Form 10-KSB for year ended December 31, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-KSB
[
x
]
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ANNUAL
REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the
fiscal year ended: December
31, 2006
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[
]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number: 0-14731
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HALLADOR
PETROLEUM COMPANY
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COLORADO
(State
of
incorporation)
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84-1014610
(IRS
Employer
Identification No.)
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1660
Lincoln Street, Suite 2700, Denver, Colorado
(Address
of principal executive offices)
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80264-2701
(Zip
Code)
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Issuer's
telephone number:
303.839.5504
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Fax:
303.832.3013
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Securities
registered under Section 12(b) of the Exchange Act: NONE
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par
value
Check
whether the
issuer is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. [ ]
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. Yes [x] No [
]
Check
if there is
no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. [x]
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act). Yes [ ] No [x]
Our
revenue for the
year ended December 31, 2006 was about $2.5 million.
At
April 16, 2007,
we had 12,168,135 shares outstanding and the aggregate market value of such
shares held by non-affiliates was about $4.7 million based on a closing price
of
$2.50.
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
ITEM
1. DESCRIPTION OF BUSINESS
General
Development of Business
Hallador
Petroleum
Company (Hallador), a Colorado corporation, was organized by our predecessor
in
1949.
We
have concluded to deemphasize our oil and gas operations and concentrate our
future efforts in the coal business.
With
that in mind,
the following events have occurred:
In
early January
2006, we signed a letter of intent with Sunrise Coal, LLC (Sunrise) to effect
a
reorganization/merger between Hallador and Sunrise, a private company not
affiliated with the Yorktown group of companies.
During
the first
quarter of 2006, we loaned Sunrise $7 million in order for Sunrise to begin
development of their second coal mine (the "Carlisle mine"). Their
first mine, Howesville, began producing coal in November 2005. Both mines are
located in western Indiana. During the second quarter of 2006, Sunrise entered
into a $30 million line-of- credit with two Indiana banks, and our $7 million
was repaid. We are a guarantor of this line of credit.
On
May 1, 2006, Sunrise informed us that they intend to shut down the Howesville
mine effective June 10, 2006.
Due
to the shut
down of the Howesville mine, all of our previous agreements with Sunrise were
voided, and on July 31, 2006, we entered into a joint venture with Sunrise
to
develop the Carlisle mine. Sunrise contributed all of their assets for a 40%
interest and we agreed to a $20.5 million funding commitment and guaranteed
the
line of credit for a 60% interest. We expect the full $20.5 million to be
expended by the first half of 2007. Through approximately 88% of the JVs cash
flow we are to receive $20.5 million plus interest at 10%. Thereafter, cash
flow
will be distributed 60% to us and 40% to the original Sunrise members. On July
31, 2006 (date of acquisition), we 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), we have reflected Sunrise’s entire losses for
the period since the acquisition. When Sunrise’s accumulated earnings exceed its
prior losses, we will reflect the original members’ minority interest in the
results of operations.
The
equipment,
valued at about $10 million, that was being used at the Howesville mine was
moved to the Carlisle mine. At the time we filed our September 30, 2006 Form
10-QSB, Sunrise had reached a preliminary agreement with the utility customer
regarding the cancellation of the Howesville coal contract. Based on the
preliminary agreement, we recorded a liability of approximately $4 million.
To
date terms for a settlement agreement have not been reached and a settlement
agreement has not been executed.
Carlisle
Mine
We
sell all of our coal to producers of electric power. Currently, we have only
one
mine (Carlisle) and two mid-west electric utility customers. The Carlisle mine
is located in western Indiana and was in the development stage through January
31, 2007. First commercial production began February 5, 2007 and we expect
to
sell 760,000 tons for the rest of 2007 at an average price of $27.95 FOB
(freight on board) the mine.
We
are 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 32 million tons.
Our
coal operations
have about 90 employees, and is running three, eight-hour shifts to develop
and
mine the Carlisle reserves. The number of employees during the mining phase
will
depend on the number of tons of coal being mined. The Carlisle mine is
non-union.
The
Coal
Industry
Coal
is a
combustible, sedimentary, organic rock formed from vegetation that has been
consolidated between other rock strata and altered by the combined effects
of
pressure and heat over millions of years. The degree of change undergone by
coal
as it matures from peat to anthracite significantly affects its physical and
chemical properties. Initially, peat is converted into lignite, a relatively
soft material, that can range in color from dark black to various shades of
brown. The continuing effects of temperature and pressure causes lignite to
transform into sub-bituminous coal. Lignite and sub-bituminous coal are
typically softer, friable materials characterized by high moisture levels and
low carbon content. Because of their carbon content, lignite and sub-bituminous
coal generally produce less energy than bituminous, or hard coal, formed by
continuing chemical and physical changes. Under the right conditions, continuing
organic maturity can result in anthracite, a hard black rock with a high carbon
and energy content and a low level of moisture. According to the World Coal
Institute, sub-bituminous and bituminous coal comprise approximately 82% of
the
global coal reserves.
Coal
Mining Methods
The
geological
characteristics of coal reserves largely determine the coal mining method
employed. There are two primary methods of mining coal: surface mining and
underground mining. The Carlisle mine is an underground mine, and is operated
using room-and-pillar mining.
