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Section 1: 10-Q (10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2016

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-3473

 

“COAL KEEPS YOUR LIGHTS ON”   “COAL KEEPS YOUR LIGHTS ON”
     
   

 

HALLADOR ENERGY COMPANY

(www.halladorenergy.com)

 

Colorado   84-1014610
(State of incorporation)   (IRS Employer Identification No.)
     
1660 Lincoln Street, Suite 2700, Denver, Colorado   80264-2701
(Address of principal executive offices)   (Zip Code)

 

Issuer's telephone number: 303.839.5504

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "larger accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

¨ Large accelerated filer þ Accelerated filer

¨ Non-accelerated filer

(do not check if a small reporting company)

¨ Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

As of November 3, 2016, we had 29,268,053 shares outstanding.

 

 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

Consolidated Balance Sheet

(in thousands, except per share data)

 

   September 30,   December 31, 
   2016   2015 
ASSETS          
Current assets:          
Cash and cash equivalents  $12,818   $15,930 
Marketable securities   1,702    1,343 
Accounts receivable   19,106    16,675 
Prepaid income taxes   3,481    5,312 
Coal inventory   13,268    14,915 
Parts and supply inventory   9,983    11,255 
Other   3,121    1,185 
Total current assets   63,479    66,615 
Coal properties, at cost:          
Land and mineral rights   126,454    116,209 
Buildings and equipment   352,845    347,963 
Mine development   136,675    131,027 
Total coal properties, at cost   615,974    595,199 
Less - accumulated DD&A   (175,983)   (149,964)
    439,991    445,235 
Investment in Savoy   10,520    12,365 
Investment in Sunrise Energy   4,482    4,747 
Other assets (Note 5)   21,611    11,416 
Total assets  $540,083   $540,378 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Current portion of bank debt, net  $26,609   $24,856 
Accounts payable and accrued liabilities   16,725    26,184 
Total current liabilities   43,334    51,040 
           
Long-term liabilities:          
Bank debt, net   206,037    219,502 
Deferred income taxes   52,186    49,033 
Asset retirement obligations   12,995    12,231 
Other   3,308    1,752 
Total long-term liabilities   274,526    282,518 
Total liabilities   317,860    333,558 
           
Commitments and contingencies          
Stockholders' equity:          
Preferred stock, $.10 par value, 10,000 shares authorized; none issued          
Common stock, $.01 par value, 100,000 shares authorized; 29,268 and 29,251 shares outstanding, respectively   292    292 
Additional paid-in capital   94,194    92,275 
Retained earnings   127,081    114,341 
Accumulated other comprehensive income (loss)   656    (88)
Total stockholders’ equity   222,223    206,820 
Total liabilities and stockholders’ equity  $540,083   $540,378 

 

See accompanying notes.

 2 

 

 

Consolidated Statement of Comprehensive Income

(in thousands, except per share data)

 

   Nine Months Ended
September 30,
   Three Months Ended
September 30,
 
   2016   2015   2016   2015 
                 
Revenue:                    
Coal sales  $207,429   $273,728   $65,360   $81,332 
Equity income (loss) - Savoy   (42)   (110)   26    (93)
Equity income (loss) - Sunrise Energy   (264)   24    (106)   21 
MSHA reimbursement   1,753                
Other income   1,340    1,625    487    753 
Total revenue   210,216    275,267    65,767    82,013 
Costs and expenses:                    
Operating costs and expenses   142,114    191,427    46,940    56,995 
DD&A   26,180    32,756    7,942    10,648 
Exploration and permitting costs   1,168    1,581    354    381 
SG&A   8,076    9,427    2,585    3,003 
Interest (1)   13,458    13,955    2,861    5,176 
Total costs and expenses   190,996    249,146    60,682    76,203 
                     
Income before income taxes   19,220    26,121    5,085    5,810 
                     
Less income taxes:                    
Current   (270)   1,231         680 
Deferred   3,153    5,302    763    (14)
Total income taxes   2,883    6,533    763    666 
                     
Net income (2)  $16,337   $19,588   $4,322   $5,144 
                     
Net income per share:                    
Basic and diluted  $.54   $.65   $.14   $.17 
                     
Weighted average shares outstanding:                    
Basic and diluted   29,251    29,011    29,252    29,044 

 

 

 

(1)Interest expense for first nine months of 2016 and 2015 includes $793 and $1,858 respectively, for the net change in the estimated fair value of our interest rate swaps. Such amounts were $(955) and $1,251 for Q3 2016 and 2015, respectively.

 

(2)There is no material difference between net income and comprehensive income.

 

See accompanying notes.

