march2014q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

  [ x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
              For the quarterly period ended: March 31, 2014
or
 
  [  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  Commission file number: 001-3473
  “COAL KEEPS YOUR LIGHTS ON”
 
“COAL KEEPS YOUR LIGHTS ON”
  HALLADOR ENERGY COMPANY
 (www.halladorenergy.com)
  Colorado
(State of incorporation)
 
 
84-1014610
(IRS Employer Identification No.)
  1660 Lincoln Street, Suite 2700, Denver, Colorado
(Address of principal executive offices)
 
80264-2701
(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 o
 
ndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ No 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 "larger accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  

o Large accelerated filer
o Accelerated filer
o Non-accelerated filer (do not check if a small reporting company)
þ Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ
 
On May 1, 2014 we had 28,771,000 shares outstanding.

 
1

 
PART I – FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS
 
Consolidated Balance Sheet
(in thousands, except share data)
 
   
March 31,
 2014
   
December 31,
 2013
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 18,277     $ 16,228  
Marketable securities
    1,621          
Accounts receivable
    10,690       10,577  
Prepaid income taxes
    3,475       4,661  
Coal inventory
    6,405       4,778  
Parts and supply inventory
    2,726       2,826  
Other
    142       291  
Total current assets
    43,336       39,361  
                 
Coal properties, at cost:
               
Land and mineral rights
    26,382       26,476  
Buildings and equipment
    151,414       148,077  
Mine development
    85,462       85,333  
      263,258       259,886  
Less - accumulated DD&A
    (82,472 )     (77,545 )
      180,786       182,341  
Investment in Savoy
    17,444       16,733  
Investment in Sunrise Energy
    4,662       4,573  
Other assets (Note 5)
    16,805       17,405  
    $ 263,033     $ 260,413  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 9,945     $ 10,357  
Total current liabilities
    9,945       10,357  
                 
Long-term liabilities:
               
Bank debt
    16,000       16,000  
Deferred income taxes
    43,248       43,304  
Asset retirement obligations
    5,367       5,290  
Other
    2,299       2,128  
Total long-term liabilities
    66,914       66,722  
Total liabilities
    76,859       77,079  
                 
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, $.10 par value, 10,000 shares authorized; none issued
               
Common stock, $.01 par value, 100,000 shares authorized; 28,758 and 28,751 outstanding, respectively
    287       287  
Additional paid-in capital
    88,346       87,872  
Retained earnings
    97,128       94,796  
Accumulated other comprehensive income
    413       379  
Total stockholders’ equity
    186,174       183,334  
    $ 263,033     $ 260,413  
See accompanying notes.
 

 
2

 

Consolidated Statement of Comprehensive Income
For the three months ended March 31,
(in thousands, except per share data)

    2014      2013  
Revenue:
           
Coal sales
  $ 33,016     $ 33,995  
Equity income – Savoy
    2,379       1,084  
Equity income - Sunrise Energy
    89       122  
Other income (Note 5)
    283       2,461  
      35,767       37,662  
Costs and expenses:
               
Operating costs and expenses
    23,005       23,290  
DD&A
    4,959       4,560  
Coal exploration costs
    665       539  
SG&A
    1,971       1,976  
Interest
    465       376  
      31,065       30,741  
                 
Income before income taxes
    4,702       6,921  
                 
Less income taxes:
               
Current
    1,232       801  
Deferred
    (56     652  
      1,176       1,453  
                 
Net income*
  $ 3,526     $ 5,468  
                 
Net income per share:
               
Basic
  $ 0.12     $ 0.19  
Diluted
  $ 0.12     $ 0.19  
                 
Weighted average shares outstanding:
               
Basic
    28,757       28,529  
Diluted
    28,916       28,751  
 
_________________________________________
*There is no material difference between net income and comprehensive income.        
 
See accompanying notes.
 
 
 
3

 

 
Consolidated Statement of Cash Flows
For the three months ended March 31,
(in thousands)
 

   
2014
   
2013
 
Operating activities:
           
Cash provided by operating activities
  $ 6,179     $ 6,333  
                 
Investing activities:
               
Capital expenditures for coal properties
    (2,936 )     (8,604 )
Marketable securities
            (1,215 )
Cash used in investing activities
    (2,936 )     (9,819 )
                 
Financing activities:
               
Dividends
    (1,194 )        
Cash used in financing activities
    (1,194 )        
                 
Increase (decrease) in cash and cash equivalents
    2,049       (3,486 )
Cash and cash equivalents, beginning of period
    16,228       21,888  
Cash and cash equivalents, end of period
  $ 18,277     $ 18,402  

 
 
 
 
See accompanying notes.
 