Room-and-pillar
mining is effective for small blocks of thin coal seams. In room-and-pillar
mining, we cut a network of rooms into the coal seam, leaving a series of
pillars of coal to support the roof of the mine. We use continuous mining
equipment to cut the coal from the mining face and shuttle cars to transport
the
coal to a conveyor belt for further transportation to the surface. The pillars
generated as part of this mining method can constitute up to 50% of the total
coal in a seam.
Coal
Preparation
Coal
extracted from
Carlisle contains impurities, such as rock and dirt, and comes in a variety
of
different-sized fragments. We use a coal preparation plant located near the
mine
or connected to the mine by a conveyor. These coal preparation plants allow
us
to treat the coal we extract from those mines to ensure a consistent quality
and
to enhance its suitability for particular end-users.
Transportation
We
ship our coal FOB the mine. The electric utilities are currently using trucks
to
transport the coal. Rail and trucks will be used in the future.
Sales,
Marketing and Customers
Coal
prices are
influenced by a number of factors and vary dramatically by region. As a result
of these regional characteristics, prices of coal by product type within a
given
major coal producing region tend to be relatively
consistent
with
each other. The price of coal within a region is influenced by market
conditions, mine operating costs, coal quality, transportation costs involved
in
moving coal from the mine to the point of use and the costs of alternative
fuels. In addition to supply and demand factors, the price of coal at the mine
is influenced by geologic characteristics such as seam thickness, overburden
ratios and depth of underground reserves.
In
addition to the cost of mine operations, the price of coal is also a function
of
quality characteristics such as heat value, sulfur, ash and moisture content.
Higher carbon and lower ash content generally result in higher prices, and
higher sulfur and higher ash content generally result in lower prices.
Competition
The
coal industry
is intensely competitive. The most important factors on which we compete are
coal quality, transportation costs from the mine to the customer and the
reliability of supply. Our principal domestic competitor is Peabody Energy
Corp.
All of our competitors are larger than us, have greater financial resources,
and
have larger reserve bases than we do. We are probably one of the smallest public
coal companies in the United States.
Additionally,
coal
competes with other fuels, such as nuclear energy, natural gas, hydropower,
and
petroleum for steam and electrical power generation. Costs and other factors,
such as safety and environmental considerations, relating to these alternative
fuels affect the overall demand for coal as a fuel.
Environmental
Matters
Our
operations,
like operations of other coal companies, are subject to regulation, primarily
by
federal and state authorities, on matters such as the discharge of materials
into the environment; employee health and safety; mine permits and other
licensing requirements; reclamation and restoration activities involving our
mining properties; management of materials generated by mining operations;
surface subsidence from underground mining; water pollution; air quality
standards; protection of wetlands; endangered plant and wildlife protection;
limitations on land use; storage of petroleum products; and substances that
are
regarded as hazardous under applicable laws including electrical equipment
containing polychlorinated biphenyls, which we refer to as PCBs.
Additionally,
the
electric generation industry is subject to extensive regulation regarding the
environmental impact of its power generation activities, which could affect
demand for our coal. The possibility exists that new legislation or regulations
may be adopted or that the enforcement of existing laws could become more
stringent, either of which may have a significant impact on our mining
operations or our customers’ ability to use coal and may require us or our
customers to significantly change operations or to incur substantial costs.
While
it is not
possible to quantify the expenditures we incur to maintain compliance with
all
applicable federal and state laws, those costs have been and are expected to
continue to be significant. Federal and state mining laws and regulations
require us to obtain surety bonds to guarantee performance or payment of certain
long-term obligations, including mine closure and reclamation costs, federal
and
state workers’ compensation benefits, coal leases and other miscellaneous
obligations. Compliance with these laws has substantially increased the cost
of
coal mining for all domestic coal producers.
Carlisle
is a new
mine and will be operated in compliance with all local, state, and federal
regulations. Since Carlisle is new, the Company has no old mine properties
to
reclaim, other than the Howesville mine, which also was a new mine and operated
for only eight months before it was closed.
Oil
and
Gas
With
regards to our
oil and gas business:
1. On
December 31, 2005, we acquired a 32% interest in Savoy Energy LLP, a private
company engaged in the oil and gas business primarily in the State of
Michigan. A value of $6.1 million was assigned for this investment. We
account for our interest in Savoy using the equity method of
accounting.
We
operate oil and natural gas properties for our own account and for the account
of others. We also review and evaluate producing oil and natural gas
properties, companies, or other entities, which meet certain guidelines for
acquisition purposes. Occasionally, we engage in the trading and
acquisition of non-producing oil and gas mineral leases and fee-simple
minerals.
Markets
Our
products are
sold to various purchasers in the geographic area of the properties.
Natural gas, after processing, is distributed through pipelines. Oil and
natural gas liquids (NGLs) are distributed through pipelines or hauled by
trucks. The principal uses for oil and natural gas are heating,
manufacturing, power, and transportation.
Competition
The
oil and gas
industry is highly competitive. We encounter competition from major and
independent oil companies in acquiring economically desirable producing
properties, drilling prospects, and even the equipment and labor needed to
drill, operate and maintain our properties. Competition is intense with
respect to the acquisition of producing and partially developed
properties. We compete with companies having financial resources and
technical staffs significantly larger than our own. We do not own any refining
or retail outlets and have minimal control over the prices of our
products. Generally, higher costs, fees and taxes assessed at the producer
level cannot be passed on to our customers.
