 30, 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 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 contracts in place where we would transfer coal, electricity, or capacity in advance of knowing the final price, and thus do not have any 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.  Additional payments for electric operations in advance of performance for the three and nine months ended September 30, 2023 were $0.0 million and $43.8 million, respectively.  For the three and nine months ended  September 30, 2023, we recognized revenue from coal operations of $2.5 million and $7.5 million, respectively, as tons of outstanding coal delivery obligations were fulfilled, and we recognized revenue from electric operations of $12.9 million and $46.0 million, respectively, as outstanding capacity obligations were fulfilled.  Pursuant to the terms of the underlying contracts, performance obligations representing $1.3 million and $8.3 million will be satisfied and recognized as revenue related to our coal operations and electric operations, respectively, during the three-month period ending December 31, 2023.