juneq2009.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2009
  OR
                                                      
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 0-14731
 
 
Hallador Petroleum Company
(Exact Name of Registrant as Specified in Its Charter)
Colorado
 
84-1014610
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
     
1660 Lincoln St., Suite 2700, Denver, Colorado
 
80264-2701
(Address of Principal Executive Offices)
 
(Zip Code)
(303) 839-5504  fax: (303) 832-3013
(Issuer’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer o
 
Accelerated filer o
 
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o
 
Shares outstanding as of August 6, 2009:  22,446,028
1

PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
 (in thousands, except share data)
 
ASSETS
Current assets:
 
June 30,
2009
   
December 31,
2008 * 
 
   Cash and cash equivalents   $ 15,832     $ 21,013  
   Certificates of deposit     2,862          
Prepaid Federal income taxes
    888       1,531  
Accounts receivable
    5,728       6,113  
Coal inventory
    308       776  
Other
    1,867       1,928  
Total current assets
    27,485       31,361  
Coal properties, at cost:
               
Land, buildings and equipment
    73,366       55,027  
Mine development
    48,952       45,289  
      122,318       100,316  
Less - accumulated depreciation, depletion, and amortization
    (11,908 )     (7,233 )
      110,410       93,083  
Investment in Savoy
    7,362       7,911  
Other assets
    2,651       3,710  
    $ 147,908     $ 136,065  
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current portion of bank debt
  $ 7,500     $ 2,500  
Accounts payable and accrued liabilities
    7,503       11,563  
State income tax payable
    602       605  
Other
    626       310  
Total current liabilities
    16,231       14,978  
                 
Long-term liabilities:
               
Bank debt, net of current portion
    32,500       37,500  
Interest rate swaps, at estimated fair value
    1,759       2,290  
Deferred income taxes
    6,351       1,700  
Asset retirement obligations
    714       686  
Other
    4,345       4,345  
Total long-term liabilities
    45,669       46,521  
                 
Total liabilities
    61,900       61,499  
Equity:
               
Hallador stockholders' equity:
               
Preferred stock, $.10 par value, 10,000,000 shares authorized; none issued
               
Common stock, $.01 par value, 100,000,000 shares authorized; 22,446,028 outstanding
    224       224  
Additional paid-in capital
    69,859       69,739  
Retained earnings
    13,461       2,920  
Total Hallador stockholders' equity
    83,544       72,883  
Noncontrolling interest
    2,464       1,683  
Total equity
    86,008       74,566  
    $ 147,908     $ 136,065  
*Derived from our Form 10-K

 
See accompanying notes.
 
2

 
Consolidated Statement of Operations
(in thousands, except per share data)

 
   
Six months ended
   
Three months ended
 
   
June 30,
   
June 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Revenue:
                       
  Coal sales
  $ 55,597     $ 23,962     $ 25,786     $ 14,281  
  Equity income (loss) – Savoy
    (549 )     275       (290 )     306  
  Other
    795       782       337       221  
 
    55,843       25,019       25,833       14,808  
                                 
Costs and expenses:
                               
  Cost of coal sales
    31,430       16,452       16,109       8,867  
  DD&A
    3,787       1,931       2,018       1,026  
  G&A
    1,740       1,368       800       767  
Interest (1)
    828       1,376       446       (156 )
      37,785       21,127       19,373       10,504  
                                 
Income  before income taxes
    18,058       3,892       6,460       4,304  
                                 
Income taxes
    6,140               2,477          
                                 
Net income
                               
Less: net income attributable to the noncontrolling interest
    11,918               3,983          
      (1,377 )     (481 )     (491 )     (555 )
                                 
Net income attributable to Hallador
  $ 10,541     $ 3,411     $ 3,492     $ 3,749  
                                 
Net income per share attributable to Hallador:
                               
Basic and diluted
  $ .47     $ .21     $ .16     $ .23  
                                 
Weighted average shares outstanding:
                               
Basic and diluted
    22,446       16,366       22,446       16,370  
                                 
                                 

(1) Included in interest expense for the six and three months ended June 30, 2009 was a credit of $531,000 and $373,000, respectively, due to the change in the estimated fair value of the interest rate swaps.  Such credit was $39,000 and $924,000 for the six and three months ended June 30, 2008, respectively.