 

 3 

 

 

Consolidated Condensed Statement of Cash Flows

For the nine months ended September 30,

(in thousands)

 

   2016   2015 
Operating activities:          
Cash provided by operating activities  $43,691   $76,573 
           
Investing activities:          
Purchase of Freelandville assets   (18,000)     
Capital expenditures   (11,810)   (27,109)
Other   186    478 
Cash used in investing activities   (29,624)   (26,631)
           
Financing activities:          
Bank borrowings   15,000      
Debt issuance cost   (2,090)     
Payments on bank debt   (26,492)   (40,312)
Dividends   (3,597)   (3,596)
Cash used in financing activities   (17,179)   (43,908)
           
Increase (decrease) in cash and cash equivalents   (3,112)   6,034 
Cash and cash equivalents, beginning of period   15,930    13,469 
Cash and cash equivalents, end of period  $12,818   $19,503 

 

See accompanying notes.

 

 4 

 

 

Consolidated Statement of Stockholders’ Equity

(in thousands)

 

   Shares   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   AOCI*   Total 
Balance, January 1, 2016   29,251   $292   $92,275   $114,341   $(88)  $206,820 
                               
Stock-based compensation             1,822              1,822 
                               
Stock issued on vesting of RSUs   2                          
                               
Taxes paid on vesting of RSUs   (1)        (3)             (3)
                               
Dividends                  (3,597)        (3,597)
                               
Net income                  16,337         16,337 
                               
Other   16         100         744    844 
                               
Balance, September 30, 2016   29,268   $292   $94,194   $127,081   $656   $222,223 

 

 

*Accumulated Other Comprehensive Income (Loss)

 

See accompanying notes.

 

 5 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1)General Business

 

The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The financial statements included herein have been prepared pursuant to the SEC’s rules and regulations; accordingly, certain information and footnote disclosures normally included in GAAP financial statements have been condensed or omitted.

 

The results of operations and cash flows for the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2016. To maintain consistency and comparability, certain 2015 amounts have been reclassified to conform to the 2016 presentation.

 

Our organization and business, the accounting policies we follow and other information, are contained in the notes to our consolidated financial statements filed as part of our 2015 Form 10-K. This quarterly report should be read in conjunction with such 10-K.

 

The consolidated financial statements include the accounts of Hallador Energy Company (the Company) and its wholly-owned subsidiary Sunrise Coal, LLC (Sunrise) and Sunrise’s wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. We are engaged in the production of steam coal from mines located in western Indiana.  We own a 40% equity interest in Savoy Energy, L.P., a private oil and gas company, which has operations in Michigan and a 50% interest in Sunrise Energy, LLC, a private entity engaged in oil and gas operations in the same vicinity as the Carlisle Mine.

 

Change in Estimate for Computing Depreciation

 

At the beginning of Q1 2016, we changed from the straight-line method to the units-of-production method in computing the depreciation for certain underground mining equipment. This change in estimate reduced our DD&A expense for the nine months and three months ended September 30, 2016 by $6.6 million and $3.1 million, respectively. As disclosed last year, we significantly curtailed the production at the Carlisle Mine. This change better reflects the usage of our underground mining equipment especially since Carlisle had limited production during the first nine months of 2016.

 

(2)Bank Debt

 

On March 18, 2016, we executed an amendment to our credit agreement with PNC, as administrative agent for our lenders.  The primary purpose of the amendment was to increase liquidity and maintain compliance through the maturity of the agreement in August 2019.  The revolver was reduced from $250 million to $200 million and the term loan remains the same. Our debt at September 30, 2016 was $238 million (term-$110, revolver-$128). In addition, a maximum annual capex of $30 million was included.

 

Bank fees and other costs incurred in connection with the initial facility and the amendment were $9.1 million, which were deferred and are being amortized over five years. The credit facility is collateralized by substantially all of Sunrise’s assets and we are the guarantor.

 

The amended credit facility increased the maximum leverage ratio (total funded debt/ trailing 12 months EBITDA) from 2.75X to those listed below:

 

Fiscal Periods Ended/Ending  Ratio 
September 30, 2016 through March 31, 2017   4.50X 
June 30, 2017 through March 31, 2018   4.25X 
June 30, 2018 and September 30, 2018   4.00X 
December 31, 2018   3.75X 
March 31, 2019 and June 30, 2019   3.50X 

 

 6 

 

 

The fixed charge coverage ratio was changed to the debt service coverage ratio and requires a minimum of 1.25X through the maturity of the credit facility. The amendment defines the debt service coverage as trailing 12 months EBITDA/annual debt service. As of September 30, 2016, we had additional borrowing capacity of $72 million.