  
 
4

 

 

Consolidated Statement of Stockholders’ Equity
(in thousands)
 
 
 
 
   
Shares
   
Common Stock
   
Additional Paid-in Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Total
 
Balance January 1, 2014
    28,751     $ 287     $ 87,872     $ 94,796     $ 379     $ 183,334  
                                                 
Stock-based compensation
                    488                       488  
                                                 
Dividends
                            (1,194 )             (1,194 )
                                                 
Net income
                            3,526               3,526  
                                                 
Other
    7               (14 )             34       20  
                                                 
Balance March 31, 2014
    28,758     $ 287     $ 88,346     $ 97,128     $ 413     $ 186,174  

 
 
 
See accompanying notes.

 

 
5

 


 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

(1)  General Business

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

The results of operations and cash flows for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2014.  To maintain consistency and comparability, certain 2013 amounts have been reclassified to conform to the 2014 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 2013 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 and its wholly-owned subsidiary, Sunrise Coal, LLC (Sunrise).  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 45% 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 primarily in natgas operations in the same vicinity as the Carlisle mine.
 
(2)   Bank Debt
 
During October 2012, Sunrise, our wholly-owned subsidiary, entered into a new credit agreement (the “Credit Agreement”) with PNC Bank, as administrative agent, and the lenders named therein. The Credit Agreement replaces the previous credit agreement we had with PNC. Closing costs on this new facility were about $1.5 million which were deferred and are being amortized over five years. Outstanding debt at March 31, 2014 was $16 million.
 
The Credit Agreement provides for a $165 million senior secured revolving credit facility. The facility matures in five years. The facility is collateralized by substantially all of Sunrise’s assets and we are the guarantor. We will draw on the facility as needed for development of our new projects in Illinois and Indiana.
 
All borrowings under the Credit Agreement bear interest, at LIBOR plus 2% if the leverage ratio is less than 1.5X (which it currently is), LIBOR plus 2.5% if the leverage ratio is over 1.5 but less than 2X and at LIBOR plus 3% if the leverage ratio is over 2X. LIBOR was 16 BPS at March 31, 2014. The maximum leverage ratio is 2.75X.  The leverage ratio is equal to funded debt/EBITDA. The annual commitment fee is 50 BPS but falls to 37.5 BPS if we borrow more than 33% of the facility.  The maximum that we can currently borrow is $116 million due to our current covenants. The Credit Agreement also imposes certain other customary restrictions and covenants as well as certain milestones we must meet in order to draw down the full amount.
 
 
6

 
(3)  Investment in Savoy

We own a 45% 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.

Below (in thousands) to the 100% is a condensed balance sheet at March 31, 2014 and a condensed statement of operations for the three months ended March 31, 2014 and 2013.

Condensed Balance Sheet

       
   
2014
 
       
Current assets
  $ 26,384  
Oil and gas properties, net
    29,054  
    $ 55,438  
         
Total liabilities
  $ 14,676  
Partners' capital
    40,762  
    $ 55,438  


Condensed Statement of Operations

   
2014
   
2013
 
             
Revenue
  $ 12,438     $ 9,022  
Expenses
    (7,161 )     (6,618 )
Net  income
  $ 5,277     $ 2,404  

 
Late last year Savoy engaged Energy Spectrum Advisors Inc. (ESA) to market its Trenton-Black River (TBR) oil properties located in southeast Michigan. ESA has offices in Dallas and Houston. Information was posted to the ESA website in early March 2014.  Offers have been received and negotiations are pending.  Savoy expects to receive additional offers during the week of May 5, 2014.  If an offer is accepted, we will make a public disclosure.
 
(4)  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 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.

 
7

 
Below (in thousands) to the 100% is a condensed balance sheet at March 31, 2014 and a condensed statement of operations for the three months ended March 31, 2014 and 2013.



