Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended: March 31, 2017

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”

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 Regulations 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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨		Accelerated filer þ
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨
		Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of May 8, 2017, we had 29,498,506 shares outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Comprehensive Income	4

	Condensed Consolidated Statements of Cash Flows	5

	Consolidated Statement of Stockholders’ Equity	6

	Notes to Consolidated Financial Statements	7

	Report of Independent Registered Public Accounting Firm	11

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	15

ITEM 4.	CONTROLS AND PROCEDURES	15

PART II - OTHER INFORMATION		15

ITEM 4.	MINE SAFETY DISCLOSURES	15

ITEM 6.	EXHIBITS	15

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Hallador Energy Company

Consolidated Balance Sheets

(in thousands, except per share data)

(Unaudited)

	March 31,			December 31,
	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	13,762		$	9,788
Restricted cash (Note 5)		3,084			2,817
Certificates of deposit		5,380			7,315
Marketable securities		1,779			1,763
Accounts receivable		16,008			22,307
Coal inventory		19,890			10,100
Parts and supply inventory		10,295			10,091
Purchased coal contracts		6,845			8,922
Prepaid expenses		12,980			9,647
Total current assets		90,023			82,750
Coal properties, at cost:
Land and mineral rights		126,313			126,303
Buildings and equipment		339,396			339,999
Mine development		128,814			126,037
Total coal properties, at cost		594,523			592,339
Less - accumulated DD&A		(178,123	)		(169,579	)
Total coal properties, net		416,400			422,760
Investment in Savoy (Note 3)		7,789			7,577
Investment in Sunrise Energy (Note 3)		4,141			4,122
Other assets (Note 4)		14,298			14,114
Total assets	$	532,651		$	531,323
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank debt, net	$	30,984		$	28,796
Accounts payable and accrued liabilities		19,201			19,773
Total current liabilities		50,185			48,569
Long-term liabilities:
Bank debt, net		196,651			204,944
Deferred income taxes		45,806			45,174
Asset retirement obligations (ARO)		13,429			13,260
Other		2,655			2,486
Total long-term liabilities		258,541			265,864
Total liabilities		308,726			314,433
Stockholders' equity:
Preferred stock, $.10 par value, 10,000 shares authorized; none issued		-			-
Common stock, $.01 par value, 100,000 shares authorized; 29,413 and 29,413 shares outstanding, respectively		294			294
Additional paid-in capital		94,597			93,816
Retained earnings		128,260			122,052
Accumulated other comprehensive income		774			728
Total stockholders’ equity		223,925			216,890
Total liabilities and stockholders’ equity	$	532,651		$	531,323

See accompanying notes.

Hallador Energy Company

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31,

(in thousands, except per share data)

(Unaudited)

	2017		2016
Revenue:
Coal sales	$	62,555	$	75,795
Equity income (loss) - Savoy		212		(325	)
Equity income (loss) - Sunrise Energy		19		(75	)
Other income		767		490
Total revenue		63,553		75,885
Costs and expenses:
Operating costs and expenses		39,692		49,777
DD&A		9,703		9,182
ARO accretion		207		249
Coal exploration costs		139		419
SG&A		2,658		2,762
Interest ⁽¹⁾		3,091		5,596
Total costs and expenses		55,490		67,985

Income before income taxes		8,063		7,900

Less income taxes:
Current		17		768
Deferred		632		970
Total income taxes		649		1,738

Net income	$	7,414	$	6,162

Net income per share (Note 6):
Basic and diluted	$	0.25	$	0.21

Weighted average shares outstanding:
Basic and diluted		29,413		29,251

⁽¹⁾

Interest expense for 2017 and 2016 includes $(420) and $1,499, respectively, for the net change in the estimated fair value of our interest rate swaps.

⁽²⁾

There is no material difference between net income and comprehensive income.

See accompanying notes.

