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 March 31,September 30, 2009
OR
 
o
r		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).days. Yes þ No or
 
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 or
 
Accelerated filer or
 
 
Non-accelerated filer or  (Do
(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 or 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 or No or
 
Shares outstanding as of May 7,November 10, 2009:  22,446,02827,758,023
 
1
PART 1I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheet
 (in thousands, except share data)
 
 March 31,
2009
 
December 31,
2008 * 
 
September 30,
2009
  
December 31,
2008 *
 
ASSETS
Current assets:
      
ASSETS      
Current assets:      
Cash and cash equivalents$  19,764 $21,013 $14,750 $21,013 
Certificates of deposit 2,838      1,021    
Federal income tax receivable 417  1,531 
Prepaid Federal income taxes        1,486  1,531 
Accounts receivable    6,732  6,113          6,769  6,113 
Coal inventory 71  776    1,620  776 
Other   1,814  1,928  2,789  1,928 
Total current assets   31,636  31,361  28,435  31,361 
      
Coal properties, at cost:            
Land, buildings and equipment   64,489  55,027  84,276  55,027 
Mine development     48,426  45,289  46,402  45,289 
     112,915  100,316  130,678  100,316 
Less - accumulated depreciation, depletion, and amortization     (9,890) (7,233) (13,586) (7,233)
   103,025  93,083  117,092  93,083 
Investment in Savoy   7,652  7,911  6,955  7,911 
Deferred income taxes, net 2,414    
Other assets   2,505  3,710  2,355  3,710 
$  144,818 $136,065 $157,251 $136,065 
LIABILITIES AND STOCKHOLDERS' EQUITY      
LIABILITIES AND EQUITY      
Current liabilities:            
Current portion of bank debt $  5,000  $2,500 $7,500 $2,500 
Accounts payable and accrued liabilities   10,210  11,563  9,561  11,563 
State income tax payable   1,173  605  483  605 
Other   18  310  609  310 
Total current liabilities   16,401  14,978  18,153  14,978 
            
Long-term liabilities:            
Bank debt, net of current portion   35,000  37,500  30,000  37,500 
Interest rate swaps, at estimated fair value   2,133  2,290  1,643  2,290 
Deferred income taxes   3,681  1,700     1,700 
Asset retirement obligations   696  686  912  686 
Other   4,345  4,345  4,345  4,345 
Total long-term liabilities   45,855  46,521  36,900  46,521 
      
Total liabilities   62,256  61,499  55,053  61,499 
Equity:            
Hallador stockholders' 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 
Common stock, $.01 par value, 100,000,000 shares authorized; 27,758,023 and 22,446,028 outstanding 277  224 
Additional paid-in capital   69,800  69,739  84,587  69,739 
Retained earnings   9,969  2,920  17,334  2,920 
Total Hallador stockholders' equity    79,993  72,883  102,198  72,883 
Noncontrolling interest      2,569  1,683     1,683 
Total equity  82,562  74,566  102,198  74,566 
$   144,818 $136,065 $157,251 $136,065 
*Derived from theour Form 10-K
See accompanying notes.
 
2
 

Consolidated Statement of Operations
(in thousands, except per share data)
 
 
 
 
  Nine months ended  Three months ended 
  September 30,  September 30, 
  2009  2008  2009  2008 
Revenue:            
  Coal sales $85,140  $41,688  $29,543  $17,726 
  Equity (loss) – Savoy  (956)  (103)  (407)  (378)
  Other  770   894   (25)  112 
   84,954   42,479   29,111   17,460 
Costs and expenses:                
Cost of coal sales  48,332   27,579   16,902   11,127 
DD&A  6,353   3,213   2,566   1,282 
SG&A  3,046   2,270   1,306   902 
Interest (1)
  1,431   2,227   603   851 
   59,162   35,289   21,377   14,162 
                 
Income before income taxes  25,792   7,190   7,734   3,298 
                 
Less income taxes  (9,358)      (3,218)    
                 
Net income  16,434   7,190   4,516   3,298 
                 
Less: net income attributable to the noncontrolling interest
  (2,020)  (846)  (643)  (365)
                 
Net income attributable to Hallador $14,414  $6,344  $3,873  $2,933 
                 
Net income per share attributable to Hallador:                
Basic and diluted $.63  $.36  $.17  $.14 
                 
Weighted average shares outstanding:                
Basic and diluted  22,753   17,824   23,358   20,707 

(1) Included in interest expense for the nine and three months ended September 30, 2009 was a credit of $647 and $116, respectively, due to the change in the estimated fair value of the interest rate swaps.  Such credit was $57 and $18 for the comparable 2008 periods. We also capitalized $293 and $176 in interest expense for the nine months ended September 30, 2009 and 2008, respectively.  No interest was capitalized for the three months ended September 30, 2009 and 2008.
   