Condensed Balance Sheet

       
   
2014
 
       
Current assets
  $ 3,319  
Oil and gas properties, net
    6,796  
    $ 10,115  
         
Total liabilities
  $ 803  
Members' capital
    9,312  
    $ 10,115  


Condensed Statement of Operations


             
   
2014
   
2013
 
             
Revenue
  $ 782     $ 812  
Expenses
    (605 )     (568 )
Net  income
  $ 177     $ 244  
                 

(5)  Other Long-Term Assets and Other Income

   
March 31,
2014
   
December 31,
 2013
 
Long-term assets:
           
Advance coal royalties
  $ 4,655     $ 4,693  
Deferred financing costs, net
    1,120       1,195  
Marketable equity securities available for sale,
  at fair value (restricted)*
    2,353       3,889  
Ohio River Terminal (see Note 7)
    2,790       2,836  
Other
    5,887       4,792  
    $ 16,805     $ 17,405  

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

 
8

 

 
    Three months ended
March 31,
 
   
2014
   
2013
 
Other income:
           
   MSHA reimbursements*
  $     $ 2,053  
   Coal storage fees
    63       232  
   Miscellaneous
    220       176  
    $ 283     $ 2,461  
                 
_______________________
*See “MSHA Reimbursements” on page 17.


(6)  Self Insurance
 
In late August 2010 we decided to terminate the property insurance on our underground mining equipment. Such equipment is allocated among five mining units spread out over 14 miles.  The historical cost of such equipment is about $109 million.
 
(7)  Ohio River Terminal
 
On May 31, 2013 we purchased for $2.8 million a multi-commodity truck/barge terminal. Over 17 acres of secured area is available. The terminal is at mile point 743.8 on the Indiana bank of the Ohio River near the William Natcher Bridge between Rockport and Grandview, Indiana.  Currently the dock will handle third party commodities.  In the long term, we plan to ship coal through the dock.  The terminal is in close proximity to the NS railroad, the CSX railroad, and American Electric Power's Rockport generating power plant. We do not expect revenue from this asset until 2015.






 

 
9

 








REPORT OF INDEPENDENT REGISTERD PUBLIC ACCOUNTING FIRM




To the Board of Directors and Stockholders
Hallador Energy Company
Denver, Colorado


We have reviewed the accompanying condensed consolidated balance sheet of Hallador Energy Company and subsidiaries (the “Company”) as of March 31, 2014 and the related condensed consolidated statements of comprehensive income, cash flows, and stockholders’ equity for the three month periods ended March 31, 2014 and March 31, 2013.  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, 2013, 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 February 28, 2014, 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, 2013, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.


 
/s/ EKS&H LLLP
 
May 2, 2014
Denver, Colorado

 


 

 
10

 

ITEM 2.   MD&A
 
THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2013 FORM 10-K AND SHOULD BE READ IN CONJUNCTION THEREWITH.

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

Overview

The largest portion of our business is devoted to coal mining in the state of Indiana through Sunrise Coal, LLC (a wholly-owned subsidiary) serving the electric power generation industry.  We also own a 45% equity interest in Savoy Energy, L.P., a private oil and gas exploration company with operations in Michigan and a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana. We account for our investments in Savoy and Sunrise Energy using the equity method.

Our largest contributor to revenue and earnings is the Carlisle underground coal mine located in western Indiana, about 30 miles south of Terre Haute.  For 2014 over 90% of our coal sales are to customers with large scrubbed coal-fired power plants in the state of Indiana.  Our mines and coal reserves are strategically located in close proximity to our primary customers, which reduces transportation costs and thus provides us with a competitive advantage with respect to those customers; our closest customer’s plant is 13 miles away and the farthest Indiana customer is 100 miles away.  We have access to our primary customers directly through either the CSX Corporation (NYSE:CSX) or through the Indiana Rail Road, majority owned by the CSX.

We see an increasing demand for coal produced in the Illinois Basin (ILB) in the future.  Demand for coal produced in the ILB is expected to grow at a rate faster than overall U.S. coal demand due to ILB coal having higher heating content than Powder River Basin (PRB) and lower cost structure than Central Appalachia (CAAP) coal. Many utilities are scrubbing to meet emission requirements beyond just sulfur compliance, even utilities that burn exclusively PRB.  Once scrubbed, those utilities are usually capable of burning ILB coal.  It is this trend of new scrubber installations coupled with rising CAAP cost structure that is leading to increased switching from CAAP coal to ILB coal.  Some fuel switching will also occur from PRB to ILB in newly scrubbed utilities located near ILB coal supply.

