September 30, 2006 Form 10QSB
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C.
20549
FORM
10-QSB
þ
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly
period ended September 30, 2006
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File
Number 0-14731
Hallador
Petroleum Company
(Name
of Small
Business Issuer as Specified in Its Charter)
Colorado
|
|
84-1014610
|
(State
or
Other Jurisdiction of incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
1660
Lincoln
St., #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)
Check
whether the
issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of
the
Exchange Act during the past 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. Yesþ
No
o
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
Shares
outstanding
as of November 20, 2006: 12,168,135
-----------------------------------------------------------------------
Transitional
Small
Business Disclosure Format: Yes o
No þ
PART
1 -
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
Consolidated
Balance Sheet
September
30,
2006
(in
thousands)
ASSETS
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
12,125
|
|
Accounts
receivable:
|
|
|
|
|
Oil
and gas
sales
|
|
|
691
|
|
Well
operations
|
|
|
353
|
|
Income
taxes
|
|
|
350
|
|
Prepaid
expenses
|
|
|
89
|
|
Total
current
assets
|
|
|
13,608
|
|
|
|
|
|
|
Oil
and gas
properties, at cost (successful efforts):
|
|
|
|
|
Unproved
properties
|
|
|
289
|
|
Proved
properties
|
|
|
2,401
|
|
Less
-
accumulated depreciation, depletion, amortization and
impairment
|
|
|
(1,814
|
)
|
|
|
|
876
|
|
Coal
properties, at cost:
|
|
|
|
|
Underground
equipment
|
|
|
7,621
|
|
Surface
equipment
|
|
|
7,588
|
|
Mine
acquisition and development
|
|
|
24,182
|
|
Less
-
accumulated depreciation, depletion, amortization and
impairment
|
|
|
(170
|
)
|
|
|
|
39,221
|
|
|
|
|
|
|
Investment
in
Savoy
|
|
|
4,124
|
|
Advance
royalties
|
|
|
150
|
|
Other
assets
|
|
|
366
|
|
|
|
|
4,640
|
|
|
|
|
|
|
|
|
$
|
58,345
|
|
Consolidated
Balance Sheet
September
30,
2006
(in
thousands)
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
Current
liabilities:
|
|
|
Current
portion of long-term debt
|
$
|
495
|
Accounts
payable and accrued liabilities
|
|
2,226
|
Oil
and gas
sales payable
|
|
1,061
|
Asset
retirement obligation
|
|
313
|
Current
portion of contract termination obligation
|
|
92
|
Total
current
liabilities
|
|
4,187
|
|
|
|
Long-term
liabilities:
|
|
|
Long-term
debt
|
|
22,543
|
Asset
retirement obligation
|
|
595
|
Long-term
portion of contract termination obligation
|
|
3,873
|
|
|
27,011
|
|
|
|
Total
liabilities
|
|
31,198
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
Preferred
stock, $.10 par value; 10,000,000 shares authorized; none
issued
|
|
-
|
Common
stock,
$ .01 par value; 100,000,000 shares authorized, 12,168,135 shares
issued
|
|
121
|
Additional
paid-in capital
|
|
29,520
|
Accumulated
deficit
|
|
(2,494)
|
|
|
27,147
|
|
|
|
|
$
|
58,345
|
See
accompanying
notes.