Three months ended March 31,
 
  2009  2008 
Revenue:      
Coal Sales                                        
 $29,811  $9,681 
Equity (loss) - Savoy  (259)   (31) 
Other  458   561 
   30,010   10,211 
         
Costs and expenses:        
Cost of coal sales  15,321   7,585 
DD&A  1,769   905 
G&A  940   600 
Interest  382   1,532* 
   18,412   10,622 
                                                                       
Income (loss) before income taxes    11,598   (411) 
         
Income taxes:        
Current  1,682     
Deferred  1,981     
   3,663     
         
Net income (loss)  7,935   (411) 
Less: net (income) loss  attributable to the noncontrolling interest  (886)    74 
         
Net income (loss) attributable to Hallador $7,049  $(337) 
         
Net income (loss) per share:        
Basic and diluted $.31  $ (.02)
         
Weighted average shares outstanding:        
Basic and diluted   22,446   16,363 

--------------------------------------------
*Includes $885 relating to our interest rate swaps.
See accompanying notes.
notes.

 
3
 

 
 
Condensed Consolidated Statement of Cash Flows
(in thousands)
 
 

  
Nine months ended
September 30,
 
  2009  2008 
Operating activities:      
Cash provided by operating activities $31,824  $7,166 
         
Investing activities:        
Acquisition of additional 20% interest in Sunrise*      (11,771)
Capital expenditures for coal properties  (33,635)  (10,852)
Other  (130)  193 
Cash used in investing activities  (33,765)  (22,430)
         
Financing activities:        
Proceeds from bank debt      2,000 
Payments of bank debt  (2,500)  (1,334)
Acquisition of remaining 20% interest in Sunrise*  (25,805)    
Proceeds from stock sales  24,892   21,983 
Cash distributions to noncontrolling interests  (909)    
Other      (47)
   Cash (used in) provided by financing activities  (4,322)  22,602 
         
Increase (decrease) in cash and cash equivalents  (6,263)  7,338 
         
Cash and cash equivalents, beginning of period  21,013   6,978 
         
Cash and cash equivalents, end of period $14,750  $14,316 
         
Cash paid for interest (net of amount capitalized - $293 and $176) $2,338  $2,308 
 
Cash paid for state income taxes  
 $849     
         
Change in accounts payable for coal properties $(3,381) $994 

 
*The 2008 acquisition was treated as an investing activity and accounted for under purchase accounting rules; however, due to changes in accounting rules, the 2009 acquisition was treated as a financing activity and accounted for as an equity transaction.
   Three months ended March 31, 
  2009  2008 
       
Operating activities:      
Cash provided by operating activities  $13,391   $730 
         
Investing activities:        
Capital expenditures for coal properties  (12,802)   (2,941)
Other  (1,838)   604 
Cash used in investing activities  (14,640)   (2,337)
         
Financing activities:        
Proceeds from bank debt      1,698 
Cash provided by financing activities      1,698 
         
Increase (decrease) in cash and cash equivalents  (1,249)  91 
         
Cash and cash equivalents, beginning of period  21,013   6,978 
         
Cash and cash equivalents, end of period $19,764  $7,069 
         
Cash paid for interest (net of amount capitalized – $300 and $100) $963  $672 

 
 
See accompanying notes.

 
4
Consolidated Statement of Stockholders’ Equity
(in thousands, except shares)
  Shares  Common Stock  Additional Paid-in Capital  Retained Earnings  Total 
                
Balance December 31, 2008  22,446,028  $224  $69,739  $2,920  $72,883 
                     
Equity offering  4,150,000   42   24,850       24,892 
                     
Stock issued to Sunrise members for their remaining 20% interest valued at par (fair value of $6,800); See Note 5  1,133,328   11   (11)        
                     
Cash ($25,805) paid to Sunrise members for their remaining 20% interest, net of deferred  income tax assets of $12,700 and $2,794 to close out the minority interest (treated as an equity transaction)          (10,311)      (10,311)
                     
Restricted shares issued  28,667       161       161 
                     
Stock-based compensation          139       139 
                     
Other          20       20 
                     
Net income              14,414   14,414 
                     
Balance September 30, 2009  27,758,023  $277  $84,587  $17,334  $102,198 

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.
 
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.subsidiary.  All significant intercompany accounts and transactions have been eliminated.  We are engaged in the production of coal from a shallowan underground mine located in westernsouthwestern 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 fiveseven 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 March 31,September 30, 2009 and (ii) a condensed statement of operations for the quartersnine months ended March 31,September 30, 2009 and 2008.