Our customers have made or announced plans to make significant investments in pollution control equipment at their plants.  Due to these large investments none of these plants are scheduled for retirement; thus we expect to be supplying these plants for many years.  It is not economical for the smaller, older, less efficient power plants to install scrubbers and other pollution control devices; accordingly, those type plants most likely will be retired in the coming years.

Our Coal Contracts

We have close relationships with our customers: Duke Energy Corporation (NYSE:DUK), Hoosier Energy, an electric cooperative, and Indianapolis Power & Light Company, a wholly-owned subsidiary of The AES Corporation (NYSE:AES). We also deliver coal to an Orlando utility through an arrangement we have with an affiliate of JP Morgan. We believe these Florida sales are an indication of the trend of ILB coal replacing CAAP coal that has traditionally supplied the southeast markets.  
 
 
 
11

 

The table below illustrates the status of our current coal contracts:

           
Period
 
Contracted Tons
 
Average Price/Ton
 
           
Nine months ending
December 31, 2014
 
2,758,000
 
$42.01   
 
2015
 
1,900,000
 
42.96
 
2016
 
   689,000
 
40.93**
 
_____________________
**During 2013, to accommodate one of our major customers, we entered into three separate agreements that allowed them to defer 338,000 tons originally to be delivered in 2013 to sometime in 2016. Under the agreements they agreed to pay us an average of $5.36/ton over the life of the deferral periods and we recognize the revenue accordingly; otherwise our average price/ton in 2016 would be $43.57.
 
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.

Current Projects

All of our underground coal reserves are high sulfur (4.5 - 6#) with a BTU content in the 11,500 range. As discussed below, the Ace surface mine is low sulfur (1.5#) with a BTU content of 11,400.  We have no met coal reserves, only steam (thermal) coal reserves. Below is a discussion of our current projects preceded by a table of our coal reserves.

Reserve Table - Controlled Tons (in millions):
 
 
           Year-End Reserves  
           2013      2012  
     Annual Capacity    
Proven
   
Probable
   
Total
   
Proven
   
Probable
   
Total
 
                                           
Carlisle (assigned)
    3.4       33.5       8.6       42.1       34.2       9.3       43.5  
Ace in the Hole (assigned)
    0.5       3.1               3.1       3.1               3.1  
Bulldog (unassigned)
            19.6       16.2       35.8       19.5       16.1       35.6  
War Eagle (unassigned)
            27.7       15.4       43.1       15.5       13.9       29.4  
  Total
    3.9       83.9       40.2       124.1       72.3       39.3       111.6  
                                                         
Assigned
                            45.2                       46.6  
Unassigned
                            78.9                       65.0  
  
                            124.1                       111.6  

 
12

 
Active Reserve (assigned) - Carlisle Mine (underground)
 
Our coal reserves at December 31, 2013 assigned to the Carlisle Mine were 42.1 million tons compared to beginning of year reserves of 43.5 million tons.  Primarily through the execution of new leases, our reserve additions of 2.5 million tons replaced 80% of our 2013 production of 3.1 million tons. We reduced our reserves by 810,000 tons due to revised mining plans.  The mine is located near the town of Carlisle, Indiana in Sullivan County and became operational in January 2007. The coal is accessed with a slope to a depth of 340'. The coal is mined in the Indiana Coal V seam which is highly volatile bituminous coal and is the most economically significant coal in Indiana.  The Indiana V seam has been extensively mined by underground and surface methods in the general area. The coal thickness in the project area is 4' to 7'.
 
The mine has several advantages as listed below:
 
SO2 - Historically, Carlisle has guaranteed a 6# SO2 product; however, with the addition of the Ace in the Hole Mine we can blend lower sulfur coal with Carlisle coal and guarantee a mid-sulfur product which should command a higher price and increase our customer base.  Few mines in the ILB have the ability to offer their customers various ranges of SO2. Carlisle has supplied coal to 11 different power plants.  
 
