ITEM
1. FINANCIAL STATEMENTS
Hallador
Energy Company
Consolidated
Balance Sheets
(in
thousands)
(unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,079
|
|
|
$
|
9,788
|
|
Restricted cash (Note 5)
|
|
|
3,320
|
|
|
|
2,817
|
|
Certificates of deposit
|
|
|
3,436
|
|
|
|
7,315
|
|
Marketable securities
|
|
|
1,852
|
|
|
|
1,763
|
|
Accounts receivable
|
|
|
17,105
|
|
|
|
22,307
|
|
Coal inventory
|
|
|
22,788
|
|
|
|
10,100
|
|
Parts and supply inventory
|
|
|
10,441
|
|
|
|
10,091
|
|
Purchased coal contracts
|
|
|
4,480
|
|
|
|
8,922
|
|
Prepaid expenses
|
|
|
11,170
|
|
|
|
9,647
|
|
Total current assets
|
|
|
84,671
|
|
|
|
82,750
|
|
Coal properties, at cost:
|
|
|
|
|
|
|
|
|
Land and mineral rights
|
|
|
126,682
|
|
|
|
126,303
|
|
Buildings and equipment
|
|
|
346,052
|
|
|
|
339,999
|
|
Mine development
|
|
|
131,944
|
|
|
|
126,037
|
|
Total coal properties, at cost
|
|
|
604,678
|
|
|
|
592,339
|
|
Less - accumulated DD&A
|
|
|
(187,159
|
)
|
|
|
(169,579
|
)
|
Total coal properties, net
|
|
|
417,519
|
|
|
|
422,760
|
|
Investment in Savoy (Note 3)
|
|
|
7,833
|
|
|
|
7,577
|
|
Investment in Sunrise Energy (Note 3)
|
|
|
4,124
|
|
|
|
4,122
|
|
Other assets (Note 4)
|
|
|
13,772
|
|
|
|
14,114
|
|
Total assets
|
|
$
|
527,919
|
|
|
$
|
531,323
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of bank debt, net
|
|
$
|
33,171
|
|
|
$
|
28,796
|
|
Accounts payable and accrued liabilities
|
|
|
19,904
|
|
|
|
19,773
|
|
Total current liabilities
|
|
|
53,075
|
|
|
|
48,569
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Bank debt, net
|
|
|
188,359
|
|
|
|
204,944
|
|
Deferred income taxes
|
|
|
44,783
|
|
|
|
45,174
|
|
Asset retirement obligations (ARO)
|
|
|
13,480
|
|
|
|
13,260
|
|
Other
|
|
|
2,808
|
|
|
|
2,486
|
|
Total long-term liabilities
|
|
|
249,430
|
|
|
|
265,864
|
|
Total liabilities
|
|
|
302,505
|
|
|
|
314,433
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, 10,000 shares authorized; none issued
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value, 100,000 shares authorized; 29,763 and 29,413 shares outstanding, respectively
|
|
|
297
|
|
|
|
294
|
|
Additional paid-in capital
|
|
|
96,915
|
|
|
|
93,816
|
|
Retained earnings
|
|
|
127,446
|
|
|
|
122,052
|
|
Accumulated other comprehensive income
|
|
|
756
|
|
|
|
728
|
|
Total stockholders’ equity
|
|
|
225,414
|
|
|
|
216,890
|
|
Total liabilities and stockholders’ equity
|
|
$
|
527,919
|
|
|
$
|
531,323
|
|
See
accompanying notes
Hallador
Energy Company
Consolidated
Statements of Comprehensive Income
(in
thousands, except per share data)
(unaudited)
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales
|
|
$
|
125,384
|
|
|
$
|
142,069
|
|
|
$
|
62,829
|
|
|
$
|
66,274
|
|
Equity income (loss) - Savoy
|
|
|
256
|
|
|
|
(68
|
)
|
|
|
44
|
|
|
|
257
|
|
Equity income (loss) - Sunrise Energy
|
|
|
2
|
|
|
|
(158
|
)
|
|
|
(17
|
)
|
|
|
(83
|
)
|