 

At September 30, 2016, our maximum leverage ratio was 3.02X and our debt service coverage ratio was 2.06X. Therefore, we were in compliance with those two ratios.

 

The interest rate on the facility ranges from LIBOR plus 2.25% to LIBOR plus 4%, depending on our maximum leverage ratio. At September 30, 2016, we were paying LIBOR at .53% plus 3.50% for a total interest rate of 4.03%.

 

New accounting rules for 2016 require that our debt issuance costs be presented as a direct reduction from the related debt rather than as an asset.  Our December 31, 2015 balance sheet was changed to reflect the new rule.

 

Debt less debt issuance cost at September 30, and December 31, are presented below (in thousands):

 

   2016   2015 
Current debt  $28,438   $26,250 
Less debt issuance cost   (1,829)   (1,394)
Net current portion  $26,609   $24,856 
           
Long-term debt  $209,542   $223,220 
Less debt issuance cost   (3,505)   (3,718)
Net long-term portion  $206,037   $219,502 

 

(3)Equity Investment in Savoy

 

We own a 40% interest in Savoy Energy, L.P., a private company engaged in the oil and gas business primarily in the state of Michigan.  Savoy uses the successful efforts method of accounting. We account for our interest using the equity method of accounting.

 

On November 3, 2016 Lubar Equity Fund, LLC acquired a 25% interest in Savoy for $9.5 million in cash. Accordingly, our ownership interest was reduced from 40% to 30.6%. At closing, Savoy made a cash distribution of $4.4 million of which our share was $1.8 million and per our credit agreement will be applied to our bank debt. Mr. Lubar, one of our directors, is affiliated with Lubar Equity Fund, LLC.

 

Below (in thousands) to the 100% is a condensed balance sheet at September 30, and a condensed statement of operations for the nine months ended September 30.

 

Condensed Balance Sheet    
   2016 
Current assets  $8,776 
Oil and gas properties, net   19,429 
Other   997 
Totals assets  $29,202 
      
Total liabilities  $3,847 
Partners’ capital   25,355 
Total liabilities and equity  $29,202 

 

Condensed Statement of Operations    
   2016   2015 
Revenue  $7,900   $10,887 
Expenses   (8,005)   (11,156)
Net loss  $(105)  $(269)

 

 7 

 

 

(4)Equity Investment in Sunrise Energy

 

We own a 50% interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment with plans to develop and operate such reserves. Sunrise Energy also plans to develop and explore for oil, gas and coal-bed methane gas reserves on or near our underground coal reserves. They use the successful efforts method of accounting. We account for our interest using the equity method of accounting.

 

Below (in thousands) to the 100% is a condensed balance sheet at September 30, and a condensed statement of operations for the nine months ended September 30.

 

Condensed Balance Sheet    
   2016 
Current assets  $2,080 
Oil and gas properties, net   7,646 
Totals assets  $9,726 
      
Total liabilities  $773 
Members’ capital   8,953 
Total liabilities and equity  $9,726 

 

Condensed Statement of Operations    
   2016   2015 
Revenue  $1,293   $1,773 
Expenses   (1,822)   (1,725)
Net income (loss)  $(529)  $48 

 

(5)Other Long-Term Assets (in thousands)

 

   September 30,   December 31, 
   2016   2015 
Long-term assets:          
Advanced coal royalties  $10,617   $6,563 
Marketable equity securities available for sale, at fair value (restricted)*   1,985    1,763 
Purchased coal contract – See Note 9   6,407      
Other   2,602    3,090 
Total long-term assets  $21,611   $11,416 

 

 

*Held by Sunrise Indemnity, Inc., our wholly-owned captive insurance company.

 

(6)Self-Insurance

 

We self-insure our underground mining equipment. Such equipment is allocated among 10 mining units spread out over 20 miles. The historical cost of such equipment is about $255 million.

 

 8 

 

 

(7)Net Income per Share

 

We compute net income per share using the two-class method, which is an allocation formula that determines net income per share for common stock and participating securities, which for us are our outstanding RSUs.