• 
Chlorine - Our reserves have lower chlorine (<0.10%) than average ILB reserves of 0.22%.  Much of the ILB’s new production is located in Illinois and possesses chlorine content in excess of .30%.  The relatively low chlorine content of our reserves is attractive to buyers given their desire to limit the corrosive effects of chlorine in their power plants.

• 
Transportation - Carlisle has a double 100 rail car loop facility and a four-hour certified batch load-out facility connected to the CSX railroad.  The Indiana Rail Road (INRD) also has limited running rights on the CSX to our mine.  Dual rail access gives us a freight advantage to more customers.  Long term, the CSX anticipates our coal being shipped to southeast markets via their railroad.  We sell our coal FOB the mine and substantially all of our coal is transported by rail.  However, on occasion we have shipped to three power plants via truck.

New Mine (assigned) – Ace in the Hole Mine (Ace) (surface)
 
In November 2012 we purchased for $6 million permitted fee coal reserves, coal leases and surface properties near Clay City, Indiana in Clay County.  The Ace mine is 42 road miles northeast of the Carlisle Mine.  We control 3.1 million tons of proven coal reserves of which we own 1.2 million tons in fee.  We mine two primary seams of low sulfur coal which make up 2.9 million of the 3.1 million tons controlled.  Both of the primary seams are low sulfur (2# SO2) Mine development began in late December 2012, and we began shipping coal in late August 2013.  We truck low sulfur coal from Ace to Carlisle to blend with Carlisle’s high sulfur coal. Many utilities in the southeastern U.S. have scrubbers with lower sulfur limits (4# SO2) which cannot accept the higher sulfur contents of the ILB (6# SO2). Blending Carlisle coal to a lower sulfur specification enables us to market Carlisle coal to more customers.  We currently have a contract at Carlisle which requires us to blend coal from Ace to meet sulfur specifications.  We also expect to ship low sulfur coal from Ace direct to unscrubbed customers that require low sulfur (2# SO2).  We expect the maximum capacity of Ace to be 500,000 tons annually. 
 
13

 

   New Reserve (unassigned) - Bulldog Mine (underground)
 
We have leased roughly 19,300 acres in Vermillion County, Illinois near the village of Allerton.  Based on our reserve estimates we currently control 35.8 million tons of coal reserves.  A considerable amount of our leased acres has yet to receive any exploratory drilling, thus we anticipate our controlled reserves to grow as we continue drilling in 2014.  The permitting process was started in the summer of 2011, and we filed the formal permit with the state of Illinois and the appropriate Federal regulators during June 2012.  We currently expect to receive an approved mining permit in the fourth quarter of 2014.
 
Full-scale mine development will not commence until we have a sales commitment.  We estimate the costs to develop this mine to be $150 million at full capacity of three million tons annually.
 
New Reserve (unassigned) – War Eagle Mine (underground)
 
We have leased roughly 11,000 acres in Lawrence County, Illinois near the village of Russellville. Based on our reserve estimates we currently control 43.1 million tons of coal reserves.  This reserve is located about 20 miles southwest of the Carlisle Mine.  Our initial testing indicates that this reserve’s minability and coal quality is very similar to the Carlisle reserve.

We anticipate filing for a mining permit in late 2014.  Full-scale mine development will not commence until we have a sales commitment.  We estimate the costs to develop this mine to be $150 million at full capacity of 3.3 million tons annually.

Unassigned reserves represent coal reserves that would require new mineshafts, mining equipment, and plant facilities before operations could begin on the property.  The primary reason for this distinction is to inform investors which coal reserves will require substantial capital expenditures before production can begin.

Ohio River Terminal

On May 31, 2013 we purchased for $2.8 million a multi-commodity truck/barge terminal.  Over 17 acres of secured area is available.  The terminal is at mile point 743.8 on the Indiana bank of the Ohio River near the William Natcher Bridge between Rockport and Grandview, Indiana.  Currently the dock will handle third party commodities.  In the long term, we plan to ship coal through the dock.  The terminal is in close proximity to the NS railroad, the CSX railroad, and American Electric Power's Rockport generating power plant.  We do not expect revenue from this asset until 2015.