Hallador Energy Company

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

(in thousands)

(Unaudited)

	2017			2016
Operating activities:
Cash provided by operating activities	$	12,576		$	19,113

Investing activities:
Capital expenditures		(3,093	)		(6,053	)
Proceeds from sale of equipment		325			-
Proceeds from maturities of certificates of deposit		1,935			-
Purchase of Freelandville assets		-			(18,000	)
Other		-			(589	)
Cash used in investing activities		(833	)		(24,642	)

Financing activities:
Payments on bank debt		(6,563	)		(8,366	)
Bank borrowings		-			15,000
Debt issuance costs		-			(2,090	)
Dividends		(1,206	)		(1,194	)
Cash provided by (used in) financing activities		(7,769	)		3,350

Increase (decrease) in cash and cash equivalents		3,974			(2,179	)
Cash and cash equivalents, beginning of period		9,788			15,930
Cash and cash equivalents, end of period	$	13,762		$	13,751

See accompanying notes.

Hallador Energy Company

Consolidated Statement of Stockholders’ Equity

(in thousands)

(Unaudited)

	Shares		Common Stock		Additional Paid-in Capital		Retained Earnings			AOCI*		Total
Balance, January 1, 2017		29,413	$	294	$	93,816	$	122,052		$	728	$	216,890

Stock-based compensation		-		-		781		-			-		781

Dividends		-		-		-		(1,206	)		-		(1,206	)

Net income		-		-		-		7,414			-		7,414

Other		-		-		-		-			46		46

Balance, March 31, 2017		29,413	$	294	$	94,597	$	128,260		$	774	$	223,925

*Accumulated Other Comprehensive Income

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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 three months ended March 31, 2017 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2017. To maintain consistency and comparability, certain 2016 amounts have been reclassified to conform to the 2017 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 2016 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.

New Accounting Standards Issued and Adopted

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with the lower of cost or net realizable value test. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be applied prospectively and is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The adoption of ASU 2015-11 did not have a material impact on our consolidated financial statements.

New Accounting Standards Issued and Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company’s primary source of revenue is from the sale of coal through both short-term and long-term contracts with utility companies whereby revenue is currently recognized when risk of loss has passed to the customer. Upon adoption of this new standard, the Company believes that the timing of revenue recognition related to our coal sales will remain consistent with our current practice. The Company is currently evaluating other revenue streams to determine the potential impact related to the adoption of the standard, as well as potential disclosures required by the standard. Because we do not anticipate a change in our pattern of revenue recognition, we anticipate that neither method will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new guidance will classify leases as either finance or operating (similar to current standard’s “capital” or “operating” classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently in the process of accumulating all contractual lease arrangements in order to determine the impact on our financial statements and do not believe we have significant amounts of off-balance sheet leases; accordingly, we do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated financial statements.

(2)

Bank Debt

On March 18, 2016, we executed an amendment to our credit agreement with PNC, as administrative agent for our lenders, for the primary purpose of increasing liquidity and maintaining 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 March 31, 2017, was $232 million (term-$95 million, revolver-$137 million).

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 (Sunrise total funded debt/ trailing 12 months adjusted EBITDA) to those listed below:

Fiscal Periods Ended/Ending		Ratio
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

The amended credit facility also requires a debt service coverage ratio minimum of 1.25X through the maturity of the credit facility. The amendment defines the debt service coverage as Sunrise trailing 12 months adjusted EBITDA/annual debt service. As of March 31, 2017, we had additional borrowing capacity of $63 million and total liquidity of $84 million.

At March 31, 2017, our maximum leverage ratio was 2.83, and our debt service coverage ratio was 2.15. 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 leverage ratio. We entered into swap agreements to fix the LIBOR component of the interest rate to achieve an effective fixed rate of ~5% on the original term loan balance and on $100 million of the revolver. The revolver swap steps down 10% each quarter commencing March 31, 2016.

At March 31, 2017, we were paying LIBOR at .79% plus 3.50% for a total interest rate of 4.29%.

Bank debt less debt issuance costs are presented below (in thousands):

	March 31,			December 31,
	2017			2016
Current debt	$	32,813		$	30,625
Less debt issuance costs		(1,829	)		(1,829	)
Net current portion	$	30,984		$	28,796

Long-term debt	$	199,242		$	207,992
Less debt issuance costs		(2,591	)		(3,048	)
Net long-term portion	$	196,651		$	204,944

(3)

Equity Method Investments

We own a 30.6% interest in Savoy Energy, L.P., a private company engaged in the oil and gas business primarily in the State of Michigan.

We also 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.