Consolidated
Statement of Operations
(in
thousands,
except per share amounts)
|
|
Nine
months
ended
|
|
Three
months
ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
|
|
$
|
673
|
|
$
|
667
|
|
$
|
202
|
|
$
|
245
|
|
Oil
|
|
|
65
|
|
|
73
|
|
|
27
|
|
|
28
|
|
Equity
income-Savoy
|
|
|
415
|
|
|
-
|
|
|
28
|
|
|
-
|
|
Interest
|
|
|
663
|
|
|
414
|
|
|
226
|
|
|
132
|
|
Property
sale
- Albany Shale
|
|
|
362
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
2,178
|
|
|
1,154
|
|
|
483
|
|
|
405
|
|
Costs
and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating
|
|
|
144
|
|
|
157
|
|
|
44
|
|
|
58
|
|
Exploration
expenses
|
|
|
31
|
|
|
38
|
|
|
4
|
|
|
-
|
|
Impairment
of
unproved properties
|
|
|
-
|
|
|
183
|
|
|
-
|
|
|
169
|
|
Depreciation,
depletion and amortization
|
|
|
41
|
|
|
30
|
|
|
13
|
|
|
11
|
|
G&A
|
|
|
1,094
|
|
|
411
|
|
|
312
|
|
|
116
|
|
G&A
-
Sunrise
|
|
|
227
|
|
|
- |
|
|
227
|
|
|
- |
|
Aborted
reorganization/merger costs
|
|
|
137
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest
|
|
|
233
|
|
|
-
|
|
|
233
|
|
|
-
|
|
Other
|
|
|
150
|
|
|
139
|
|
|
54
|
|
|
36
|
|
|
|
|
2,057
|
|
|
958
|
|
|
887
|
|
|
390
|
|
Income
(loss)
from continuing operations before taxes
|
|
|
121
|
|
|
196
|
|
|
(404
|
)
|
|
15
|
|
Income
taxes
|
|
|
125
|
|
|
(90
|
)
|
|
320
|
|
|
(6
|
)
|
Income
(loss)
from continuing operations
|
|
|
246
|
|
|
106
|
|
|
(84
|
)
|
|
9
|
|
Loss
on sale
of discontinued operations
|
|
|
-
|
|
|
(146
|
)
|
|
-
|
|
|
(170
|
)
|
Net
income
(loss)
|
|
$
|
246
|
|
$
|
(40
|
)
|
$
|
(84
|
)
|
$
|
(161
|
)
|
Basic
and
diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
.02
|
|
$
|
0.02
|
|
$
|
(0.01
|
)
|
$
|
-
|
|
Discontinued
operations
|
|
|
-
|
|
|
(0.02
|
)
|
|
-
|
|
|
(0.02
|
)
|
Net
income
(loss) per share
|
|
$
|
.02
|
|
$
|
0.00
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
Weighted
average shares outstanding-basic and diluted
|
|
|
11,562
|
|
|
7,093
|
|
|
12,168
|
|
|
7,093
|
|
See
accompanying
notes.
Consolidated
Statement of Cash Flows
(in
thousands)
|
|
Nine
months
ended September 30,
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
cash
provided by (used in) operating activities:
|
|
|
|
|
$
|
(882
|
)
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
E&B
note
receivable
|
|
|
|
|
|
-
|
|
|
3,538
|
|
Acquisition
of Sunrise Coal, net of acquired cash of $1,892
|
|
|
|
|
|
(5,828
|
)
|
|
-
|
|
Properties
|
|
|
|
|
|
(4,312
|
)
|
|
(3,614
|
)
|
Prospect
sales
|
|
|
|
|
|
3,394
|
|
|
-
|
|
Distributions
from Savoy
|
|
|
|
|
|
518
|
|
|
-
|
|
Investment
in
COALition
|
|
|
|
|
|
-
|
|
|
(326
|
)
|
Decrease
in
bonds
|
|
|
|
|
|
-
|
|
|
252
|
|
Other
|
|
|
|
|
|
(26
|
)
|
|
(14
|
)
|
Net
cash used
in investing activities
|
|
|
|
|
|
(6,254
|
)
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Stock
sale to
related party
|
|
|
|
|
|
7,000
|
|
|
-
|
|
Repurchase
of
partnership options
|
|
|
|
|
|
-
|
|
|
(407
|
)
|
Distribution
to limited partners
|
|
|
|
|
|
-
|
|
|
(8,081
|
)
|
Net
cash
provided by (used in) financing activities
|
|
|
|
|
|
7,000
|
|
|
(8,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease
in cash and cash equivalents
|
|
|
|
|
|
(136
|
)
|
|
(8,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents, beginning of period
|
|
|
|
|
|
12,261
|
|
|
19,927
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents, end of period
|
|
|
|
|
$
|
12,125
|
|
$
|
11,539
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid
during the period for interest (net of amount capitalized)
|
|
|
|
|
$
|
190
|
|
$
|
-
|
|
Income
taxes
|
|
|
|
|
$
|
432
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Non-cash
property additions
|
|
|
|
|
$
|
170
|
|
$
|
-
|
|
See
accompanying
notes.
Notes
to
Financial Statements
The
interim
financial data is unaudited; however, in our opinion, it includes all
adjustments, consisting only of normal recurring adjustments necessary for
a
fair statement of the results for the interim periods. The financial statements
included herein have been prepared pursuant to the SEC’s rules and regulations;
accordingly, certain information and footnote disclosures normally included
in
GAAP financial statements have been condensed or omitted.