We
also face competition from imported products as well as alternative sources
of
energy such as coal, nuclear, hydro-electric power, and a growing trend toward
solar. We could incur delays or curtailments of the purchase of our available
production. We may also encounter increasing costs of production and
transportation while sale prices remain stable or decline. Any of these
competitive factors could have an adverse effect on our operating
results.
Environmental
and Other Regulations
Our
operations are
affected in varying degrees by federal, state, regional and local laws and
regulations, including, but not limited to, laws governing allowable rates
of
production, well spacing, air emissions, water discharges, endangered species,
marketing, prices and taxes. We are further affected by changes in such
laws and by constantly changing administrative regulations.
Most
natural gas
pricing is presently deregulated and the remaining regulation has no material
impact on our prices. We cannot predict the long-term impact of future
natural gas price regulation or deregulation.
We
are subject to various federal, state, regional and local laws and regulations
relating to discharge of materials into, and protection of, the
environment. These laws and regulations may, among other things, impose
liability on the owner or the lessee for the cost of pollution clean-up
resulting from operations, subject the owner or lessee to liability for
pollution damages, require suspension or cessation of operations in affected
areas or impose restrictions on injection into subsurface aquifers that may
contaminate groundwater. Such regulation has increased the resources
required
in, and
costs associated with, planning, designing, drilling, installing, operating
and
abandoning our oil and natural gas wells and other facilities.
We
have and will continue to make expenditures to comply with these requirements,
which we believe are necessary business costs. Although environmental
requirements do have a substantial impact upon the energy industry, generally
these requirements do not appear to affect us any differently or to any greater
or lesser extent than other companies.
Although
we are not
fully insured against all environmental and other risks, we maintain insurance
coverage, which we believe, is customary in the industry.
During
2006, the
cost to comply with these recurring environmental regulations were not
significant to our continuing operations and are not expected to be in the
foreseeable future.
To
the extent these environmental expenditures reduce funds available for
increasing our reserves of oil and natural gas, future operations could be
adversely impacted. Despite the fact that all of our competitors have to
comply with similar regulations, many are much larger and have greater resources
with which to deal with these regulations.
Other
We
have no significant patents, trademarks, licenses, franchises or
concessions.
The
oil business is
not generally seasonal in nature; although unusual weather extremes for extended
periods may increase or decrease demand. Natural gas prices tend to
increase in the fall and winter months and to decrease in the spring and
summer.
Other
than the coal
employees, in Denver we have four full-time employees and two part-time
employees. When needed we also engage consulting petroleum engineers,
environmental professionals, geologists, geophysicists, landmen, accountants
and
attorneys on a fee basis.
Our
office is
located at 1660 Lincoln Street, Suite 2700, Denver, Colorado 80264, phone
303.839.5504, fax 303.832.3013. Sunrise Coal, LLC is located at 6641 S.
St. Rd. 46, Terre Haute, IN 47802, phone 812.894.3480, fax 812.894.3665. Terre
Haute is approximately 70 miles west of Indianapolis. We have no
website.
ITEM
2. DESCRIPTION OF PROPERTY
Coal
Operations
The
current project
area is located near the town of Carlisle in Sullivan County, Indiana. The
Carlisle mine is an underground mine which became operational in January 2007;
during 2006 the mine was under development. The coal is accessed with a slope
to
a depth of 340'. The coal is mined in the Indiana Coal V seam which is high
volatile B bituminous coal.
Current
mine plans
indicates 11,000 acres of mineable coal greater than 4' thickness in the project
area. Of the 11,000 acres, 8,000 are currently under lease to Sunrise Coal,
LLC.
The Indiana V seam has been extensively mined by underground and surface methods
in the general area and is the most economically significant coal in
Indiana.
Findings
are based
on generally accepted engineering principles and professional experience in
the
mining industry. All judgments are based on the facts that are available at
this
time.
Sunrise
Coal, LLC
currently has approximately 3,575 acres under an approved Indiana
permit.
Coal
Reserve Estimates
The
Mine Reserve
estimate for the 8,000 leased acres was made utilizing Carlson mining 2007
(software developed by Carlson Software). To convert volumes of coal to an
in-place tonnage, a weight of 80 pounds/cubic foot was used. To convert to
product tonnage, a 55% mine recovery and an average of 79% washed recovery
(coal
only recovery, no out-of- seam dilution included) were used.
Example:
In-place
tonnage x 55% x 79% = product tonnage.
Standards
set forth
by the United States Geological Survey were used to place areas of the mine
reserves into the Proven (measured) and Probable (indicated) categories. Under
these standards, coal within 1,320' of a data point is considered to be Proven,
and coal within 1,320' to 3,960' is placed in the Probable category. All
reserves are stated as a final salable product.
ADDITIONAL
DISCLOSURES
1.
|
The
Carlisle
mine currently has road frontage on State Highway 58, and is adjacent
to
the CSX railroad. Design plans are being completed for a 100 car
loop
facility, and construction is planned to be completed in 2007. Currently,
coal is being trucked from the Carlisle
mine.
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2.
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Currently
only the Indiana V seam is planned to be mined, and all of the controlled
tonnage is leased to Sunrise Coal. Most leases have unlimited terms
once
mining has begun, and yearly payments or earned royalties are kept
current. Mineable coal thickness used is greater than four feet.