MSHA reimbursement
|
|
|
1,636
|
|
|
|
1,753
|
|
|
|
1,250
|
|
|
|
1,753
|
|
Other income
|
|
|
587
|
|
|
|
853
|
|
|
|
206
|
|
|
|
363
|
|
Total revenue
|
|
|
127,865
|
|
|
|
144,449
|
|
|
|
64,312
|
|
|
|
68,564
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
83,771
|
|
|
|
95,174
|
|
|
|
44,079
|
|
|
|
45,397
|
|
DD&A
|
|
|
18,804
|
|
|
|
18,238
|
|
|
|
9,101
|
|
|
|
9,056
|
|
ARO accretion
|
|
|
421
|
|
|
|
504
|
|
|
|
214
|
|
|
|
249
|
|
Coal exploration costs
|
|
|
414
|
|
|
|
814
|
|
|
|
275
|
|
|
|
395
|
|
SG&A
|
|
|
9,236
|
|
|
|
5,491
|
|
|
|
6,578
|
|
|
|
2,729
|
|
Interest
(1)
|
|
|
6,433
|
|
|
|
10,093
|
|
|
|
3,342
|
|
|
|
4,503
|
|
Total costs and expenses
|
|
|
119,079
|
|
|
|
130,314
|
|
|
|
63,589
|
|
|
|
62,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
8,786
|
|
|
|
14,135
|
|
|
|
723
|
|
|
|
6,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,374
|
|
|
|
-
|
|
|
|
1,357
|
|
|
|
(768
|
)
|
Deferred
|
|
|
(391
|
)
|
|
|
2,120
|
|
|
|
(1,023
|
)
|
|
|
1,150
|
|
Total income taxes
|
|
|
983
|
|
|
|
2,120
|
|
|
|
334
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(2)
|
|
$
|
7,803
|
|
|
$
|
12,015
|
|
|
$
|
389
|
|
|
$
|
5,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.25
|
|
|
$
|
0.40
|
|
|
$
|
0.01
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
29,458
|
|
|
|
29,251
|
|
|
|
29,503
|
|
|
|
29,251
|
|
(1) Interest
expense for the first six months of 2017 and 2016 includes $(440) and $1,748, respectively, for the net change in the estimated
fair value of our interest rate swaps. Such amounts were $(20) and $249 for Q2 2017 and 2016, respectively.
(2) There
is no material difference between net income and comprehensive income.
See
accompanying notes.
Hallador
Energy Company
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
(unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
23,458
|
|
|
$
|
30,389
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
(1)
|
|
|
(11,855
|
)
|
|
|
(7,875
|
)
|
Proceeds from sale of equipment
|
|
|
343
|
|
|
|
-
|
|
Proceeds from maturities of certificates of deposit
|
|
|
3,879
|
|
|
|
-
|
|
Purchase of Freelandville assets
|
|
|
-
|
|
|
|
(18,000
|
)
|
Other
|
|
|
-
|
|
|
|
186
|
|
Cash used in investing activities
|
|
|
(7,633
|
)
|
|
|
(25,689
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payments on bank debt
|
|
|
(13,125
|
)
|
|
|
(14,929
|
)
|
Bank borrowings
|
|
|
-
|
|
|
|
15,000
|
|
Debt issuance costs
|
|
|
|
|
|
|
(2,090
|
)
|
Dividends
|
|
|
(2,409
|
)
|
|
|
(2,394
|
)
|
Cash used in financing activities
|
|
|
(15,534
|
)
|
|
|
(4,413
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
291
|
|
|
|
287
|
|
Cash and cash equivalents, beginning of period
|
|
|
9,788
|
|
|
|
15,930
|
|
Cash and cash equivalents, end of period
|
|
$
|
10,079
|
|
|
$
|
16,217
|
|
(1)
We acquired $1.5 million in capital equipment in Q2 2017 that was prepaid in a prior period.