See accompanying notes

 
3

 

Condensed Consolidated Statement of Cash Flows
(in thousands)



   
Six months ended
June 30,
 
   
2009
   
2008
 
Operating activities:
           
Cash provided by operating activities
  $ 23,237     $ 2,740  
                 
Investing activities:
               
Capital expenditures for coal properties
    (25,945 )     (6,264 )
Other
    (1,877 )     682  
 Cash used in investing activities
    (27,822 )     (5,582 )
                 
Financing activities:
               
Proceeds from bank debt
            2,000  
Cash distributions to noncontrolling interests
    (596 )        
 Cash provided by (used in) financing activities
    (596 )     2,000  
                 
Decrease in cash and cash equivalents
    (5,181 )     (842 )
                 
Cash and cash equivalents, beginning of period
    21,013       6,978  
                 
Cash and cash equivalents, end of period
  $ 15,832     $ 6,136  
                 
Cash paid for interest (net of amount capitalized - $293 and $176)
  $ 1,612     $ 1,440  
 
Cash paid for state income taxes  
  $ 849          
                 
Change in accounts payable for coal properties
  $ (4,049 )   $ (1,500 )
                 
                 
                 





See accompanying notes.


 
4

 
Notes to Consolidated Financial Statements
1.
General Business
 
The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The financial statements included herein have been prepared pursuant to the SEC’s rules and regulations; accordingly, certain information and footnote disclosures normally included in GAAP financial statements have been condensed or omitted.
 
On January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
 
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 2008 Form 10-K. This quarterly report should be read in conjunction with such 10-K.
 
The accompanying consolidated financial statements include the accounts of Hallador Petroleum Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  We are engaged in the production of coal from a shallow underground mine located in western Indiana.  We also own a 45% equity interest in Savoy Energy L.P., a private oil and gas company which has operations primarily in Michigan.
 
As discussed in prior filings, we have entered into significant equity transactions with Yorktown and other entities that invest with Yorktown.  Yorktown currently owns about 55% of our common stock and represents one of the five seats on our board.
 
2.
Equity Investment in Savoy
 
We account for our 45% interest in Savoy using the equity method of accounting.
 
Below (in thousands) are:   (i) a condensed balance sheet at June 30, 2009 and (ii) a condensed statement of operations for the six months ended June 30, 2009 and 2008.

 
Condensed Balance Sheet
 
 
Current assets
 
$  9,573
 
 
PP&E
 
  11,530
 
     
$21,103
 
         
 
Total liabilities
 
$  4,780
 
 
Partners' capital
 
  16,323
 
     
$21,103
 
  
Condensed Statement of Operations
 
   
2009
 
2008
 
           
 
Revenue
$ 3,638
 
$ 3,670
 
 
Expenses
  (4,855
  (2,559
)
 
Net income (loss)
$(1,217
$ 1,111
 
           
 
For 2008, the difference between the purchase price and our pro rata share of the equity of Savoy was amortized based on Savoy's units of production rate using proved developed oil and gas reserves and amounted to $226,000.  For 2009 there was no difference. 
 
5

 

 
3.         Notes Payable

In December 2008, we entered into a new loan agreement with a bank consortium that provides for a $40 million term loan and a $30 million revolving credit facility.  At June 30, 2009, we have fully drawn down the $40 million term loan.  We have outstanding letters of credit in the amount of $3 million, which leaves $27 million available under the revolver.  
 
In connection with the old loan agreements, we entered into two agreements swapping variable rates for fixed rates. The first swap agreement, which initially covered $26 million in debt, commenced on July 15, 2007 and matures on July 15, 2012; the current notional amount is about $17 million.  The second swap agreement, which initially covered $10 million, commenced on December 28, 2007 and matures on December 28, 2011; the current notional amount is about $8 million.  Considering the two swap agreements our current interest rate is about 6.2%.  At June 30, 2009 and December 31, 2008, our interest rates swaps resulted in a liability of $1.76 million and $2.3 million, respectively.  The difference of $531,000 is included as a reduction in our interest expense for the six months ended June 30, 2009.  The recorded value of our bank debt approximates fair value as it bears interest at a floating rate.
 
4.         Income Taxes

Our effective tax rate of about 37% for the six months ended June 30, 2009 was calculated using the annual effective rate projection on recurring earnings.   Excess tax depletion is the primary reason for our effective rate being less than the statutory rate.

5.         Cash Distributions by Sunrise

During the six months ended June 30, 2009 Sunrise made cash distributions, for members’ tax purposes, of about $3.6 million of which $600,000 was made to the noncontrolling members.

6.        Subsequent Events

No subsequent events have occurred through August 6, 2009 that could have a material effect on our financial position, cash flows or results of operations.
 

 
6

 
ITEM 2. MD&A.

THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2008 FORM 10-K AND SHOULD BE READ IN CONJUNCTION THERETO.
 
Cap on Carbon Emissions
 
On April 17, 2009 the Obama Administration declared that carbon dioxide threatened the planet.  The landmark decision lays the ground work for federal efforts to cap carbon emissions.   The Environmental Protection Agency (EPA) officials are on record saying they would take a go-slow approach, holding two public hearings in May 2009 before the findings are official.  After that, any new regulations would go through a public comment period, more hearings and a long review.  New regulations driven by the finding could be years away; but, unless superseded by congressional action, the EPA ruling eventually could lead to stricter emissions limits. 
 
Under our current contracts, any new taxes or costs relating to these events can be passed on to the customer.  We are unable to determine what effect these events will have on future coal demand.

Our management is in favor of reasonable and practical steps to protect the environment.  We are not in favor of the current cap and trade bill passed by the House.  Unless countries like Mexico, China, India and Russia pass and enforce similar laws any reduction in carbon omissions in our country would be inconsequential to the ultimate goal.
 
Liquidity and Capital Resource
 
We plan to fund future mine expansion through a combination of draws from the $30 million revolving credit facility with our banks and cash from operations.  We have $27 million available under the revolver due to outstanding letters of credit of $3 million.  Our budgeted capital expenditures for the last half of 2009 are about $15 million.
 
We have no material off-balance sheet arrangements.
 
Results of Operations 

Year to Date

The recession has reduced power demand, which has reduced the need for coal.  Stockpiles at some of our customers are high and accordingly, we were asked by one of our customers to defer a total of 400,000 tons through December 31, 2010.  These tons will be shipped in 2011-2013 at an escalated price.  We have agreed to assist our customer because of our valued relationship.
 
Due to the reduced power demand, we estimate 2009 sales to be about 2.7 million tons at an average selling price of $44/ton.  We expect 2010 sales to be about 3 million tons at an average price of $42.  The reduction in average prices is due to higher priced coal being deferred to later years.

For 2009 we sold 1,258,000 tons at an average price of about $44/ton.  For 2008 we sold 825,000 tons at an average price of about $29/ton.

During 2009 our equity loss in Savoy was due to lower oil and gas prices and higher exploration costs relative to 2008.

Cost of coal sales per ton averaged $25/ton in 2009 compared to $20 in 2008.  The increase was due to inefficiencies during our mine expansion and construction and temporary adverse mining conditions.  Our mining employees totaled 290 at June 30, 2009 compared to 160 at June 30, 2008.  We expect the cost of coal sales to average $24/ton for the remainder of 2009.

 
 
 
7

 
  
G&A increased primarily to the higher level of operations.
 
Included in 2009 interest expense was a credit of $531,000 relating to our interest rate swaps.  The 2008 amount includes a credit of $39,000 for the swaps.  In addition, we capitalized $293,000 in interest expense for 2009 compared to $176,000 for 2008.  Because our mine expansion is complete we are no longer capitalizing interest.
 
Quarter to Date

For 2009 we sold 596,000 tons at an average price of about $43/ton.  For 2008 we sold 472,000 tons at an average price of about $30/ton.

For 2009 our equity loss in Savoy was due to lower oil and gas prices and higher exploration costs relative to 2008.

Cost of coal sales averaged $27/ton in 2009 compared to $19 in 2008.  If we are not able to gain efficiencies and if the temporary adverse mining conditions persist, our costs could remain in the $27/ton range for the remainder of the year.
 
The increase in DD&A was due to the significant increase in our coal sales.

Included in 2009 interest expense was a credit of $373,000 relating to our interest rate swaps.  The 2008 amount includes a credit of $924,000 for the swaps.  In addition, we capitalized about $3,000 in interest expense for 2009 compared to $75,000 for 2008.

New Accounting Pronouncements

None of the recent FASB pronouncements had, or will have any material effect on us.
 
ITEM 4(T).  CONTROLS AND PROCEDURES.
 
Disclosure Controls
 
We maintain a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our CEO 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 of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO, who is also our CFO, concluded that our disclosure controls and procedures are effective for the purposes discussed above.
 
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II—OTHER INFORMATION
 
ITEM 6.
EXHIBITS

(a)
31    -- SOX 302 Certification
32    -- SOX 906 Certification
 
 
 
8

 
 
 
SIGNATURE
 
In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated:  August 6, 2009                                                                    By:  ­/S/ VICTOR P. STABIO
          Victor P. Stabio
          CEO and CFO
          Signing on behalf of registrant and
          as principal financial officer

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9