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: June 30, 2017
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” | ||
| |||
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) |
Registrant’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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer x | |
| Non-accelerated filer ¨ | Smaller reporting company ¨ | |
| (Do not check if a smaller reporting company) | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 7, 2017, we had 29,763,449 shares outstanding.
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TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
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
| 3 |
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.
| 4 |
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.
| 5 |
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.
| 6 |
Notes to Consolidated Financial Statements
(unaudited)
| (1) | General Business |
The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The financial statements included herein have been prepared pursuant to the SEC’s rules and regulations; accordingly, certain information and footnote disclosures normally included in GAAP financial statements have been condensed or omitted.
The results of operations and cash flows for the 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.
| 7 |
| (2) | Bank Debt |
On March 18, 2016, we executed an amendment to our credit agreement with PNC, as administrative agent for our lenders, for the primary purpose of increasing liquidity and maintaining compliance through the maturity of the agreement in August 2019. The revolver was reduced from $250 million to $200 million, and the term loan remains the same. Our debt at 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 | ||||
| 8 |
| (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.
| (5) | Self-Insurance |
We self-insure our underground mining equipment. Such equipment is allocated among ten mining units spread out over 18 miles. The historical cost of such equipment is approximately $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.
| 9 |
| (6) | Net Income per Share |
We compute net income per share using the two-class method, which is an allocation formula that determines net income per share for common stock and participating securities, which for us are our outstanding RSUs.
The following table sets forth the computation of net income per share 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.
| (8) | 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 of 2017. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis, which is a permanent difference.
| 10 |
| (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.
| 11 |
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
| 12 |
| 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.
| 13 |
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):
| 3rd 2016 | 4th 2016 | 1st 2017 | 2nd 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 | ||||||||||
| 3rd 2015 | 4th 2015 | 1st 2016 | 2nd 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.
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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
| 3rd 2016 | 4th 2016 | 1st 2017 | 2nd 2017 | |||||||||||||
| Basic and diluted | $ | .14 | $ | (.13 | ) | $ | .25 | $ | .01 | |||||||
| 3rd 2015 | 4th 2015 | 1st 2016 | 2nd 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.
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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.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
No material change from the disclosure in our 2016 Form 10-K.
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| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls
We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our CEO and CFO as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO and CFO of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective for the purposes discussed above.
There have been no changes to our internal control over financial reporting during the quarter ended June 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 4. | MINE SAFETY DISCLOSURES |
See Exhibit 95 to this Form 10-Q for a listing of our mine safety violations.
| ITEM 6. | EXHIBITS |
| 10 | Retention Plan |
| 15 | Letter Regarding Unaudited Interim Financial Information |
| 31 | SOX 302 Certifications |
| 32 | SOX 906 Certification |
| 95 | Mine Safety Report |
| 101 | Interactive Files |
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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: August 8, 2017 | /s/ Lawrence D. Martin | |
| Lawrence D. Martin, CFO and CAO |
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