 

The following table sets forth the computation of net income per share for the nine and three months ended September 30 (in thousands):

 

   Nine Months Ended   Three Months Ended 
   2016   2015   2016   2015 
Numerator:                    
Net income  $16,337   $19,588   $4,322   $5,144 
Less earnings allocated to RSUs   (429)   (595)   (115)   (155)
Net income allocated to common shareholders  $15,908   $18,993   $4,207   $4,989 

 

(8)Asset Realization

 

As disclosed last year, we significantly curtailed the production at the Carlisle Mine and had a reduction in work force. Consequently, we conducted a review of those assets for recoverability and determined that no impairment charge was necessary. In conducting such review, we assumed: (i) that natural gas prices will start to increase in late 2017; (ii) Carlisle production will increase in 2018-2019, and (iii) sometime in 2020, the Carlisle Mine will return to its normal production capacity of 3.3 million tons per year. The Carlisle assets had an aggregate carrying value of $134 million at September 30, 2016. If, in later quarters, we reduce our estimate of the future net cash flows attributable to the Carlisle Mine, it may result in future impairment of such assets and such charges could be significant.

 

(9)Freelandville Purchase

 

On March 22, 2016, we completed the purchase of the Freelandville coal reserves and coal sales agreement for $18 million. These reserves totaled 14.2 million tons of fee and leased coal and will be mined from our Oaktown 1 portal. This purchase also allows Sunrise access to another 1.6 million tons of our own leased reserves that were previously inaccessible. The purchased coal sales agreement totaled 1,435,000 tons (can be adjusted +/- 6,700 tons monthly). The purchase price allocation for the acquisition was as follows (in thousands):

 

Purchased coal contract  $6,407 
Advanced coal royalties   1,690 
Mineral rights and leases   9,903 
Total  $18,000 

 

(10)Income Taxes

 

Our effective tax rate (ETR) for the first nine months of 2016 was 15% compared to 25% for the first nine months of 2015. Assuming no changes in our expected results of operations, we expect our ETR for the last three months of 2016 and for the year 2017 to be about the same as the first nine months of 2016. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis, which is a permanent difference.

 

 9 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

Hallador Energy Company

Denver, Colorado

 

We have reviewed the accompanying consolidated condensed balance sheet of Hallador Energy Company and subsidiaries (the “Company”) as of September 30, 2016, the related consolidated condensed statements of comprehensive income for the nine and three month periods ended September 30, 2016 and 2015, and cash flows for the nine-month periods ended September 30, 2016 and 2015, respectively, and the statement of stockholders’ equity for the nine-month period ended September 30, 2016.  These financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2015, and the related consolidated statements of comprehensive income, cash flows, and stockholders’ equity for the year then ended (not presented herein); and in our report dated March 11, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2015, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

 

/s/ EKS&H LLLP

 

November 4, 2016

 

Denver, Colorado

 

 10 

 

 

ITEM 2. MD&A

 

The following discussion updates the MD&A section of our 2015 Form 10-K and should be read in conjunction therewith.

 

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

 

Our Coal Contracts

 

On March 22, 2016, we completed the purchase of certain underground coal reserves and a coal sales agreement associated with Triad Mining, LLC’s (Triad) Freelandville mining complex for $18 million.  Triad is a wholly-owned subsidiary of Blackhawk Mining, LLC based in Lexington, Kentucky. The Freelandville complex is located in Sullivan and Knox Counties, Indiana.  As part of the transaction, we purchased 14.2 million tons of proven coal reserves and associated advanced royalties in addition to rights under a coal sales agreement that extends through 2017. See Note 9 to our financial statements.

 

The table below (in thousands, except prices) shows our contracted tons. Some of our contracts contain language that allow our customers to increase or decrease tonnages throughout the year. The table represents the minimum and maximum tonnages we could deliver under existing contracts. In some cases, our customers are required to purchase their additional tonnage needs from us. We fully anticipate making additional sales.

 

           Estimated 
   Minimum Tons To Be Sold   Maximum Tons to Be Sold   Prices @ 
   Priced   (Unpriced)   Total   Priced   (Unpriced)   Total   Minimum 
Year  Tons   Tons   Tons   Tons   Tons   Tons   Tons 
2016
(last three months)
   1,732         1,732    1,739         1,739   $42.80 
2017    4,914         4,914    5,520         5,520    43.67 
2018    1,949    810    2,759    2,791    1,210    4,001    44.76 
2019    1,689    1,620    3,309    2,131    2,420    4,551    45.21 
2020    1,000    2,009    3,009    1,000    3,001    4,001    48.58 
2021        2,009    2,009         3,001    3,001      
2022        2,009    2,009         3,001    3,001      
2023        1,620    1,620         2,420    2,420      
2024        810    810         1,210    1,210      
    11,284    10,887    22,171    13,181    16,263    29,444      

 

Unpriced tons are firm commitments, meaning we are required to ship and our customer is required to receive said tons through the duration of the contract. The contracts provide mechanisms for establishing a market-based price. As set forth in the table above, we have 11-16 million tons committed but unpriced through 2024.