The
current Carlisle mine plan is broken into four areas - North Main
- South
Main - West Main - 2 South Main. Approximately 73% of the total mine
plan
is currently under lease ("controlled"). It is believed that all
additional property that would be required to access all lease areas
can
be obtained but, if some properties cannot be leased, some modification
of
the current mine plan would be required. All coal should be mined
within
the terms of the leases. Leasing programs are continuing by Sunrise
Coal
staff.
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3.
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Mine
construction began in 2006 and the first coal sales were in February
2007.
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4.
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The
Carslisle
mine has a dual use slope for the main coal conveyor, the moving
of
supplies and personnel without a hoist. There are two 8' diameter
shafts
at the base of the slope for mine ventilation. The slope is 18' wide
with
concrete and steel arch construction. All underground mining equipment
is
powered with electricity and underground compliant
diesel.
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5.
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Current
production capabilities are 1,200,000 tons per year. Additional equipment
is planned to increase production to 2 million tons per year by 2009.
Total reserves in the current mine plan (both controlled and uncontrolled)
indicates approximately 22 years production at 2 million tons per
year.
The mine plan is a basic room and pillar mine using a synchronized
continuous miner section with no retreat mining. Plans are for 60'x80'
pillars with 18' entries for our mains, and 60'x60' pillars with
20'
entries in the rooms.
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6.
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The
Carslisle
mine has been in production since January 2007. The North main is
currently being developed toward the first
panel.
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7.
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Quality
specifications for saleable product are 13-16% moisture; 10,900-11,400
BTU; 8-10% ash; and 5-6.5 LB
SO2.
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8.
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The
Carlisle
mine has a 400 tons/hour raw feed wash plant that was moved from
our
Howesville mine, which was closed in June 2006, and reconstructed
at the
Carlisle mine. The wash plant is modular in construction and was
designed
and constructed on site so that capacity could be doubled if sales
dictate.
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9.
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Mine
dilution
is assumed to be from 6% to 10% depending on seam
height.
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10.
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Proven
(measured) reserves are 17.4 million tons and probable (indicated)
reserves are 14.5 million tons.
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Oil
and
Gas Operations
Our
primary
operating property is in the San Juan Basin, located in the northwest corner
of
New Mexico.
We
hold our working interests in oil and natural gas properties either through
recordable assignments, leases, or contractual arrangements such as operating
agreements. Consistent with industry practices, we do not make a detailed
examination of title when we acquire undeveloped acreage. Title to such
properties is examined by legal counsel prior to commencement of drilling
operations. This method of title examination is consistent with industry
practices.
In
the acquisition and operation of oil and natural gas properties, burdens such
as
royalty, overriding royalty, liens incident to operating agreements, liens
by
taxing authorities, as well as other burdens and minor encumbrances are
customarily created. We believe that no such burdens materially affect the
value
or use of our properties.
Savoy's
oil and gas
properties are located primarily in the State of Michigan. Savoy's
condensed financial statements are presented in Note 7 to our financial
statements and Savoy's condensed oil and gas reserve information is presented
in
Note 8 to our financial statements.
Proved
Oil and Gas Reserves
Information
concerning our reserve estimates is set forth in Note 8 to the consolidated
financial statements. Our reserve estimates were prepared by Edwin James,
a sole-proprietor consulting petroleum engineer. Savoy's reserve estimates
were
prepared by Netherland, Sewell & Associates and Mr. James. All of our
and Savoy's reserves are located onshore.
Sales
and Price Data
See
Item 6 -
MD&A
Producing
Wells
As
of April 16, 2007, we had a working interest in 32 gross (3 net) gas
wells.
Leasehold
Interests
The
following table
sets forth our gross and net acres of undeveloped oil and gas leases as of
April
2, 2007:
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Gross
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Net
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|
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|
|
|
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Kentucky
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82,141
|
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15,053
|
|
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Montana
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54,070
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44,512
|
|
|
North
Dakota
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720
|
|
120
|
|
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Wyoming
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42,404
|
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33,747
|
|
|
Other
|
238
|
|
169
|
|
|
Total
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179,573
|
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93,601
|
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Drilling
Activity - Continuing Operations
During
2005, we
drilled two development gas wells, the Horton 1C and the Horton 1D, located
in
the San Juan Basin. We have about a 6% WI in each well.
There
was no
drilling activity during 2006 and there has been no drilling activity since
the
beginning of 2007.
ITEM
3. LEGAL PROCEEDINGS:
None
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is
traded on the OTC Bulletin Board under the symbol “HPCO”. The following
table sets forth the high and low sales price for the periods
indicated:
|
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High
|
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Low
|
|
2007
|
|
|
|
|
|
|
|
(January 1 through April 16, 2007)
|
|
$
|
3.00
|
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
First quarter
|
|
|
4.10
|
|
|
3.10
|
|
Second quarter
|
|
|
5.00
|
|
|
3.90
|
|
Third quarter
|
|
|
4.25
|
|
|
3.25
|
|
Fourth
quarter
|
|
|
3.45
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
First quarter
|
|
|
2.15
|
|
|
2.10
|
|
Second quarter
|
|
|
3.40
|
|
|
1.75
|
|
Third quarter
|
|
|
8.00
|
|
|
2.06
|
|
Fourth quarter
|
|
|
3.99
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
During
the last two
years no dividends were paid. We have no present intention to pay any
dividends in the foreseeable future.