 
Condensed Balance Sheet
 
 Current assets $  8,5018,879 
 PP&E   11,35712,072 
   $19,85820,951 
     
 Total liabilities $  2,8935,522 
 Partners' capital   16,96515,429 
   $19,85820,951 
  
Condensed Statement of Operations
 
  2009 2008 
      
 Revenue$ 1,981  $1,460 
 Expenses  (2,556)    (1,289) 
 Net income (loss)$  (575) $   171 
      
  2009 2008 
 Revenue$5,556 $5,587 
 Expenses  (7,668)   (5,078) 
 Net (loss) income
$ (2,112)
 $   509 
 
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 $109,000.$332,000.  For 2009 there was no difference.
 
5
6
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 March 31, 2009, weWe have fully drawn down the $40 million term loan.loan and have made or first  principal payment  of $2.5 million.  We have outstanding letters of credit in the amount of $3$3.5 million, which leaves $27about $26 million available under the revolver.  We pay a .5% commitment fee for the unused funds.
 
In connection with the old loan agreements, we entered into two interest rate swap agreements swapping variable rates for fixed rates. The first swap agreement, which coversinitially covered $26 million in debt, commenced on July 15, 2007 and matures on July 15, 2012.2012; the current notional amount is about $15 million.  The second swap agreement, which coversinitially covered $10 million, commenced on December 28, 2007 and matures on December 28, 2011.  The2011; the current notional amount is about $8 million.  Considering the two swap agreements, fix our current interest rate atis about 8.3%6.1%.  At MarchSeptember 30, 2009 and December 31, 2009,2008, our interest rates swaps resulted in a liability of about $2.1$1.64 million and at December 31, 2008 they resulted in a liability of$2.3 million.million, respectively.  The difference of $157,000$647,000 is included as a reduction in our interest expense.expense for the nine months ended September 30, 2009.  The recorded value of our bank debt approximates fair value as it bears interest at a floating rate.
 
4.         Income Taxes
 
TheFor the nine months ended September 30, 2009, our effective income tax rate increased to 39%, a 2% increase over the effective tax rate of about 34%37% for the six months ended June 30, 2009.  As discussed in Note 5 below, we acquired the remaining 20% membership interest in Sunrise.  In doing so, we derived tax basis for our coal properties and, consequently, there will not be any percentage depletion in excess of basis which is a permanent difference for tax purposes that previously served to reduce the effective income tax rate.  This change caused the effective rate for the three months ended March 31,September 30, 2009 was calculated usingto be 45%.
5.         Stock Sale and Purchase of Remaining Interest in Sunrise
On September 16, 2009, we entered into agreements to purchase the annual effective rate projection on recurring earnings.   Excess tax depletionremaining 20% membership interest in Sunrise Coal, LLC (“Sunrise”), from the existing members for an aggregate purchase price of about $32.6 million, consisting of about $25.8 million in cash and 1,133,328 in shares of our common stock valued at $6/share ($6.8 million).  Sunrise is the primary reasonnow a wholly-owned entity of ours.  Brent Bilsland, our new president and board member, received cash of about $3.185 million and 8,333 shares of our stock for the effective rate beinghis approximate 2% interest and his spouse received cash of about $1.775 million and 208,333 shares of our stock for her interest (slightly less than 2%). His parents also sold their approximate 8% interest in Sunrise under the statutory ratesame terms receiving 383,332 shares and the remainder in cash.   In addition, Brent Bilsland purchased for cash 200,000 shares (at $6/share) directly from Victor Stabio, our CEO.
For accounting purposes the buyout was treated as an equity transaction among members of a controlled group.  For income tax purposes we will be able to increase our tax basis in the coal properties and receive future tax deductions; accordingly, a deferred tax asset of $12.7 million was recognized.
The day before the purchase, in a private placement transaction, we sold 4,150,000 shares of our common stock for an aggregate cash purchase price of $24.9 million ($6/share).

  The proceeds from the sale were used to purchase the remaining membership interests in Sunrise as described above.  All but 450,000 shares were sold to our existing shareholders and board members.  Yorktown Energy Partners VIII, LP, a private partnership affiliated with board member Bryan Lawrence, purchased 2,950,000 shares and an entity affiliated with board member Sheldon Lubar purchased 750,000 shares.
 
67
6.         Subsequent Events
No subsequent events have occurred through November 10, 2009 that could have a material effect on our financial position, cash flows or results of operations.
ITEM 2. MD&A.
 
THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2008 FORM 10-K AND SHOULD BE READ IN CONJUNCTION THEREWITH. THERETO.
We are still on track to sell about three million tons of coal for the year. Through March 31, 2009 we have sold about 662,000 tons at an average price of about $45/ton. 
 
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 before the findings are official.  After that, any new regulations would go through a public comment period, more hearings and a long review.approach.   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 and being discussed in the Senate.  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 $27about $26 million available under the revolver due to outstanding letters of creditcredit.  Our budgeted capital expenditures for the last quarter of $3 million. 2009 are about $8 million and $20 million for 2010.
 
We have no material off-balance sheet arrangements.
 
Results of Operations
 
Year to Date
During
The recession has reduced power demand, which has reduced the need for coal.  Stockpiles at some of our customers are high and, accordingly, during July 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.  We have agreed to assist our customer because of our valued relationship.
Due to the reduced power demand, we estimate fourth quarter sales for 2009 we soldto be about 662,000737,000 tons of coal at an average selling price of $44.50/ton.  We expect 2010 sales to be about $45/3 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 1,931,000 tons at an average price of about $44/ton.  DuringFor 2008 we sold 1,355,000 tons at an average price of about 353,000$30.75/ton.
During 2009 our equity loss in Savoy was due to lower oil and gas prices and higher operating costs relative to 2008.
Cost of coal sales per ton averaged $25/ton in 2009 compared to $20.35 in 2008.  The increase was due to inefficiencies during our mine expansion and construction, temporary adverse mining conditions and higher costs associated with government impositions.  Our mining employees totaled 290 at about $27/ton.  ForSeptember 30, 2009 compared to 190 at September 30, 2008.  We expect the cost of coal sales to average $23-24/ton for the remainder of 2009, we expect the average price to be in the $45/ton range.2009.
 
The increase in DD&A was due to the significant increase in our coal sales. There were no significant changes in our coal reserves.
8
SG&A increased primarily due to the higher level of operations.
Included in 2009 interest expense was a credit of $647,000 relating to our interest rate swaps; such amount for 2008 was a credit of $57,000.   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 673,000 tons at an average price of about $44/ton.  For 2008 we sold 530,000 tons at an average price of about $33.45/ton.
For 2009 our equity loss in Savoy was due to lower oil and gas prices and higher operating costs relative to 2008.
Cost of coal sales averaged $25.11/ton in 2009 compared to $21 in 2008. We expect the cost of coal sales andto average $23-24/ton for the remainder of 2009.
The increase in DD&A was due to the significant increase in our coal sales.
 
G&A increased primarily to the higher level of operations.
Included in 20082009 interest expense was about $885,000a credit of $116,000 relating to our interest rate swaps.  The 2009swaps; such amount includesfor 2008 was a credit of about $160,000$18,000.  No interest was capitalized for the swaps.  In addition, we capitalized about $300,000 in interest expense for 2009 compared to $100,000 for 2008.either period.
 
For most of our history, we operated in a loss position and had significant net operating loss carry forwards.  At December 31, 2008, we have federal net operating loss carry forwards of about $2.5 million and expect to utilize them in 2009.  For calendar year 2008 we had pretax income of about $11.8 million and a tax provision of about $2.9 million.  For the quarter ended March 31, 2009 we had pretax income of about $11.6 million and a tax provision of about $3.7 million.  We expect these income trends to continue and estimate our effective tax rate to be in the 34% - 38% range for the foreseeable future.  
New Accounting Pronouncements
 
None of the recent FASB pronouncements had, or will have any material effect on us.
 
 
79

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(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 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 who is also ourand 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 March 31,September 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)
 
3110.1 -- Form of Purchase and Sale Agreement dated September 16, 2009 (1)
10.2 -- Form of Subscription Agreement dated September 15, 2009 (1)
10.3 -- Form of Hallador Petroleum Company Restricted Stock Unit Issuance Agreement. (1)
21.1 -- List of Subsidiaries (2)
31.1 -- SOX 302 Certification(2)
31.2 -- SOX 302 Certification (2)
32    -- SOX 906 Certification(2)
---------------------------------------------
(1)IBR to the Form 8-K Filed September 18, 2009
(2)Filed herewith.
 
SIGNATURES
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 PETROLEUM COMPANY
 
 
SIGNATURE
 November 10, 2009
 
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.
 By:
 
 HALLADOR PETROLEUM COMPANY
/S/VICTOR P. STABIO
Victor  P. Stabio, CEO 
     
Dated: May 7, 2009
  
November 10, 2009  By:
/S/ VICTOR P. STABIOS/W. ANDERSON BISHOP
CEO andW. Anderson Bishop, CFO
 Signing on behalf of registrant and
 as principal financial officer.

 
 
 
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