(4)

Other Long-Term Assets (in thousands)

	March 31,		December 31,
	2017		2016
Long-term assets:
Advanced coal royalties	$	9,462	$	9,296
Marketable equity securities available for sale, at fair value (restricted)*		2,093		2,036
Other		2,743		2,782
Total long-term assets	$	14,298	$	14,114

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

(5)

Self-Insurance

We self-insure our underground mining equipment. Such equipment is allocated among ten mining units spread out over 18 miles. The historical cost of such equipment is approximately $247 million.

Restricted cash of $3.1 million represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments.

(6)

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 three months ended March 31 (in thousands):

	2017			2016
Numerator:
Net income	$	7,414		$	6,162
Less earnings allocated to RSUs		(179	)		(125	)
Net income allocated to common shareholders	$	7,235		$	6,037

(7)

Asset Impairment Review

In December 2016, the deterioration of the North End of the Carlisle Mine (the North End), coupled with lower coal prices led us to determine that the North End could no longer be mined safely and profitably. The sealing of the North End was completed in March 2017.

With the Carlisle Mine remaining in hot idle status, we conducted a review of the Carlisle Mine assets as of March 31, 2017, based on estimated future net cash flows, and determined that no impairment was necessary.

The Carlisle Mine assets had an aggregate carrying value of $115 million at March 31, 2017. If in future periods, 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. None of our other assets are considered impaired.

(8)

Income Taxes

Our effective tax rate (ETR) for 2017 was estimated at 8% and 22% as of March 31, 2017 and 2016, respectively. Assuming no changes in our expected results of operations, we expect our ETR for the remainder of 2017 to be about the same as the first quarter of 2017. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis, which is a permanent difference.

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 balance sheet of Hallador Energy Company and subsidiaries (the “Company”) as of March 31, 2017, the related consolidated statements of comprehensive income for the three-month periods ended March 31, 2017 and 2016, the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2017 and 2016, and the consolidated statement of stockholders’ equity for the three-month period ended March 31, 2017. 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 referred to above 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, 2016, 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 10, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ EKS&H LLLP

May 8, 2017

Denver, Colorado

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion updates the MD&A section of our 2016 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

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
2017 (last nine months)		4,540		-		4,540		4,910		-		4,910	$	41.22
2018		2,094		810		2,904		2,991		1,210		4,201		44.26
2019		1,689		1,620		3,309		2,131		2,420		4,551		44.99
2020		1,000		2,009		3,009		1,000		3,001		4,001		48.36
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
		9,323		10,887		20,210		11,032		16,263		27,295

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 currently have a minimum of 6.1 million tons contracted for 2017, of which 1.6 million were sold during Q1; we project total contracted tons for 2017 to range from 6.3 to 6.6 million.

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.

Asset Impairment Review

See Note 7 to our financial statements.

Liquidity and Capital Resources

As set forth in our Statement of Cash Flows, cash provided by operations was $13 million. 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 nine months is $27 million, of which $16 million is for maintenance capex. Cash provided by operations for the next nine months should fund our maintenance capital expenditures, debt service, and dividend.

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

Capital Expenditures (capex)

For the first three months, capex for 2017 was $3.1 million allocated as follows (in millions):

Oaktown – investment	$	2.2
Oaktown – maintenance capex		.6
Other projects		.3
Capex per the Cash Flow Statement	$	3.1

Results of Operations

Oaktown’s cash costs for Q1 2017 were $23.22/ton. We see Oaktown’s costs ranging from $26 to $28 for the remainder of 2017. We expect SG&A for the remainder of 2017 to be $8 million and cash costs associated with Prosperity and Carlisle for the remainder of 2017 to be $5.5 million.