 

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.

 

 11 

 

 

Asset Realization

 

See Note 8 to our financial statements.

 

Liquidity and Capital Resources

 

As set forth in our Statement of Cash Flows, cash provided by operations was $44 million that includes a non-recurring $1.8 million cash distribution from Savoy. This amount was adequate to fund our capital expenditures for coal properties, our debt service requirements and our dividend. Our capex budget for the next three months is $5 million, of which $3 million is for maintenance capex. Cash from operations for the next twelve months should fund our capital expenditures, debt service and dividend.

 

Other than our surety bonds for reclamation, we have no material off-balance sheet arrangements. Our surety bonds total $24 million in the event we are not able to perform.

 

Capital Expenditures (capex)

 

For the first nine months, capex for 2016 was $11.8 million allocated as follows (in thousands):

 

Oaktown – investment  $5,664 
Oaktown – maintenance capex   4,950 
Other projects   1,196 
Capex per the Cash Flow Statement  $11,810 

 

Results of Operations

 

Oaktown’s cash costs for Q3 2016 were $29.57/ton. We see Oaktown’s costs ranging from $28 to $30 for the remainder of 2016. Going forward we expect our SG&A to be $11 million annually and costs associated with Prosperity and Carlisle to be $10 million annually.

 

Quarterly coal sales and cost data (in thousands, except per ton and percentage data):

 

   4th 2015   1st 2016   2nd 2016   3rd 2016   T4Qs 
Tons sold   1,432    1,629    1,464    1,485    6,010 
Coal sales  $65,762   $75,795   $66,274   $65,360   $273,191 
Average price/ton   45.92    46.53    45.27    44.01    45.46 
Wash plant recovery in %   64    65    63    68      
Operating costs   46,470    49,777    45,397    46,940    188,584 
Average cost/ton   32.45    30.56    31.01    31.61    31.38 
Margin   19,292    26,018    20,877    18,420    84,607 
Margin/ton   13.47    15.97    14.26    12.40    14.08 
Capex   4,058    6,053    1,822    3,935    15,868 
Maintenance capex   1,047    2,984    904    1,709    6,644 
Maintenance capex/ton   .73    1.83    .62    1.15    1.11 

 

 12 

 

 

   4th 2014   1st 2015   2nd 2015   3rd 2015   T4Qs 
Tons sold   2,275    2,146    2,078    1,791    8,290 
Coal sales  $99,992   $97,073   $95,323   $81,332   $373,720 
Average price/ton   43.95    45.23    45.87    45.41    45.08 
Wash plant recovery in %   67    67    69    69      
Operating costs   68,002    66,152    68,280    56,995    259,429 
Average cost/ton   29.89    30.83    32.86    31.82    31.29 
Margin   31,990    30,921    27,043    24,337    114,291 
Margin/ton   14.06    14.40    13.01    13.59    13.78 
Capex   11,509    8,250    14,789    4,070    38,618 
Maintenance capex   11,162    6,685    13,323    1,816    32,986 
Maintenance capex/ton   4.91    3.12    6.41    1.01    3.98 

 

First Nine Months 2016 v. 2015

 

For 2016, we sold 4,578,000 tons at an average price of $45.31/ton. For 2015, we sold 6,015,000 tons at an average price of $45.51/ton.

 

Operating costs and expenses averaged $31.04/ton in 2016 compared to $31.82 in 2015.  Our Indiana employees totaled 737 at September 30, 2016 compared to 736 at September 30, 2015.

 

SG&A costs were higher in 2015 due to amortization of RSUs and accruals of bonuses related to our Vectren Fuels acquisition in 2014.  SG&A as a percentage of coal revenue increased, however, from 3.4% to 3.9% for the first nine months of 2016 due to lower sales volumes in 2016.

 

At the beginning of Q1 2016, we changed from the straight-line method to the units-of-production method in computing the depreciation for certain underground mining equipment. This change in estimate reduced our DD&A expense for the nine months and three months ended September 30, 2016 by $6.6 million and $3.1 million, respectively. As disclosed last year, we significantly curtailed the production at the Carlisle Mine. This change better reflects the usage of our underground mining equipment especially since Carlisle had limited production during the first nine months of 2016.

 

Third Quarter 2016 v. 2015

 

For the third quarter of 2016, we sold 1,485,000 tons at an average price of $44.01/ton. For the third quarter of 2015, we sold 1,791,000 tons at an average price of $45.41/ton.

 

Operating costs and expenses averaged $31.61/ton in 2016 compared to $31.82 in 2015.  