Liquidity and Capital Resources
 
Our capex budget for the remainder of 2014 is about $12 million.  At Carlisle we expect to spend $9 million for maintenance capex and $2.5 million for expansion capex.  At Ace we estimate maintenance capex to be about $500,000.  Cash from operations should fund these expenditures.  In addition, we have about $100 million available under our bank line.

We have no material off-balance sheet arrangements.
 
 
14

 


Capital Expenditures (capex)

For the 2014 first quarter our capex was about $3 million allocated as follows (in 000’s):

Carlisle - maintenance capex
  $ 2,650  
Ace - surface equipment
    766  
Other projects
    51  
Items accrued for but not paid
    (531 )
Capex per the Cash Flow Statement
  $ 2,936  

Results of Operations

Quarterly coal sales and cost data (in 000’s):
 
 
   
   
2nd 2013
   
3rd 2013
   
4th 2013
   
1st 2014
   
T4Qs
 
Tons sold
    774       817       757       776       3,124  
Coal sales
  $ 34,149     $ 34,985     $ 34,307     $ 33,016     $ 136,457  
Average price/ton
    44.12       42.82       45.32       42.55       43.68  
Wash plant recovery in %
    70.90       68.00       63.20       65.60          
Operating costs
  $ 22,262     $ 23,407     $ 23,934     $ 23,005     $ 92,608  
Average cost/ton
    28.76       28.65       31.62       29.65       29.64  
Margin
    11,887       11,578       10,373       10,011       43,849  
Margin/ton
    15.36       14.17       13.70       12.90       14.04  
Capex
    6,174       8,780       7,834       2,936       25,724  
                                         
 
  
   
   
2nd 2012
   
3rd 2012
   
4th 2012
   
1st 2013
   
T4Qs
 
Tons sold
    743       810       752       840       3,145  
Coal sales
  $ 32,487     $ 36,152     $ 33,111     $ 33,995     $ 135,745  
Average price/ton
    43.72       44.63       44.03       40.47       43.16  
Wash plant recovery in %
    71.20       71.10       71.70       74.00          
Operating costs
  $ 18,816     $ 20,745     $ 21,745     $ 23,290     $ 84,596  
Average cost/ton
    25.32       25.61       28.91       27.73       26.90  
Margin
    13,671       15,407       11,366       10,705       51,149  
Margin/ton
    18.40       19.02       15.12       12.74       16.26  
Capex
    1,857       4,993       16,987       8,604       32,441  


 
15

 

Year
 
 
Tons
 
Average Sales
 Price/ton
 
Average
Cost/ton
 
Margin/ton
 
Margin
(in millions)
 
2012
 
3,006,000
 
$43.70
 
$26.53
 
$17.17
 
$51.6  
 
2013
 
3,188,000
 
43.11
 
29.14
 
13.97
 
44.5
 
Nine months ending
 December 31, 2014*
 
2,758,000
 
42.01
 
29.00
 
13.01
 
 
35.9
 
____________________________
*Sales are contracted for 2014. Average cost per ton is an estimate.

The cold weather we experienced during the 2014 first quarter was both a blessing and curse.  The coal burn was high but the freezing weather caused train delays and missed shipments.  The missed shipments caused our stockpiles to increase which translates to more handling time to keep the coal from burning and the coal deteriorates the longer it sits resulting in lower wash plant recovery.  We have limited space for our stockpiles so we had to cut production which lowers our productivity resulting in higher costs.  The train delays and missed shipments continued during the month of April.
 
We expect to make up the missed shipments throughout the year. Until the train issues are corrected, our second quarter mining costs will most likely approximate first quarter costs.  We continue to believe that our mining costs for the last half of 2014 will be $28.50/ton or lower.

Three months ended March 31, 2014 vs. 2013
 
For the first quarter of 2014, we sold 776,000 tons at an average price of $42.55/ton.  For the first quarter of 2013, we sold 840,000 tons at an average price of $40.47/ton.  Our average price for the remainder of 2014, based on our contracts, will be $42.01/ton.  The higher average price for first quarter 2014 is due to the mix of our various contracts and corresponding prices.  We expect our coal sales for the remainder of 2014 to be in the 2.7 million ton range as set forth in the table above.

Operating costs and expenses averaged $29.65/ton in 2014 compared to $27.73 in 2013.  The cold weather as discussed above caused the increase.  We expect such costs to average $29.00/ton or less for the remainder of 2014.