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

	2 ^nd 2016			3 ^rd 2016			4 ^th 2016			1 ^st 2017			T4Qs
Tons sold		1,464			1,485			1,739			1,555			6,243
Coal sales	$	66,274		$	65,360		$	71,495		$	62,555		$	265,684
Average price/ton	$	45.27		$	44.01		$	41.11		$	40.23		$	42.56
Wash plant recovery in %		63	%		68	%		67	%		67	%
Operating costs	$	45,397		$	46,940		$	50,663		$	39,692		$	182,692
Average cost/ton	$	31.01		$	31.61		$	29.13		$	25.53		$	29.26
Margin	$	20,877		$	18,420		$	20,832		$	22,863		$	82,992
Margin/ton	$	14.26		$	12.40		$	11.98		$	14.70		$	13.29
Capex	$	1,822		$	3,935		$	8,022		$	3,093		$	16,872
Maintenance capex	$	904		$	1,709		$	5,301		$	836		$	8,750
Maintenance capex/ton	$	.62		$	1.15		$	3.05		$	.54		$	1.40

	2 ^nd 2015			3 ^rd 2015			4 ^th 2015			1 ^st 2016			T4Qs
Tons sold		2,078			1,791			1,432			1,629			6,930
Coal sales	$	95,323		$	81,332		$	65,762		$	75,795		$	318,212
Average price/ton	$	45.87		$	45.41		$	45.92		$	46.53		$	45.92
Wash plant recovery in %		69	%		69	%		64	%		65	%
Operating costs	$	68,280		$	56,995		$	46,470		$	49,777		$	221,522
Average cost/ton	$	32.86		$	31.82		$	32.45		$	30.56		$	31.97
Margin	$	27,043		$	24,337		$	19,292		$	26,018		$	96,690
Margin/ton	$	13.01		$	13.59		$	13.47		$	15.97		$	13.95
Capex	$	14,789		$	4,070		$	4,058		$	6,053		$	28,970
Maintenance capex	$	13,323		$	1,816		$	1,047		$	2,984		$	19,170
Maintenance capex/ton	$	6.41		$	1.01		$	0.73		$	1.83		$	2.77

2017 v. 2016

For 2017, we sold 1,555,000 tons at an average price of $40.23/ton. For 2016, we sold 1,629,000 tons at an average price of $46.53/ton.

Operating costs and expenses averaged $25.53/ton ($23.22/ton at our operating Oaktown mines) in 2017 compared to $30.56 ($27.87 at Oaktown) in 2016. This ~$5 reduction in cost was due to two primary factors. First, we made a conscious effort to produce more tons in the first six weeks of the quarter, in anticipation of stronger market demand. Secondly, we added new haulage equipment to some of the units at the Oaktown mines; those units are seeing production increases of ~30%. Both of these factors combined, led to a 25% increase in production over our 2016 average production. Late in Q3, we anticipate the arrival of additional haulage equipment and the implementation of a new elevator at Oaktown 1. Both investments will contribute to maintaining our low-cost structure.

Our Sunrise Coal employees totaled 733 at March 31, 2017 compared to 721 at March 31, 2016.

Earnings (loss) per Share

		2nd 2016				3rd 2016				4th 2016				1st 2017
Basic and diluted		$	.19			$	.14			$	(.13	)		$	.25

		2nd 2015				3rd 2015				4th 2015				1st 2016
Basic and diluted		$	.23			$	.17			$	.02			$	.21

Income Taxes

Our effective tax rate (ETR) was estimated at 8% and 22% as of March 31, 2017 and 2016, respectively. Assuming no changes in our expected results of operations, we expect our ETR for the remainder of 2017 to be about the same as the first quarter of 2017. 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 2012 in June 2015 and received $1.75 million from one of our customers in June 2016. We will receive an additional payment of $1.25 million in Q2 2017. As stated above we do not record such reimbursements as revenue until they have been agreed to by our customers.

Incurred costs for 2013 – 2016 will be submitted in 2017. 2013 costs are expected to be between $2 million and $2.7 million. Such reimbursable costs for 2014 through 2016 are not expected to be material.

Critical Accounting Estimates

We believe that the estimates of our coal reserves, our deferred tax accounts, our business acquisitions, 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.

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 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

See “Item 1. Financial Statements - Note 1. General Business” for a discussion of new accounting standards.

Yorktown Distributions

Yorktown Energy Partners and its affiliated partnerships (Yorktown) own approximately 18.5% of our total shares outstanding as of March 31, 2017. Yorktown has made 14 distributions to their numerous partners since May 2011. Yorktown last distributed shares in November 2016.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

No material change from the disclosure in our 2016 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls

We maintain a system of disclosure controls and procedures that are designed for the purpose 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 March 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 4. MINE SAFETY DISCLOSURES

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

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.