 

As mentioned above, SG&A costs were higher in 2015 due to amortization of RSUs and accruals of bonuses related to our Vectren Fuels acquisition in 2014.  SG&A as a percentage of coal revenue increased, however, from 3.7% to 4.0% for the 3 months ending September 30, 2016 due to lower sales volumes in 2016.

 

Earnings per Share

 

   4th 2015   1st 2016   2nd 2016   3rd 2016 
Basic and diluted  $.02   $.21   $.19   $.14 

 

   4th 2014   1st 2015   2nd 2015   3rd 2015 
Basic and diluted  $.31   $.25   $.23   $.17 

 

 13 

 

 

Income Taxes

 

Our effective tax rate (ETR) for the first nine months of 2016 was 15% compared to 25% for first nine months of 2015. Assuming no changes in our expected results of operations, we expect our ETR for the last three months of 2016 and for the year 2017 to be about the same as first nine months of 2016. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis, which is a permanent difference.

 

MSHA Reimbursements

 

Some of our legacy coal contracts allow us to pass on to our customers certain costs incurred resulting from changes in costs to comply with mandates issued by MSHA or other government agencies.  We do not recognize any revenue until our customers have notified us that they accept the charges.

 

We submitted our incurred costs for 2011 in October 2012 for $3.7 million. $2.1 million in reimbursements were recorded in the first quarter 2013 and $1.6 million were recorded in the fourth quarter of 2013. We submitted our incurred costs for 2012 in June 2015 and received $1.75 million from one of our customers in June 2016. We expect to receive a similar amount from another customer during Q4 2016. As stated above we do not record such reimbursements as revenue until they have been agreed to by our customers.

 

Such reimbursable costs for 2013, 2014 and 2015 are not expected to be material.

 

Critical Accounting Estimates

 

We believe that the estimates of our coal reserves, our deferred tax accounts, and the estimates used in our impairment analysis are our only critical accounting estimates. The reserve estimates are used in the DD&A calculation and in our internal cash flow projections.  If these estimates turn out to be materially under or over-stated, our DD&A expense and impairment test may be affected.

 

We account for business combinations using the purchase method of accounting. The purchase method requires us to determine the fair value of all acquired assets, including identifiable intangible assets and all assumed liabilities. The total cost of acquisitions is allocated to the underlying identifiable net assets, based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and the utilization of independent valuation experts, and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates and asset lives, among other items. The fair value of our interest rate swaps is determined using a discounted future cash flow model based on the key assumption of anticipated future interest rates.

 

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.  During 2012, the IRS completed an examination of our 2009 and 2010 federal tax returns and there were no significant adjustments.  During 2012, the State of Indiana completed their examination of our 2008-2010 returns and no adjustments were proposed.  We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our consolidated financial position. 

 

New Accounting Pronouncements

 

None of the recent FASB pronouncements will have any material effect.

 

Yorktown Distributions

 

As previously disclosed, Yorktown Energy Partners and its affiliated partnerships (Yorktown) have made 13 distributions to their numerous partners totaling 8.75 million shares since May 2011.  In the past, these distributions were made soon after we filed our Form 10-Qs and Form 10-Ks. Currently, they own 6.45 million shares of our stock representing about 22.07% of total shares outstanding. Yorktown’s last distribution was in August 2016.

 

We have been informed by Yorktown that they have not made any determination as to the disposition of their remaining Hallador stock. While we do not know Yorktown’s ultimate strategy to realize the value of their Hallador investment for their partners, we expect that over time such distributions will increase our liquidity and float.

 

If we are advised of another Yorktown distribution, we will timely report such on a Form 8-K.

 

 14 

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

No material change from the disclosure in our 2015 Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls

 

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

 

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

 

There have been no changes to our internal control over financial reporting during the quarter ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 4. MINE SAFETY DISCLOSURE

 

As a testament to our commitment to mine safety, in October 2016, our mine rescue team competed in and won the 2016 Nationwide Mine Rescue Skills Championship contest in Madisonville, Kentucky.  Thirteen teams from five different states competed in the competition. The Nationwide Skills Championship is divided into seven skills competitions and a written test.  Refer to www.halladorenergy.com for a link to more information regarding this prestigious award.

 

See Exhibit 95 to this Form 10-Q for a listing of our mine safety violations.