At
April 2, 2007 there were 387 holders of record of our common stock and the
last
recorded sales price was $2.50.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
Our
consolidated
financial statements should be read in conjunction with this discussion.
Our primary operating property is the Carlisle coal mine located in western
Indiana of which we own a 60% interest. We also have oil and gas reserves in
the
San Juan Basin, located in the northwest corner of New Mexico, and we have
a 32%
equity interest in Savoy Energy, LLC, an oil and gas company which has
operations in Michigan.
Our
coal properties
comprise over 70% of our total assets. The Carlisle mine was in the development
stage through January 31, 2007. Commercial coal production began February 5,
2007.
We
have concluded to deemphasize our oil and gas operations and concentrate our
future efforts in the coal business.
With
that in mind,
the following events have occurred:
In
early January 2006, we signed a Letter of Intent with Sunrise Coal, LLC
(Sunrise) with the intent to effect a reorganization/merger between Hallador
and
Sunrise a private company not affiliated with the Yorktown group of companies.
During
the first
quarter of 2006, we loaned Sunrise $7 million in order for Sunrise to begin
development of their second coal mine (the "Carlisle mine"). Their
first mine, Howesville, began producing coal in November 2005. Both mines are
located in western Indiana. During the second quarter of 2006, Sunrise entered
into a $30 million line-of- credit with two Indiana banks, and our $7 million
was repaid. We are the guarantor of this line of credit.
May
1, 2006,
Sunrise informed us that they intend to shut down the Howesville mine effective
June 10, 2006.
Due
to the shut
down of the Howesville mine, all of our previous agreements with Sunrise were
voided, and on July 31, 2006, we entered into a joint venture with Sunrise
to
develop the Carlisle mine. Sunrise contributed all of their assets for a 40%
interest and we agreed to a $20.5 million funding commitment and guaranteed
the
line of credit for a 60% interest. We expect the full $20.5 million to be
expended by the first half of 2007. Through approximately 88% of the JVs cash
flow we are to receive $20.5 million plus interest at 10%. Thereafter, cash
flow
will be distributed 60% to us and 40% to the original Sunrise members. On July
31, 2006 (date of acquisition), we 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), we have reflected Sunrise’s entire losses for
the period since the acquisition. When Sunrise’s accumulated earnings exceed its
prior losses, we will reflect the original members’ minority interest in the
results of operations.
The
equipment,
valued at about $10 million, that was being used at the Howesville mine was
moved to the Carlisle mine. At the time we filed our September 30, 2006 Form
10-QSB, Sunrise had reached a preliminary agreement with the utility customer
regarding the cancellation of the Howesville coal contract. Based on the
preliminary agreement, we recorded a liability of approximately $4 million.
To
date terms for a settlement agreement have not been reached and a settlement
agreement has not been executed.
What
follows is a
discussion of our oil and gas assets.
San
Juan
Basin
This
gas field is
located in the northwest corner of New Mexico in San Juan County. We have
an interest in 28 wells and are the operator. These wells have long-lived
reserves. Our WI in this field ranges from 5%-15% with NRIs between
5%-13%. At December 31, 2006, our net book value in this prospect was
about $600,000. We assigned proved developed gas reserves to this field of
about 1 BCF to our interest with a PV10 value of about $2.3
million.
New
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 began in December 2006. Our 1/3 of the land costs would be
about
$1.4 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 $700,000 (one-half of the $1.4
million discussed above). Our net ownership in the project would then be
1/6th.
For
accounting
purposes we deferred the $500,000 gain as of December 31, 2006 pending the
decision to exercise the option. In April 2007, we jointly exercised the option.
We will be responsible for our share of completion costs of the three wells
and
any future drilling and development costs.
COALition
Energy LLC (CELLC)
During
the fourth
quarter of 2006, we relinquished our interest in CELLC, and CELLC relinquished
its interest in the Sunrise joint venture and any finder's fee due them. In
addition, we wrote off our entire investment.
Liquidity
and Capital Resources
Upon
completion of
our $20.5 million commitment to Sunrise estimated to be completed during the
first half of 2007 and our commitments for the Kentucky prospect, we expect
to
have about $1.6 million 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.
As
discussed above, we have entered into significant related party transactions
with the Yorktown group of companies. Yorktown and its affiliates
currently own about 54% of our common stock and represents one of the five
seats
on our board.
Results
Of Continuing Operations
The
table below
provides sales data and average prices for the period.
|
2006
|
|
2005
|
|
Sales
Volume
|
|
Average
Price
|
|
Revenue
|
|
Sales
Volume
|
|
Average
Price
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas-mcf
|
|
|
|
|
|
|
|
|
|
|
|
San
Juan
|
63,700
|
|
$9.82
|
|
$625,500
|
|
62,515
|
|
$10.81
|
|
$675,800
|
Other
|
30,920
|
|
7.16
|
|
221,400
|
|
41,000
|
|
8.20
|
|
336,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil-barrels
|
|
|
|
|
|
|
|
|
|
|
|
San
Juan
|
72
|
|
59.17
|
|
4,260
|
|
110
|
|
49.09
|
|
5,400
|
Other
|
1,315
|
|
61.98
|
|
81,500
|
|
1,565
|
|
54.31
|
|
85,000
|
Revenue
decreased
due to lower prices. San Juan natural gas is sold at an index price that is
set
at the first of every month and remains in effect for the entire month. Our
San
Juan April 2007 price is about $6.26 per MCF.