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
|
|
|
-
|
|
|
|
-
|
|
|
|
5,391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued on vesting of RSUs
|
|
|
644
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid on vesting of RSUs
|
|
|
(294
|
)
|
|
|
-
|
|
|
|
(2,292
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,409
|
)
|
|
|
-
|
|
|
|
(2,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,803
|
|
|
|
-
|
|
|
|
7,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2017
|
|
|
29,763
|
|
|
$
|
297
|
|
|
$
|
96,915
|
|
|
$
|
127,446
|
|
|
$
|
756
|
|
|
$
|
225,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Accumulated
Other Comprehensive Income
See
accompanying notes.
Hallador
Energy Company
Notes
to Consolidated Financial Statements
(unaudited)
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 six months ended June 30, 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 was 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.
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 June 30, 2017, was
$225 million (term-$88 million, revolver-$137 million). As of June 30, 2017, we had additional borrowing capacity of $63 million
and total liquidity of $79 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 Ending
|
|
Ratio
|
|
June 30, 2017 through March 31, 2018
|
|
|
4.25
|
X
|
June 30, 2018 and September 30, 2018
|
|
|
4.00
|
X
|
December 31, 2018
|
|
|
3.75
|
X
|
March 31, 2019 and June 30, 2019
|
|
|
3.50
|
X
|
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’s trailing 12 months adjusted EBITDA/annual debt service.
At
June 30, 2017, our maximum leverage ratio was 2.76, 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 which commenced on March 31, 2016.
At
June 30, 2017, we were paying LIBOR at 1.04% plus 3.50% for a total interest rate of 4.54%.
Bank
debt less debt issuance costs are presented below (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current debt
|
|
$
|
35,000
|
|
|
$
|
30,625
|
|
Less debt issuance cost
|
|
|
(1,829
|
)
|
|
|
(1,829
|
)
|
Net current portion
|
|
$
|
33,171
|
|
|
$
|
28,796
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
190,492
|
|
|
$
|
207,992
|
|
Less debt issuance cost
|
|
|
(2,133
|
)
|
|
|
(3,048
|
)
|
Net long-term portion
|
|
$
|
188,359
|
|
|
$
|
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
Assets (in thousands)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Advanced coal royalties
|
|
$
|
9,228
|
|
|
$
|
9,296
|
|
Marketable equity securities available for sale, at fair value (restricted)*
|
|
|
1,968
|
|
|
|
2,036
|
|
Other
|
|
|
2,576
|
|
|
|
2,782
|
|
Total other assets
|
|
$
|
13,772
|
|
|
$
|
14,114
|
|
|
|
|
|
|
|
|
|
|
*Held by Sunrise Indemnity, Inc., our wholly owned
captive insurance company.
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 $253 million.
Restricted
cash of $3.3 million represents cash held and controlled by a third party and is restricted for future workers’ compensation
claim payments.
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 allocated to common shareholders for the six and three months
ended June 30 (in thousands):
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,803
|
|
|
$
|
12,015
|
|
|
$
|
389
|
|
|
$
|
5,853
|
|
Less earnings allocated to RSUs
|
|
|
(304
|
)
|
|
|
(315
|
)
|
|
|
(16
|
)
|
|
|
(157
|
)
|
Net income allocated to common shareholders
|
|
$
|
7,499
|
|
|
$
|
11,700
|
|
|
$
|
373
|
|
|
$
|
5,696
|
|
|
(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 June 30, 2017, based on
estimated future net cash flows, and determined that no impairment was necessary.
The
Carlisle Mine assets had an aggregate net carrying value of $113 million at June 30, 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.
Our
effective tax rate (ETR) for 2017 was estimated at 11% and 15% for the six months ended June 30, 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 six months of 2017. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis,
which is a permanent difference.
|
(9)
|
Restricted
Stock Units (RSUs)
|
Non-vested grants at December 31, 2016
|
|
|
733,000
|
|
Vested - April 1, 2017 –share price on vesting date was $8.54
|
|
|
(149,500
|
)
|
Granted – May 16, 2017 – share price on grant date was $7.74
|
|
|
495,000
|
|
Vested – May 16, 2017 –share price on vesting date was $7.74
|
|
|
(495,000
|
)
|
Granted - June 1, 2017 - share price on grant date was $7.49
|
|
|
70,000
|
|
Granted- June 6, 2017 – share price on grant date was $8.23
|
|
|
645,000
|
|
Forfeited
|
|
|
(6,500
|
)
|
Non-vested grants at June 30, 2017
(1)
|
|
|
1,292,000
|
|
|
(1)
|
Following
is the vesting schedule of RSUs
.