Our
organization
and business, the accounting policies we follow and other information, excluding
those of Sunrise Coal, LLC that are provided hereinafter, are contained in
the
notes to our financial statements filed as part of our 2005 Form 10-KSB. This
quarterly report should be read in conjunction with that annual report.
2.
|
Summary
of Significant Accounting
Policies
|
Consolidation
The
consolidated
financial statements include the accounts of Hallador Petroleum Company (the
Company) and its majority-owned subsidiary Sunrise Coal, LLC (Sunrise), and
Sunrise’s wholly-owned subsidiary Devers Drilling Company, LLC (Devers). Devers
renders services solely to its parent company Sunrise, and does not render
services for any unrelated third party. Intercompany accounts and transactions
have been eliminated in consolidation.
Accounting
estimates
The
preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
and cash
equivalents
Cash
and cash
equivalents are stated at cost. Cash equivalents consist of highly-liquid
investments with an original maturity of three months or less when
purchased.
Inventories
Coal
and supplies
inventories are valued at the lower of average cost or market. Coal inventory
costs include labor, supplies, equipment costs and overhead. The Company had
no
coal production and related inventories as of and for the period ended September
30, 2006.
Advance
royalties
Rights
to develop
leased coal lands may require payments of advance royalties. When those advance
royalties may be recouped through future production, the payments are reflected
as current or long-term assets, depending on the expected recovery period.
As
coal is produced, the payments are statutorily amortized and reflected as cost
of coal sales in the consolidated statements of operations.
Property,
plant
and equipment
Property,
plant and
equipment are recorded at cost. Interest costs applicable to major asset
additions are capitalized during the construction period. Expenditures that
extend the useful lives of existing property, plant and equipment or increase
the productivity of the assets are capitalized. The cost of maintenance and
repairs that do not extend the useful lives or increase the productivity of
the
assets are expensed as incurred. Property, plant and equipment are depreciated
using the units-of-production method over the estimated recoverable
reserves.
If
facts and
circumstances suggest that a long-lived asset may be impaired, the carrying
value is reviewed for recoverability. If this review indicates that the carrying
value of the asset will not be recoverable through estimated undiscounted future
net cash flows related to the asset over its remaining life, then an impairment
loss is recognized by reducing the carrying value of the asset to its estimated
fair value.
For
the period from
July 31, 2006 (date of acquisition) through September 30, 2006, Sunrise
capitalized $133,000 of interest.
Deferred
mine
development
Costs
of developing
new coal mines, including asset retirement obligation assets, or significantly
expanding the capacity of existing mines, are capitalized and amortized using
the units-of-production method over estimated recoverable (proved and probable)
reserves.
Coal
land and
mineral rights
Certain
of the
Sunrise’s coal reserves were obtained through leases. The cost of those leases
is capitalized and depleted using the units-of-production method over estimated
recoverable (proved and probable) reserves.
Asset
retirement obligations
At
the time they
are incurred, legal obligations associated with the retirement of long-lived
assets are reflected at their estimated fair value, with a corresponding charge
to asset retirement obligation assets. Obligations are typically incurred when
Sunrise commences development of either underground or surface mines, and
include reclamation of support facilities, refuse areas and slurry
ponds.
Obligations
are
reflected at the present value of their discounted cash flows. Sunrise reflects
accretion of the obligations for the period from the date they are incurred
through the date they are extinguished. The asset retirement obligation assets
are amortized using the units-of-production method over estimated recoverable
(proved and probable) reserves.
Sunrise's
asset
retirement obligations arise from the federal Surface Mining Control and
Reclamation Act of 1977 (SMCRA) and similar state statutes. SMCRA and states
require that mines be reclaimed to their previous condition in accordance with
specific standards and approved reclamation plans, as outlined in mining
permits. Activities include reclamation of pit and support acreage at surface
mines, sealing portals at underground mines, and reclamation of refuse areas
and
slurry ponds.
Sunrise
assesses it
asset retirement obligations at least annually, and reflects revisions for
permit changes, as granted by state authorities, for revisions to the estimated
reclamation costs, and for revisions to the timing of those costs.