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.
G&A
increased
by about $900,000 due primarily to stock option expense of $460,000, employee
bonuses and higher salaries of $220,000, higher 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.
Sunrise's
G&A
relates to coal operations which were in the start up phase during
2006.
Interest
expense
relates solely to the debt connected with the Sunrise acquisition.
The
income tax
benefit of $118,000 primarily is a result of reflecting the 2005 current tax
provision in excess of taxes paid.
Critical
Accounting Policies and Estimates
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements.
Successful
Efforts Method of Accounting
We
account for our exploration and development activities utilizing the successful
efforts method of accounting. Under this method, costs of productive exploratory
wells, development dry holes and productive wells and undeveloped leases are
capitalized. Oil and gas lease acquisition costs are also capitalized.
Exploration costs, including personnel costs, certain geological and geophysical
expenses and delay rentals for oil and gas leases, are charged to expense as
incurred. Exploratory drilling costs are initially capitalized, but charged
to
expense if and when
the
well is
determined not to have found reserves in commercial quantities. The sale of
a
partial interest in a proved property is accounted for as a cost recovery and
no
gain or loss is recognized as long as this treatment does not significantly
affect the unit-of-production amortization rate. A gain or loss is recognized
for all other sales of producing properties.
The
application of
the successful efforts method of accounting requires managerial judgment to
determine the proper classification of wells designated as developmental or
exploratory which will ultimately determine the proper accounting treatment
of
the costs incurred. The results from a drilling operation can take considerable
time to analyze and the determination that commercial reserves have been
discovered requires both judgment and industry experience. Wells may be
completed that are assumed to be productive and actually deliver oil and gas
in
quantities insufficient to be economic, which may result in the abandonment
of
the wells at a later date. Wells are drilled that have targeted geologic
structures that are both developmental and exploratory in nature and an
allocation of costs is required to properly account for the results. The
evaluation of oil and gas leasehold acquisition costs requires managerial
judgment to estimate the fair value of these costs with reference to drilling
activity in a given area. Drilling activities in an area by other companies
may
also effectively condemn leasehold positions.
The
successful
efforts method of accounting can have a significant impact on the operational
results reported when we enter a new exploratory area in hopes of finding an
oil
and gas field that will be the focus of future development drilling activity.
The initial exploratory wells may be unsuccessful and will be expensed. Seismic
costs can be substantial which will result in additional exploration expenses
when incurred.
Reserve
Estimates
Our
estimates of
oil and gas reserves, by necessity, are projections based on geologic and
engineering data, and there are uncertainties inherent in the interpretation
of
such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that are difficult to
measure. The accuracy of any reserve estimate is a function of the quality
of
available data, engineering and geological interpretation and judgment.
Estimates of economically recoverable oil and gas reserves and future net cash
flows necessarily depend upon a number of variable factors and assumptions,
such
as historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies
and
assumptions governing future oil and gas prices, future operating costs,
severance taxes, development costs and workover costs, all of which may in
fact
vary considerably from actual results. The future drilling costs associated
with
reserves assigned to proved undeveloped locations may ultimately increase to
an
extent that these reserves may be later determined to be uneconomic. For these
reasons, estimates of the economically recoverable quantities of oil and
gas attributable to any particular group of properties, classifications of
such
reserves based on risk of recovery, and estimates of the future net cash flows
expected therefrom may vary substantially. Any significant variance in the
assumptions could materially affect the estimated quantity and value of the
reserves, which could affect the carrying value of our oil and gas properties
and/or the rate of depletion of the oil and gas properties. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material.
Impairment
of Developed Oil and Gas Properties
We
review our oil and gas properties for impairment whenever events and
circumstances indicate a decline in the recoverability of their carrying value.
We estimate the expected future cash flows of our oil and gas properties and
compare such future cash flows to the carrying amount of our oil and gas
properties to determine if the carrying amount is recoverable. If the
carrying amount exceeds the estimated undiscounted future cash flows, we will
adjust the carrying amount of the oil and gas properties to their fair value.
The factors used to determine fair value include, but are not limited to,
estimates of proved reserves, future commodity pricing, future production
estimates, anticipated
capital
expenditures, and a discount rate commensurate with the risk associated with
realizing the expected cash flows projected.
Impairment
of Unproved Oil and Gas Properties
We
periodically assess individually significant unproved oil and gas properties
for
impairment, on a project-by-project basis. Our assessment of the results
of exploration activities, commodity price outlooks, planned future sales or
expiration of all or a portion of such projects impact the amount and timing
of
impairment provisions.
Equity
Method of Accounting for Investment
We
account for our interest in Savoy using the equity method of accounting.
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 we commence development of underground mines, and
include reclamation of support facilities, refuse areas and slurry
ponds.
Obligations
are
reflected at the present value of their discounted cash flows. We reflect
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.
Our
asset
retirement obligations (ARO) 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.
We
assess our ARO at least annually, and reflect 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.
Income
Taxes
We
provide for deferred income taxes on the difference between the tax basis of
an
asset or liability and its carrying amount in our financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes". This difference
will result in taxable income or deductions in future years when the reported
amount of the asset or liability is recovered or settled, respectively.