|
Vesting Year
|
|
RSUs Vesting
|
|
2017
|
|
|
346,000
|
|
2018
|
|
|
178,250
|
|
2019
|
|
|
375,250
|
|
2020
|
|
|
231,250
|
|
2021
|
|
|
161,250
|
|
|
|
|
1,292,000
|
|
On
May 25, 2017, the Hallador Energy Company 2008 Restricted Stock Unit Plan (the Plan) was amended and restated to extend the term
of the Plan to May 25, 2027 and add 1,000,000 shares to the Plan.
At
June 30, 2017, we had 1,236,866 RSUs available for future issuance.
On
the vesting dates above, the shares that vested had a value of $5.1 million for the six months ended June 30, 2017. Under our RSU
plan, participants are allowed to relinquish shares to pay for their required statutory income taxes.
For
the six months ended June 30, 2017 and 2016, our stock based compensation was $5.4 million and $1.2 million, respectively. For
the three months ended June 30, 2017 and 2016, our stock based compensation was $4.6 million and $.6 million, respectively.
The
outstanding RSUs have a value of $8.55 million based on the August 7, 2017 closing stock price of $6.62.
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 June 30, 2017, the related consolidated statements of comprehensive income for the six and three-month periods ended June
30, 2017 and 2016, the consolidated statements of cash flows for the six-month periods ended June 30, 2017 and 2016, and the consolidated
statement of stockholders’ equity for the six-month period ended June 30, 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
August
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
|
|
|
|
Tons
|
|
|
Tons
|
|
|
Tons
|
|
|
Tons
|
|
|
Tons
|
|
|
Tons
|
|
|
Tons
|
|
2017
(last six months)
|
|
|
3,093
|
|
|
|
-
|
|
|
|
3,093
|
|
|
|
3,218
|
|
|
|
-
|
|
|
|
3,218
|
|
|
$
|
41.38
|
|
2018
|
|
|
2,904
|
|
|
|
-
|
|
|
|
2,904
|
|
|
|
3,405
|
|
|
|
-
|
|
|
|
3,405
|
|
|
|
43.04
|
|
2019
|
|
|
2,499
|
|
|
|
810
|
|
|
|
3,309
|
|
|
|
3,341
|
|
|
|
1,210
|
|
|
|
4,551
|
|
|
|
43.72
|
|
2020
|
|
|
1,810
|
|
|
|
1,199
|
|
|
|
3,009
|
|
|
|
2,210
|
|
|
|
1,791
|
|
|
|
4,001
|
|
|
|
45.57
|
|
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
|
|
|
|
|
|
|
|
|
10,306
|
|
|
|
8,457
|
|
|
|
18,763
|
|
|
|
12,174
|
|
|
|
12,633
|
|
|
|
24,807
|
|
|
|
|
|
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 8-13 million tons committed but unpriced through 2024. We currently have a minimum of 6.2 million tons contracted
for 2017, of which 3.1 million were sold during the first six months of 2017; 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 $23 million in 2017 and $30 million in 2016. The
decrease is primarily the result of our increase in coal inventory, which we anticipate normalizing in the second half of
the year. Our capex budget for the next six months is $21 million, of which $11 million is for maintenance capex.
Cash provided by operations for the next six 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 $25 million in the event we are not able to perform.
Capital
Expenditures (capex)
For
the first six months, capex for 2017 was $13.4 million, including $1.5 million of non-cash acquisitions, allocated as follows
(in millions):
Oaktown – investment
|
|
$
|
5.9
|
|
Oaktown – maintenance capex
|
|
|
7.2
|
|
Other projects
|
|
|
0.3
|
|
Capex per the Cash Flow Statement
|
|
$
|
13.4
|
|
Results
of Operations
Oaktown’s
cash costs were $24.73/ton and $26.30/ton for the six months and three months ended June 30, 2017, respectively. 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 $5 million and cash
costs associated with Prosperity and Carlisle for the remainder of 2017 to be $3.5 million.