The
following table
reflects the changes to the Sunrise's asset retirement obligations:
Balance,
July
31, 2006 (date of Sunrise Acquisition)
|
|
$
|
1,186
|
|
Additions
|
|
|
-
|
|
Accretion
|
|
|
6
|
|
Settlements
|
|
|
(284
|
)
|
Revisions
to
previous estimates
|
|
|
-
|
|
Balance,
September 30, 2006
|
|
$
|
908
|
|
|
|
|
|
|
Current
|
|
$
|
313
|
|
Long-term
|
|
|
595
|
|
|
|
$
|
908
|
|
|
|
|
|
|
Fair
Value of
Financial Instruments
Cash
and cash
equivalents - the carrying amounts approximate fair value.
Debt
- the carrying
amounts approximate fair value.
Credit
Risk
Financial
instruments that potentially subject the company to concentrations of credit
risk consist primarily of cash in excess of the federally insured amount of
$100,000 and trade receivables. Generally, credit is extended based on an
evaluation of a customer’s financial condition, and collateral is not required.
Sunrise has not incurred a loss relating to these concentrations of credit
risk.
Long-term
contract
The
Carlisle mine,
Sunrise's primary asset, is currently being developed in order to begin shipping
coal sometime during the first quarter of 2007.
Sunrise has a
large portion of its current production capacity contracted with a public
utility for several years. The coal is contracted at market prices that were
in
effect July 1, 2005. Sunrise is talking
to other coal
purchasers about additional contracts, and if coal prices continue to rise,
we
believe coal production could peak at about
3
million
tons per year in
five or six years. Recoverable reserves that are presently leased are about
35
million tons.
Transportation
The
Company depends
primarily on truck and rail transportation to deliver coal to its customers.
Disruption of these services due to weather, mechanical issues, strikes,
lockouts, bottlenecks and other events may have a temporary adverse impact
on
shipments and, consequently, to coal sales.
4.
|
Sale
of Albany Shale Gas Lease
Play
|
In
early May, we sold for about $3.3 million all of our interest in our Albany
Shale Gas Lease Play, located in Kentucky, to Approach Oil and Gas Inc.
(Approach), a private company based in Fort Worth, Texas. Approach is controlled
by the Yorktown group of companies. We recognized a gain of about $360,000.
Under
our agreement
with Approach, sixty days after three exploratory gas wells are drilled, we
have
the option to purchase a 1/3 working interest in the project by paying 1/3
of
the land costs expended by Approach. We are carried on the drilling of the
three
wells. Drilling is expected to begin December 2006. Our 1/3 of the land costs
would be about $1.2 million.
In
mid-October, we sold one-half of our rights under this option for $500,000
to an
unaffiliated third party. If we jointly elect to exercise the option, the third
party will owe us an additional $500,000. We would then owe one-half of our
share of the land costs which would be about $600,000 (one-half of the $1.2
million discussed above). Our net ownership in the project would then be
1/6th.
For
accounting
purposes we plan to defer the $500,000 gain pending the decision to exercise
the
option, which we should know in early 2007.
5.
|
Sunrise
Coal Acquisition
|
As
discussed in the
first quarter Form 10-QSB, Sunrise informed us of their intention to shut down
the Howesville mine, which they did. As a result, all of our previous agreements
with Sunrise were voided.
On
July 31, 2006
Hallador entered into a joint venture with Sunrise. The original Sunrise members
retained a 40% interest in the venture, and Hallador agreed to contribute
capital of $20.5 million for a 60% interest. Of the $20.5 million, $7.5 million
was paid to Sunrise at closing, and was used to develop the Carlisle
mine.
We
expect the
entire $20.5 million to be expended by the first half of 2007. Through
approximately 88% of the Carlisle mine’s net cash flow, Hallador will receive
$20.5 million plus interest at 10%. Thereafter, distribution of net cash flow
will revert to 60% to Hallador, and 40% to the original Sunrise
members.
As
a result of
these developments, we have expensed about $137,000 in legal fees, which were
previously deferred pending closing of the reorganization/merger with
Sunrise.
On
July 31, 2006
(date of acquisition), Hallador began consolidating the Sunrise joint venture.
Because, at the date of acquisition, the original Sunrise members had not
contributed capital in excess of accumulated losses (resulting primarily from
the Howesville mine closure), Hallador has reflected Sunrise’s entire losses for
the period since acquisition. When Sunrise’s accumulated earnings exceed its
prior losses, Hallador will reflect the original members’ minority interest in
the results of operations.