 

ITEM 6. EXHIBITS

 

15   Letter Regarding Unaudited Interim Financial Information
31   SOX 302 Certifications
32   SOX 906 Certification
95   Mine Safety Report
101   Interactive Files

 

 15 

 

 

SIGNATURE

 

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

  

    HALLADOR ENERGY COMPANY
     
Date: November 4, 2016   /s/ Lawrence D. Martin
    Lawrence D. Martin, CFO and CAO

 

 16 

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Section 2: EX-15 (EXHIBIT 15)

 

Exhibit 15     Letter Regarding Unaudited Interim Financial Information

 

Hallador Energy Company

 

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Hallador Energy Company for the periods ended September 30, 2016, and 2015, as indicated in our report dated November 4, 2016; because we did not perform an audit, we expressed no opinion on that information.

 

We are aware that our report referred to above, which is included in your Form 10-Q for the quarter ended September 30, 2016, is incorporated by reference in Registration Statement Nos. 333-163431 and 333-171778 of Hallador Energy Company on Form S-8.

 

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

 

/s/ EKS&H LLLP

 

November 4, 2016

 

Denver, Colorado

 

 

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Section 3: EX-31.1 (EXHIBIT 31.1)

 

Exhibit 31.1

 

CERTIFICATION

 

I, Brent K. Bilsland, certify that:

 

1.   I have reviewed this quarterly report on Form 10-Q of Hallador Energy Company;

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

 

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

November 4, 2016   /s/ Brent K. Bilsland  
    Brent K. Bilsland, President and CEO  

 

 

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Section 4: EX-31.2 (EXHIBIT 31.2)

 

Exhibit 31.2

 

CERTIFICATION

 

I, Lawrence D. Martin, certify that:

 

1.   I have reviewed this quarterly report on Form 10-Q of Hallador Energy Company;

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

 

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

November 4, 2016   /s/ Lawrence D. Martin  
    Lawrence D. Martin, CFO  

 

 

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Section 5: EX-32 (EXHIBIT 32)

 

Exhibit 32

 

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with this Quarterly Report (the "Report"), of Hallador Energy Company (the "Company"), on Form 10-Q for the period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof the undersigned, in the capacities and date indicated below, each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

November 4, 2016      
       
  By: 

/s/ Brent K. Bilsland

 
    Brent K. Bilsland, President and CEO  
       
  By: /s/ Lawrence D. Martin  
    Lawrence D. Martin, CFO  

 

 

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Section 6: EX-95 (EXHIBIT 95)

 

Exhibit 95 Mine Safety Disclosure

 

Our principles are safety, honesty, and compliance. We firmly believe that these values compose a dedicated workforce and with that, come high production. The core to this is our strong training programs that include accident prevention, workplace inspection and examination, emergency response, and compliance. We work with the Federal and State regulatory agencies to help eliminate safety and health hazards from our workplace and increase safety and compliance awareness throughout the mining industry.  Sunrise has not had a fatality since its establishment in 2005.

 

Sunrise is regulated by MSHA under the Federal Mine Safety and Health Act of 1977 (“Mine Act”). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. We present information below regarding certain violations, which MSHA has issued with respect to our mines. While assessing this information please consider that the number and cost of violations will vary depending on the MSHA inspector and can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed. We are currently contesting 17 MSHA citations.

 

Sunrise has not been issued written notice from MSHA of a pattern of, or the potential to have a pattern of, violations of mandatory health or safety standards that are of such a nature as could significantly and substantially cause and effect health or safety standards under section 104(e) of the Mine Act.

 

The table that follows outlines citations and orders issued to us by MSHA during the first nine months of 2016. The citations and orders outlined below may differ from MSHA`s data retrieval system due to timing, special assessed citations, and other factors.

 

Definitions:

 

Section 104(a) Significant and Substantial Citations “S&S”: An alleged violation of a mining safety or health standard or regulation where there exists a reasonable likelihood that the hazard outlined will result in an injury or illness of a serious nature.

 

Section 104(b) Orders:  Failure to abate a 104(a) citation within the period of time prescribed by MSHA. The result of which is an order of immediate withdraw of non-essential persons from the affected area until MSHA determines the violation has been corrected.

 

Section 104(d) Citations and Orders: An alleged unwarrantable failure to comply with mandatory health and safety standards.

 

Section 107(a) Orders: An order of withdraw for situations where MSHA has determined that an imminent danger exists.

 

Section 110(b) (2) Violations: An alleged flagrant violation issued by MSHA under section 110(b) (2) of the Mine Act.

 

Pattern or Potential Pattern of Violations: A pattern of violations of mandatory health or safety standards that are of such a nature as could have significantly and substantially contributed to the cause and effect of coal mine health or safety hazards under section 104(e) of the Mine Act or a potential to have such a pattern.

 

Contest of Citations, Orders, or Proposed Penalties: A contest proceeding may be filed with the Commission by the operator or miners/miner’s representative to challenge the issuance or penalty of a citation or order issued by MSHA.