Quarterly
coal sales and cost data (in thousands, except per ton and percentage data):
|
|
3
rd
2016
|
|
|
4
th
2016
|
|
|
1
st
2017
|
|
|
2
nd
2017
|
|
|
T4Qs
|
|
Tons sold
|
|
|
1,485
|
|
|
|
1,739
|
|
|
|
1,555
|
|
|
|
1,548
|
|
|
|
6,327
|
|
Coal sales
|
|
$
|
65,360
|
|
|
$
|
71,495
|
|
|
$
|
62,555
|
|
|
$
|
62,829
|
|
|
$
|
262,239
|
|
Average price/ton
|
|
$
|
44.01
|
|
|
$
|
41.11
|
|
|
$
|
40.23
|
|
|
$
|
40.59
|
|
|
$
|
41.45
|
|
Wash plant recovery in %
|
|
|
68
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
61
|
%
|
|
|
|
|
Operating costs
|
|
$
|
46,940
|
|
|
$
|
50,663
|
|
|
$
|
39,692
|
|
|
$
|
44,079
|
|
|
$
|
181,374
|
|
Average cost/ton
|
|
$
|
31.61
|
|
|
$
|
29.13
|
|
|
$
|
25.53
|
|
|
$
|
28.47
|
|
|
$
|
28.67
|
|
Margin
|
|
$
|
18,420
|
|
|
$
|
20,832
|
|
|
$
|
22,863
|
|
|
$
|
18,750
|
|
|
$
|
80,865
|
|
Margin/ton
|
|
$
|
12.40
|
|
|
$
|
11.98
|
|
|
$
|
14.70
|
|
|
$
|
12.11
|
|
|
$
|
12.78
|
|
Capex
|
|
$
|
3,935
|
|
|
$
|
8,022
|
|
|
$
|
3,093
|
|
|
$
|
10,260
|
|
|
$
|
25,310
|
|
Maintenance capex
|
|
$
|
1,709
|
|
|
$
|
5,301
|
|
|
$
|
836
|
|
|
$
|
6,581
|
|
|
$
|
14,427
|
|
Maintenance capex/ton
|
|
$
|
1.15
|
|
|
$
|
3.05
|
|
|
$
|
.54
|
|
|
$
|
4.25
|
|
|
$
|
2.28
|
|
|
|
3
rd
2015
|
|
|
4
th
2015
|
|
|
1
st
2016
|
|
|
2
nd
2016
|
|
|
T4Qs
|
|
Tons sold
|
|
|
1,791
|
|
|
|
1,432
|
|
|
|
1,629
|
|
|
|
1,464
|
|
|
|
6,316
|
|
Coal sales
|
|
$
|
81,332
|
|
|
$
|
65,762
|
|
|
$
|
75,795
|
|
|
$
|
66,274
|
|
|
$
|
289,163
|
|
Average price/ton
|
|
$
|
45.41
|
|
|
$
|
45.92
|
|
|
$
|
46.53
|
|
|
$
|
45.27
|
|
|
$
|
45.78
|
|
Wash plant recovery in %
|
|
|
69
|
%
|
|
|
64
|
%
|
|
|
65
|
%
|
|
|
63
|
%
|
|
|
|
|
Operating costs
|
|
$
|
56,995
|
|
|
$
|
46,470
|
|
|
$
|
49,777
|
|
|
$
|
45,397
|
|
|
$
|
198,639
|
|
Average cost/ton
|
|
$
|
31.82
|
|
|
$
|
32.45
|
|
|
$
|
30.56
|
|
|
$
|
31.01
|
|
|
$
|
31.45
|
|
Margin
|
|
$
|
24,337
|
|
|
$
|
19,292
|
|
|
$
|
26,018
|
|
|
$
|
20,877
|
|
|
$
|
90,524
|
|
Margin/ton
|
|
$
|
13.59
|
|
|
$
|
13.47
|
|
|
$
|
15.97
|
|
|
$
|
14.26
|
|
|
$
|
14.33
|
|
Capex
|
|
$
|
4,070
|
|
|
$
|
4,058
|
|
|
$
|
6,053
|
|
|
$
|
1,822
|
|
|
$
|
16,003
|
|
Maintenance capex
|
|
$
|
1,816
|
|
|
$
|
1,047
|
|
|
$
|
2,984
|
|
|
$
|
904
|
|
|
$
|
6,751
|
|
Maintenance capex/ton
|
|
$
|
1.01
|
|
|
$
|
0.73
|
|
|
$
|
1.83
|
|
|
$
|
.62
|
|
|
$
|
1.07
|
|
The
increase in maintenance capex/ton for 2Q 2017 is the result of our maintenance program normalizing costs back to our
traditional $3-$4 per ton range.