The
following table
summarizes the costs and allocations of the above acquisition which are
preliminary and subject to finalization:
Acquisition
costs:
|
|
|
|
|
Cash
consideration
|
|
$
|
7,500
|
|
Direct
acquisition costs
|
|
|
220
|
|
|
|
$
|
7,720
|
|
|
|
|
|
|
Allocation
of acquisition costs:
|
|
|
|
|
Current
assets
|
|
$
|
1,892
|
|
Coal
properties
|
|
|
35,312
|
|
Other
assets
|
|
|
192
|
|
Liabilities
assumed
|
|
|
(29,676
|
)
|
|
|
$
|
7,720
|
|
|
|
|
|
|
Included
in
liabilities assumed is the estimated present value of the contract termination
obligation with the utility who was to purchase the coal from the Howesville
mine. The purchase price is subject to modification for certain items, including
the contract termination obligation, and, consequently, may change.
Pro
Forma
Results of Operations (Unaudited)
The
following table
reflects the unaudited pro forma consolidated results of operations for the
nine
and three months ended September 30, 2006 and 2005 as though the Sunrise and
Savoy acquisitions had occurred on January 1, 2005. The unaudited pro forma
results have been prepared for comparative purposes only and may not be
indicative of future results.
|
|
Nine
months
ended
September
30,
|
|
Three
months
ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,339
|
|
$
|
1,433
|
|
$
|
486
|
|
$
|
405
|
|
Net
loss
|
|
|
(10,568
|
)
|
|
(105
|
)
|
|
(571
|
)
|
|
(381
|
)
|
Net
loss per
basic share
|
|
|
(0.91
|
)
|
|
(0.01
|
)
|
|
(0.05
|
)
|
|
(0.04
|
)
|
Weighted
average basic shares outstanding
|
|
|
11,562
|
|
|
8,986
|
|
|
12,168
|
|
|
8,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
August 2005, we
began negotiations to purchase from Yorktown Energy Partners II, L.P. its 32%
interest in Savoy Energy LLP, a private company engaged in the oil and gas
business primarily in the State of Michigan. A purchase price of $4.1 million
was agreed upon and closing occurred on December 31, 2005. On December 20,
2005
we sold about 1,893,000 shares of our common stock to Yorktown Energy Partners
VI, L.P. at $2.20 per share (about $4.1 million). We account for our interest
in
Savoy using the equity method of accounting.
Below
(in
thousands) are Savoy's: (i) unaudited condensed balance sheet at September
30,
2006, and (ii) unaudited condensed statement of operations for the nine months
ended September 30, 2006.
|
Condensed
Balance Sheet
|
|
|
|
|
|
|
|
|
Current
assets
|
$
|
9,179
|
|
|
|
PP&E,
net
|
|
9,229
|
|
|
|
|
$
|
18,408
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
$
|
3,521
|
|
|
|
Partners
capital
|
|
14,887
|
|
|
|
|
$
|
18,408
|
|
|
|
Condensed
Statement Of Operations
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
5,030
|
|
|
|
Expenses
|
|
(3,732)
|
|
|
|
Net
income
|
$
|
1,298
|
|
|
The
difference
between our investment account and our pro rata share of the equity of Savoy
will be amortized based on Savoy's units of production rate.
In
June, we
received a distribution from Savoy of about $133,000 which was credited to
the
investment account. We have received total distributions of $518,000 in
2006.
On
April 19, 2006,
Sunrise entered into a new $30,000,000 facility with Old National Bank. The
Line
of Credit under the facility has a maturity of July 28, 2007. Thereafter, the
Line of Credit balance converts to a Term Loan that has a maturity of July
28,
2012. The Line of Credit bears interest at LIBOR plus 3.55%, and the Term Loan
bears interest at 8.50%. Monthly interest-only payments are required through
the
term of the Line of Credit. Thereafter, the Term loan requires amortizing
payments through maturity.
Proceeds
of the
Line of Credit were available to pay then existing notes payable to First
Financial, Fifth Third, and Hallador to fund the acquisition of certain real
and
personal property at the Company’s Carlisle mine, and to fund working
capital.
The
loan is secured
by all of Sunrise’s real and personal property, guaranteed by Sunrise and
Hallador, and requires Sunrise to comply with certain
covenants.
