NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
|
|
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
|
)
|
|
|
(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.
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.
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
|
|
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
|
|
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.
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
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.
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):
|
|
|
4
th
2015
|
|
|
1
st
2016
|
|
|
2
nd
2016
|
|
|
3
rd
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
|
|
|
|
|
4
th
2014
|
|
|
1
st
2015
|
|
|
2
nd
2015
|
|
|
3
rd
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
|
|
|
4
th
2015
|
|
|
1
st
2016
|
|
|
2
nd
2016
|
|
|
3
rd
2016
|
|
|
Basic and diluted
|
|
$
|
.02
|
|
|
$
|
.21
|
|
|
$
|
.19
|
|
|
$
|
.14
|
|
|
|
|
4
th
2014
|
|
|
1
st
2015
|
|
|
2
nd
2015
|
|
|
3
rd
2015
|
|
|
Basic and diluted
|
|
$
|
.31
|
|
|
$
|
.25
|
|
|
$
|
.23
|
|
|
$
|
.17
|
|
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.