2017
v. 2016 (first six months)
For
2017, we sold 3,103,000 tons at an average price of $40.41/ton. For 2016, we sold 3,093,000 tons at an average price of $45.93/ton.
The decrease in average price per ton is the result of our contract mix, expiration
of contracts, and acquisition of other contracts.
Operating
costs and expenses averaged $27.00/ton ($24.73/ton at our operating Oaktown mines) in 2017 and $30.77/ton ($28.07
at Oaktown) in 2016. This ~$2-3 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 first 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 20% 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.
SG&A
expenses are $3.7 million higher in 2017 than in 2016 due primarily to a stock bonus of $3.8 million awarded to three executives
as reported in our 8-K filed May 17, 2017.
Our
Sunrise Coal employees totaled 717 at June 30, 2017 compared to 710 at June 30, 2016.
2017
v. 2016 (second quarter)
For
2017, we sold 1,548,000 tons at an average price of $40.59/ton. For 2016, we sold 1,464,000 tons at an average price of $45.27/ton.
The decrease in average price per ton is the result of our contract mix, expiration
of contracts, and acquisition of other contracts.
Operating
costs and expenses averaged $28.47/ton ($26.30/ton at our operating Oaktown mines) in 2017 and $31.01/ton ($28.29 at Oaktown)
in 2016.
SG&A
expenses are $3.8 million higher in 2017 than in 2016 due primarily to a stock bonus of $3.8 million awarded to three executives
as reported in our 8-K filed May 17, 2017.
Earnings
(loss) per Share
|
|
3
rd
2016
|
|
|
4
th
2016
|
|
|
1
st
2017
|
|
|
2
nd
2017
|
|
Basic and diluted
|
|
$
|
.14
|
|
|
$
|
(.13
|
)
|
|
$
|
.25
|
|
|
$
|
.01
|
|
|
|
3
rd
2015
|
|
|
4
th
2015
|
|
|
1
st
2016
|
|
|
2
nd
2016
|
|
Basic and diluted
|
|
$
|
.17
|
|
|
$
|
.02
|
|
|
$
|
.21
|
|
|
$
|
.19
|
|
Income
Taxes
Our
effective tax rate (ETR) for 2017 was estimated at 11% and 15% for the six months ended June 30, 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 six months. 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 received
an additional payment of $1.25 million in Q2 2017 for 2012 costs. 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.
Restricted
Stock Grants
On
May 16, 2017, the Board authorized the grant and immediate vesting of 495,000 RSUs to our executives as reported in our 8-K filed
May 17, 2017. On May 16, 2017, the grant and vesting date of those RSUs, the shares were valued at $7.74 per share based upon
the closing price on that date.
Under
our RSU plan, the participants are allowed to relinquish shares to pay for their required statutory income taxes. Of the 495,000
RSUs granted, 230,057 shares were relinquished back to the Company as consideration for the income taxes due.
As
part of our executive Four-Year Compensation Plan, on June 6, 2017, the Board authorized the grant of 645,000 RSUs to our executives
as reported in our 8-K filed June 9, 2017. The shares were valued at $5.3 million based upon $8.23 per share, the closing stock
price on the date of grant. These RSUs vest over four years, with the first vesting date on December 16, 2018.
For the six months ended June
30, 2017 and 2016, our stock based compensation was $5.4 million and $1.2 million, respectively. For the three months ended June
30, 2017 and 2016, our stock based compensation was $4.6 million and $.6 million, respectively.
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 18.3% of our total shares outstanding as of June
30, 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.