8.
|
Stock-Based
Compensation
|
On
April 15, 2005,
we issued 750,000 ten-year options to employees at an exercise price of
$2.25. To date no options have been exercised or forfeited.
The exercise price was based on the sales price of a March 2005 private stock
transaction between one of our shareholders and a third party. These options
vest at 1/3 per year over the next three years. There are no more options
available for issuance.
Effective
January
1, 2006, we adopted the fair value recognition provisions of SFAS 123R,
using the modified prospective transition method and therefore have not restated
prior periods' results.
We
estimated the
fair value of the option grant using the Black-Scholes option-pricing model,
using the following assumptions: (i) risk free interest rate of 4.24%; (ii)
expected life of 10 years; (iii) expected volatility of 120%; and (iv) expected
default rate of 5%, and (v) no dividend yield. The average fair value of options
granted during 2005 was $2.15. At September 30, 2006, our 750,000 outstanding
stock options had a remaining contractual maturity of nine years and an
aggregate intrinsic value of about $750,000.
The
total
compensation expense related to this plan was $345,000 for the nine months
ended
September
30, 2006.
The impact on earnings per share for the nine months ended September
30, 2006
was $.03 per share. No options were granted during the first quarter of 2005
and
none were outstanding. Assuming no more grants, we estimate
that, for each of the next six quarters, we will reflect stock-based
compensation expense of approximately $115,000 per quarter, or a total of
$690,000.
9.
|
Related
Party Transactions
|
For
the period from
July 31, 2006 (date of acquisition) through September 30, 2006, two entities
owned by two members of Sunrise (other than Hallador) provided services to
the
Company in the aggregate gross amount of $44,000.
The
Company is
engaged in two segments: the acquisition, exploration, development and
production of oil, natural gas and natural gas liquids through Hallador
Petroleum Company, and the acquisition, development and sale of coal..
Accordingly, the Company’s Chief Executive Officer makes operating decisions,
assesses financial performance and allocates resources on a segment
basis.
The
Company
prepares business segment information in accordance with generally accepted
accounting principles, except that certain items below income (loss) from
continuing operations are not allocated to business segments, as management
does
not consider them in its evaluation of business unit
performance.
The
table below
presents information about identifiable assets for the reported segments as
of
September 30, 2006 and 2005:
|
Hallador
|
Sunrise
|
Total
|
September
30,
2006:
|
|
|
|
Total
segment
assets
|
$16,277
|
$42,068
|
$58,345
|
|
|
|
|
September
30,
2005:
|
|
|
|
Total
segment
assets
|
$17,888
|
-
|
$17,888
|
|
|
|
|
The
table below
presents information about operating income (loss) for the reported segments
for
the nine and three months ended September 30, 2006 and 2005.
|
|
Hallador
|
|
Sunrise
|
|
Total
|
|
Nine
months
ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,166
|
|
$
|
12
|
|
$
|
2,178
|
|
Expenses
|
|
|
1,591
|
|
|
466
|
|
|
2,057
|
|
Income
(loss)
from continuing operations before taxes
|
|
$
|
575
|
|
$
|
(454
|
)
|
|
121
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
125
|
|
Income
from
continuing operations
|
|
|
|
|
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months
ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,154
|
|
|
-
|
|
$
|
1,154
|
|
Expenses
|
|
|
958
|
|
|
-
|
|
|
958
|
|
Income
from
continuing operations before taxes
|
|
$
|
196
|
|
|
-
|
|
|
196
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
(90
|
)
|
Income
from
continuing operations
|
|
|
|
|
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months
ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
471
|
|
$
|
12
|
|
$
|
483
|
|
Expenses
|
|
|
421
|
|
|
466
|
|
|
887
|
|
Income
(loss)
from continuing operations before taxes
|
|
$
|
50
|
|
$
|
(454
|
)
|
|
(404
|
)
|
Income
taxes
|
|
|
|
|
|
|
|
|
320
|
|
Loss
from
continuing operations
|
|
|
|
|
|
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Three
months
ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
405
|
|
|
-
|
|
$
|
405
|
|
Expenses
|
|
|
390
|
|
|
-
|
|
|
390
|
|
Income
from
continuing operations before taxes
|
|
$
|
15
|
|
|
-
|
|
|
15
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
(6
|
)
|
Income
from
continuing operations
|
|
|
|
|
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
2.