Considerable judgment is required in determining when these events may occur
and
whether recovery of an asset is more likely than not. Additionally, our federal
and state income tax returns are generally not filed before the consolidated
financial statements are prepared, therefore we estimate the tax basis of our
assets and liabilities at the end of each period as well as the effects of
tax
rate changes, tax credits, and net operating and capital loss carryforwards
and
carrybacks. Adjustments related to differences between the estimates we used
and
actual amounts we reported are recorded in the period in which we file our
income tax returns. These adjustments and changes in our estimates of asset
recovery could have an impact on our results of operations.
New
Accounting Pronouncements
None
of the FASB
pronouncements issued during the last two years had, or will have, any material
effect on us.
ITEM
7. FINANCIAL STATEMENTS
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
Report
of
Independent Registered Public Accounting Firm
|
17
|
|
|
|
|
Consolidated
Balance Sheet
|
18
|
|
|
|
|
Consolidated
Statement of Operations
|
20
|
|
|
|
|
Consolidated
Statement of Cash Flows
|
21
|
|
|
|
|
Statement
of
Stockholders' Equity
|
23
|
|
|
|
|
Notes
to
Consolidated Financial Statements
|
24
|
|
REPORT
OF
INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Hallador
Petroleum
Company
Denver,
Colorado
We
have audited the consolidated balance sheet of Hallador Petroleum Company and
Subsidiaries as of December 31, 2006 and the consolidated statements of
operations, cash flows and stockholders' equity for the years ended December
31,
2006 and 2005. These consolidated financial statements are the responsibility
of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of Hallador Petroleum
Company and Subsidiaries, as of December 31, 2006 and the results of their
operations and their cash flows for the years ended December 31, 2006 and 2005,
in conformity with accounting principles generally accepted in the United States
of America.
As
discussed in Note 1, the Company has changed its accounting method for
stock-based compensation by adopting SFAS No. 123 (R) "Share-Based Payment"
effective January 1, 2006.
/s/
Ehrhardt Keefe
Steiner & Hottman PC
April
16, 2007
Denver,
Colorado
Consolidated
Balance Sheet
December
31,
2006
(in
thousands)
ASSETS
|
|
|
Current
assets:
|
|
|
Cash
and cash
equivalents
|
|
$7,206
|
Accounts
receivable-
|
|
|
Oil
and gas
sales
|
|
945
|
Well
operations
|
|
159
|
Income
taxes
|
|
350
|
Other
|
|
59
|
Prepaid
expenses
|
|
63
|
Total
current
assets
|
|
8,782
|
|
|
|
Coal
properties, at cost:
|
|
46,046
|
Less
-
accumulated depreciation, depletion, and amortization
|
|
(413)
|
|
|
45,633
|
Oil
and gas
properties, at cost (successful efforts):
|
|
|
Unproved
properties
|
|
295
|
Proved
properties
|
|
2,413
|
Less
-
accumulated depreciation, depletion, amortization and
impairment
|
|
(1,828)
|
|
|
880
|
Other
assets:
|
|
|
Investment
in
Savoy
|
|
6,049
|
Advance
royalties - coal
|
|
183
|
Other
assets
|
|
296
|
Total
other
assets
|
|
6,528
|
Total
assets
|
|
$61,823
|
Consolidated
Balance Sheet
December
31,
2006
(in
thousands,
except share and per share data)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
Current
liabilities:
|
|
|
Current
portion of long-term debt
|
|
$1,718
|
Accounts
payable and accrued liabilities
|
|
2,044
|
Oil
and gas
sales payable
|
|
973
|
Deferred
gain
|
|
500
|
Asset
retirement obligations
|
|
286
|
Current
portion of contract termination obligation
|
|
92
|
Total
current
liabilities
|
|
5,613
|
Long-term
liabilities:
|
|
|
Long-term
debt
|
|
23,500
|
Asset
retirement obligations
|
|
626
|
Long-term
portion of contract termination obligation
|
|
3,905
|
Total
long-term liabilities
|
|
28,031
|
Total
liabilities
|
|
33,644
|
|
|
|
Commitments
and Contingencies (Note 5)
|
|
|
|
|
|
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
|
|
31,623
|
Accumulated
deficit
|
|
(3,565)
|
Total
stockholders' equity
|
|
28,179
|
Total
liabilities and stockholders' equity
|
|
$61,823
|
See
accompanying
notes.
Consolidated
Statement of Operations
(in
thousands,
except per share data)
|
|
Years
ended
December 31,
|
|
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
Gas
|
|
$
|
847
|
|
$
|
1,012
|
|
Oil
|
|
|
86
|
|
|
90
|
|
Equity
income
- Savoy
|
|
|
353
|
|
|
|
|
Interest
|
|
|
804
|
|
|
544
|
|
Prospect
sale
|
|
|
378
|
|
|
-
|
|
|
|
|
2,468
|
|
|
1,646
|
|
Costs
and
expenses:
|
|
|
|
|
|
|
|
Lease
operating
|
|
|
242
|
|
|
227
|
|
Impairment
of
unproved properties
|
|
|
-
|
|
|
183
|
|
Exploration
expenses
|
|
|
107
|
|
|
57
|
|
Depreciation,
depletion and amortization
|
|
|
56
|
|
|
43
|
|
G&A
|
|
|
1,497
|
|
|
612
|
|
G&A
-
coal operations
|
|
|
438
|
|
|
|
|
Aborted
reorganization/merger costs
|
|
|
137
|
|
|
|
|
Interest
|
|
|
695
|
|
|
|
|
Equity
loss-CELLC
|
|
|
223
|
|
|
103
|
|
Other
|
|
|
15
|
|
|
114
|
|
|
|
|
3,410
|
|
|
1,339
|
|
Income
(loss)
before income taxes
|
|
|
(942
|
)
|
|
307
|
|
Income
tax-(expense) benefit
|
|
|
118
|
|
|
(145
|
)
|
Net
income
(loss)
|
|
$
|
(824
|
)
|
$
|
162
|
|
|
|
|
|
|
|
|
|
Net
income
(loss) per share, basic
|
|
$
|
(.07
|
)
|
$
|
.02
|
|
Weighted
average shares outstanding - basic
|
|
|
11,715
|
|
|
7,155
|
|
See
accompanying
notes.