 

 

 

 

Carlisle Mine

 

    Section     Section     Section     Section     Section     Proposed  
    104(a)     104(b)     104(d)     107(a)     110(b)(2)     MSHA  
    Citations     Citations     Citations/Orders     Orders     Violations     Assessments  
                                  (In thousands)  
January     3       0       0       0       0     $ 5.00  
February     1       0       1       0       0       5.10  
March     2       0       0       0       0       3.55  
April     0       0       0       0       0       0.50  
May     1       0       0       0       0       1.10  
June     0       0       0       0       0       0.15  
July     0       0       0       0       0       0.00  
August     0       0       0       0       0       0.20  
September     1       0       0       0       0       0.95  
Totals     8       0       1       0       0     $ 16.55  

 

Ace in the Hole Mine

  

    Section     Section     Section     Section     Section     Proposed  
    104(a)     104(b)     104(d)     107(a)     110(b)(2)     MSHA  
    Citations     Citations     Citations/Orders     Orders     Violations     Assessments  
                                  (In thousands)  
January     0       0       0       0       0     $ 0.00  
February     0       0       0       0       0       0.00  
March     0       0       0       0       0       0.00  
April     0       0       0       0       0       0.00  
May     0       0       0       0       0       0.00  
June     0       0       0       0       0       0.00  
July     0       0       0       0       0       0.00  
August     0       0       0       0       0       0.20  
September     0       0       0       0       0       0.00  
Totals     0       0       0       0       0     $ 0.20  

 

Carlisle Preparation Plant

   

    Section     Section     Section     Section     Section     Proposed  
    104(a)     104(b)     104(d)     107(a)     110(b)(2)     MSHA  
    Citations     Citations     Citations/Orders     Orders     Violations     Assessments  
                                  (In thousands)  
January     0       0       0       0       0     $ 0.00  
February     1       0       0       0       0       0.65  
March     0       0       0       0       0       0.00  
April     0       0       0       0       0       0.00  
May     0       0       0       0       0       0.00  
June     0       0       0       0       0       0.00  
July     0       0       0       0       0       0.00  
August     0       0       0       0       0       0.00  
September     0       0       0       0       0       0.00  
Totals     1       0       0       0       0     $ 0.65  

 

 

 

 

Oaktown Fuels No. 1

 

    Section     Section     Section     Section     Section     Proposed  
    104(a)     104(b)     104(d)     107(a)     110(b)(2)     MSHA  
    Citations     Citations     Citations/Orders     Orders     Violations     Assessments  
                                  (In thousands)  
January     3       0       0       0       0     $ 3.70  
February     6       0       0       0       0       10.30  
March     4       0       0       0       0       7.45  
April     1       0       0       0       0       2.30  
May     1       0       0       0       0       2.55  
June     2       0       0       0       0       3.50  
July     0       0       0       0       0       1.85  
August     4       0       0       0       0       7.40  
September     2       0       0       0       0       2.40  
Totals     23       0       0       0       0     $ 41.45  

 

Oaktown Fuels No. 2

 

    Section     Section     Section     Section     Section     Proposed  
    104(a)     104(b)     104(d)     107(a)     110(b)(2)     MSHA  
    Citations     Citations     Citations/Orders     Orders     Violations     Assessments  
                                  (In thousands)  
January     2       0       0       0       0     $ 3.40  
February     8       0       0       0       0       10.70  
March     2       0       0       0       0       2.55  
April     2       0       0       0       0       5.30  
May     1       0       0       0       0       2.95  
June     0       0       0       0       0       0.40  
July     0       0       0       0       0       1.50  
August     3       0       0       0       0       7.80  
September     2       0       0       0       0       2.00  
Totals     20       0       0       0       0     $ 36.60  

 

Oaktown Fuels Preparation Plant

 

    Section     Section     Section     Section     Section     Proposed  
    104(a)     104(b)     104(d)     107(a)     110(b)(2)     MSHA  
    Citations     Citations     Citations/Orders     Orders     Violations     Assessments  
                                  (In thousands)  
January     1       0       0       0       0     $ 0.10  
February     0       0       0       0       0       0.00  
March     0       0       0       0       0       0.00  
April     0       0       0       0       0       0.00  
May     0       0       0       0       0       0.00  
June     0       0       0       0       0       0.10  
July     3       0       0       0       0       0.75  
August     0       0       0       0       0       0.00  
September     0       0       0       0       0       0.00  
Totals     4       0       0       0       0     $ 0.95  

 

Prosperity Mine: None

 

 

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