MD&A
THE
FOLLOWING
DISCUSSION UPDATES THE MD&A SECTION OF OUR 2005 FORM 10-KSB WHICH WAS FILED
ON APRIL 14, 2006 AND SHOULD BE READ IN CONJUNCTION THERETO.
Sunrise
Coal
and Loan Guarantee
As
discussed in the first quarter Form 10-QSB, Sunrise informed us of their
intention to shut down the Howesville mine which they did. As a result all
of
our previous agreements with Sunrise were voided and on July 31, 2006 we entered
into a joint venture with Sunrise. Sunrise contributed all of their assets
for a
40% interest and we agreed to a $20.5 million commitment, of which $7.5 million
was paid to Sunrise at closing, to develop the Carlisle mine for a 60% interest.
We expect the full $20.5 million to be expended by the first quarter of 2007.
We
are to receive approximately 88% of the free cash flow from the Carlisle mine
until we recoup our $20.5 million plus interest at 10%. Upon recoupment, the
ownership reverts back to 60/40. During the third quarter we will begin
consolidating the joint venture at 100%. Due to the Sunrise's losses, we pick
up
100% of their losses for financial reporting purposes. In addition we remain
a
guarantor of Sunrise's $30 million line of credit with two Indiana banks. As
of
September 30, 2006, $23 million
has been
drawn down, $2.5 million has been used on allocated letters of credit leaving
an
available balance of $4.5 million.
The
equipment,
valued at about $10.8 million, that was being used at the Howesville mine has
been moved to the Carlisle mine. Sunrise is in final discussions with the
utility who purchased coal from the Howesville mine regarding the termination
of
the Howesville coal contract. We do not expect the final terms of the
negotiation to have a material adverse effect.
To
date Sunrise has not had significant operations and is currently concentrating
its efforts in the development of the Carlisle mine.
Carlisle
Mine
The
Carlisle mine,
Sunrise's primary asset, is currently being developed in order to begin shipping
coal sometime during the first half of 2007.
Sunrise has a
large portion of its current production capacity contracted with a public
utility for several years. The coal is contracted at market prices that were
in
effect July 1, 2005. Sunrise is talking
to other coal
purchasers about additional contracts, and if coal prices continue to rise,
we
believe coal production could peak at about
3
million
tons per year in
five or six years. Recoverable reserves that are presently leased are about
35
million tons.
Sunrise
has 87
employees and is running three, eight-hour shifts to develop the Carlisle mine.
The number of employees during the mining phase will depend on the number of
tons of coal being mined.
Mine
development
continues with the building of the "slope", which is the entrance to the mine
for transporting equipment and employees into the mine and transporting coal
out
of the mine. The "slope" starts at the surface and heads down into the earth
at
a 8-3/4% grade and when completed should be about
2,400 feet
long. The slope will meet the coal seam about 340 vertical feet below
the
surface.
Albany
Shale
Gas Lease Play
In
early May, we sold for about $3.3 million all of our interest in our Albany
Shale Gas Lease Play, located in Kentucky, to Approach Oil and Gas Inc.
(Approach), a private company based in Fort Worth, Texas. Approach is controlled
by the Yorktown group of companies. We recognized a gain of about $360,000.
Under
our agreement
with Approach, sixty days after three exploratory gas wells are drilled, we
have
the option to purchase a 1/3 working interest in the project by paying 1/3
of
the land costs expended by Approach. We are carried on the drilling of the
three
wells. Drilling is expected to begin December 2006. Our 1/3 of the land costs
would be about $1.2 million.
In
mid-October, we sold one-half of our rights under this option for $500,000
to an
unaffiliated third party. If we jointly elect to exercise the option, the third
party will owe us an additional $500,000. We would then owe one-half of our
share of the land costs which would be about $600,000 (one-half of the $1.2
million discussed above). Our net ownership in the project would then be
1/6th.
For
accounting
purposes we plan to defer the $500,000 gain pending the decision to exercise
the
option which we should know in early 2007.
COALition
Energy LLC (CELLC)
We
continue to be in discussions with CELLC as to the resolution of our 29%
interest. Our remaining investment in CELLC is not significant.
Liquidity
and
Capital Resources
Upon
completion of
our $20.5 million commitment to Sunrise estimated to be completed during the
first half of 2007, we expect to have about $2 million in cash. We may be
required to raise additional capital to fund future cash calls for mine
development and expansion. There can be no assurances that we will be able
to
raise additional capital on terms which would be acceptable to us.