Our Indiana employees totaled 379 at March 31, 2014 compared to 351 at March 31, 2013.  

Savoy’s activity is discussed below.

Earnings per Share

   
2nd 2013
   
3rd 2013
   
4th 2013
   
1st 2014
 
Basic
  $ .29     $ .17     $ .16     $ .12  
Diluted
    .28       .17       .16       .12  

   
2nd 2012
   
3rd 2012
   
4th 2012
   
1st 2013
 
Basic
  $ .23     $ .22     $ .18     $ .19  
Diluted
    .23       .22       .17       .19  


 
 
16

 
MSHA Reimbursements

Some of our coal contracts allow us to pass on 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 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.  Based on past experience we expect to collect the 2012 costs in 2014 and the 2013 costs in 2015.

Income Taxes

During 2013 our effective tax rate was 25%.  For 2014, we are projecting an effective tax rate of 25% or slightly less.  Based on our projections, we are forecasting a total federal and state tax obligation in excess of existing prepayments of $3.5 million, resulting in additional outlays of cash for income taxes.  In addition, we expect the tax consequences between income tax and financial reporting purposes to result in a reduction to the deferred tax liability with a corresponding deferred tax benefit. 

45% Ownership in Savoy
 
Late last year Savoy engaged Energy Spectrum Advisors Inc. (ESA) to market its Trenton-Black River (TBR) oil properties located in southeast Michigan. ESA has offices in Dallas and Houston. Information was posted to the ESA website in early March 2014.  Offers have been received and negotiations are pending.  Savoy expects to receive additional offers during the week of May 5.  If an offer is accepted, we will make a public disclosure.
 
17

 



The table below illustrates the growth in Savoy (to the 100% - in other words not shown proportionate to our 45% interest) comparing the first quarter of 2014 to 2013; (financial statement data in thousands):

   
2014
   
2013
 
Revenue:
           
Oil
  $ 9,067     $ 7,499  
NGLs (natural gas liquids)
    236       225  
Natgas
    347       134  
Contract drilling
    1,463       455  
Other
    1,325       709  
Total revenue
    12,438       9,022  
Costs and expenses:
               
LOE (lease operating expenses)
    1,557       1,310  
Contract drilling costs
    1,064       776  
DD&A (depreciation, depletion & amortization)
    1,339       1,209  
G&G (geological and geophysical costs)
    1,183       1,203  
Dry hole costs
    787       554  
Impairment of unproved properties
    721       1,147  
Other exploration costs
    110       80  
G&A (general & administrative)
    400       339  
Total expenses
    7,161       6,618  
Net income
  $ 5,277     $ 2,404  
                 
The information below is not in thousands:
               
Oil production – barrels
    98,670       83,000  
Average oil prices/barrel
  $ 91.80     $ 90.35  
                 
 
Critical Accounting Estimates and Significant Accounting Policies
 
We believe that the estimates of our coal reserves and our deferred tax assets and liability accounts are our only critical accounting estimates. The reserve estimates are used in the DD&A calculation, in our impairment test 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. Furthermore, if our coal reserves are materially overstated, our liquidity and stock price could be adversely affected.
 

 
18

 

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. 

Yorktown Distributions

As previously disclosed, Yorktown Energy Partners and its affiliated partnerships (Yorktown) have made eight distributions to their numerous partners totaling 6 million (750,000 per distribution) 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 9.7 million shares of our stock representing about 34% of total shares outstanding.

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 improve our liquidity and float.

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

New Accounting Pronouncements
 
None of the recent FASB pronouncements will have any material effect on us.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Smaller reporting companies are not required to provide the information required by this item.

ITEM 4.  CONTROLS AND PROCEDURES
 
Disclosure Controls

We maintain a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our CEO and CFO as appropriate to allow timely decisions regarding required disclosure.
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective for the purposes discussed above.
 
 
 
19

 
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II - OTHER INFORMATION

ITEM 4.  MINE SAFETY DISCLOSURE

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 Disclosure
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.
 
 
   
HALLADOR ENERGY COMPANY
     
     
     
Date: May 2, 2014
 
/s/W. Anderson Bishop
   
    W. Anderson Bishop, CFO and CAO