Results
Of
Continuing Operations
The
tables below
provides sales data and average prices for the period.
|
Year-to-date
Comparison
|
|
2006
|
|
2005
|
|
Sales
Volume
|
Average
Price
|
Revenue
|
|
Sales
Volume
|
Average
Price
|
Revenue
|
|
|
|
|
|
|
|
|
Gas-mcf
|
|
|
|
|
|
|
|
San
Juan
|
49,230
|
$10.17
|
$500,600
|
|
47,172
|
$9.54
|
$450,000
|
Other
|
23,475
|
7.36
|
172,800
|
|
30,961
|
7.01
|
217,000
|
|
|
|
|
|
|
|
|
Oil
-
barrels
|
|
|
|
|
|
|
|
Other
|
987
|
65.50
|
64,650
|
|
1,380
|
52.90
|
73,000
|
|
|
|
|
|
|
|
|
|
Quarter-to-date
Comparison
|
|
2006
|
|
2005
|
|
Sales
Volume
|
Average
Price
|
Revenue
|
|
Sales
Volume
|
Average
Price
|
Revenue
|
|
|
|
|
|
|
|
|
Gas-mcf
|
|
|
|
|
|
|
|
San
Juan
|
15,702
|
$9.50
|
$149,000
|
|
15,402
|
$10.84
|
$167,000
|
Other
|
7,712
|
6.85
|
53,000
|
|
9,519
|
8.20
|
78,000
|
|
|
|
|
|
|
|
|
Oil
-
barrels
|
|
|
|
|
|
|
|
Other
|
402
|
66.93
|
26,900
|
|
468
|
59.94
|
28,000
|
|
|
|
|
|
|
|
|
Oil
and gas sales
and LOE remained about the same comparing 2006 to 2005.
Interest
income
increased due to higher rates and more cash available for investment. In the
future interest income will decrease due to the Sunrise funding and a reduction
of our cash balances.
For
the nine
months, G&A increased by about $680,000 due primarily to stock option
expense of $345,000, employee bonuses of $100,000, higher salaries of $71,000,
accounting fees of $70,000, increased travel of $17,000, higher franchise taxes
in New Mexico of $25,000, and late fees to Minerals Management Services for
properties held 20 years ago of $20,000. The increase in accounting fees relate
primarily to the Sunrise transaction.
For
the three
months G&A increased by about $196,000 due primarily to stock option expense
of $115,000, higher salaries of $28,000, and higher legal and accounting fees
of
$33,000.
Sunrise's
G&A
relates to the its coal operations which are in the start up phase.
Interest
expense
relates solely to the debt connected with the Sunrise
acquisition.
For
the nine months
income taxes reflect a benefit of $125,000 primarily as a result of reflecting
the 2005 current tax provision in excess of taxes paid. For the three months,
income taxes reflect a benefit of $320,000 primarily as a result of reflecting
the 2005 current tax provision in excess of taxes paid, and the tax benefit
derived from losses generated by Sunrise Coal.
During
the first
quarter, we expensed $137,000 of legal fees related to the merger with Sunrise
which was terminated
Loss
on the sale of
discontinued operations relates to additional income taxes due on the sale
of
the South Cuyama field.
ITEM
3.
CONTROLS AND PROCEDURES
We
maintain a system of disclosure controls and procedures that are designed for
the purposes of ensuring that information required to be disclosed in our SEC
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our CEO as appropriate to allow timely decisions regarding
required disclosure.
As
of the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our CEO of the effectiveness
of the design and operation of our disclosure controls and procedures. Based
upon that evaluation, our CEO, who is also our CFO, concluded that our
disclosure controls and procedures are effective for the purposes discussed
above. There have been no changes in our internal controls that has materially
affected, or is reasonably likely to materially affect our internal control
over
financial reporting.
PART
II—OTHER INFORMATION
|
ITEM
6.
|
EXHIBITS
|
(a)
|
31
-- SOX 302
Certification
32
-- SOX 906
Certification
|
SIGNATURE
|
In
accordance
with the requirements of the Exchange Act, the Registrant has caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
HALLADOR
PETROLEUM COMPANY
|
|
|
|
|
|
Dated:
November 20, 2006
|
|
By:
|
|
/S/VICTOR
P.
STABIO
CEO
and
CFO
Signing
on
behalf of registrant and
as
principal
financial officer.
|