Consolidated
Statement of Cash Flows
(in
thousands)
|
|
Years
ended
December 31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows
from operating activities:
|
|
|
|
|
|
|
|
Net
income
(loss)
|
|
$
|
(824
|
)
|
$
|
162
|
|
Equity
loss
of CELLC
|
|
|
223
|
|
|
103
|
|
Equity
income
of Savoy
|
|
|
(353
|
)
|
|
|
|
Gain
on
prospect sale
|
|
|
(378
|
)
|
|
|
|
Depreciation,
depletion, and amortization
|
|
|
56
|
|
|
43
|
|
Accretion
of
asset retirement obligations
|
|
|
15
|
|
|
|
|
Accretion
of
contract termination obligation
|
|
|
32
|
|
|
|
|
Settlement
of
asset retirement obligations
|
|
|
(329
|
)
|
|
|
|
Stock-based
compensation
|
|
|
460
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
(407
|
)
|
Minority
interest
|
|
|
|
|
|
66
|
|
Impairment
of
undeveloped properties
|
|
|
|
|
|
183
|
|
Change
in
current assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
985
|
|
|
(1,197
|
)
|
Prepaid
expenses
|
|
|
(63
|
)
|
|
|
|
Advance
royalties
|
|
|
(41
|
)
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,301
|
)
|
|
1,235
|
|
Income
taxes
payable
|
|
|
(558
|
)
|
|
(92
|
)
|
Other
|
|
|
(22
|
)
|
|
10
|
|
Net
cash
provided by (used for) operating activities
|
|
|
(2,098
|
)
|
|
106
|
|
Cash
flows
from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures for coal properties
|
|
|
(10,215
|
)
|
|
|
|
Capital
expenditures for oil and gas properties
|
|
|
(432
|
)
|
|
(4,696
|
)
|
Proceeds
from
property sale (Cuyama)
|
|
|
|
|
|
3,538
|
|
Proceeds
from
prospect sale
|
|
|
3,423
|
|
|
1,616
|
|
Proceeds
from
option - deferred gain
|
|
|
500
|
|
|
|
|
Investment
in
COALition
|
|
|
|
|
|
(326
|
)
|
Investment
in
Savoy
|
|
|
(22
|
)
|
|
(4,205
|
)
|
Distribution
from Savoy
|
|
|
518
|
|
|
|
|
Investment
in
Sunrise, net of acquired cash of $1,892
|
|
|
(5,895
|
)
|
|
|
|
Acquisition
of Hallador Petroleum, LLP minority interest
|
|
|
|
|
|
(1,200
|
)
|
Decrease
in
bonds
|
|
|
|
|
|
252
|
|
Other
assets
|
|
|
(14
|
)
|
|
(35
|
)
|
Net
cash used
for investing activities
|
|
|
(12,137
|
)
|
|
(5,056
|
)
|
See
accompanying
notes.
Consolidated
Statement of Cash Flows
(in
thousands)
(continued)
|
|
Years
ended
December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
flows
from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from
bank debt
|
|
|
2,180
|
|
|
|
|
Distributions
to limited partners of Hallador Petroleum, LLP
|
|
|
|
|
|
(6,881
|
)
|
Common
stock
sale to Yorktown Energy VI. L.P.
|
|
|
7,000
|
|
|
4,165
|
|
Net
cash
provided by (used for) financing activities
|
|
|
9,180
|
|
|
(2,716
|
)
|
Net
decrease
in cash and cash equivalents
|
|
|
(5,055
|
)
|
|
(7,666
|
)
|
Cash
and cash
equivalents, beginning of year
|
|
|
12,261
|
|
|
19,927
|
|
Cash
and cash
equivalents, end of year
|
|
$
|
7,206
|
|
$
|
12,261
|
|
|
|
|
|
|
|
|
|
Cash
paid for
interest (net of amount capitalized)
|
|
$
|
695
|
|
|
|
|
Cash
paid for
income taxes
|
|
$
|
439
|
|
$
|
225
|
|
See
accompanying
notes.
Statement
of Stockholders' Equity
(In
thousands)
|
|
Common
Stock
|
|
Additional
Paid
In
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2004
|
|
$
|
71
|
|
$
|
18,061
|
|
$
|
(4,625
|
)
|
$
|
13,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
sale to
Yorktown (a related party)
(1,893,169 shares)
|
|
|
19
|
|
|
6,133
|
|
|
|
|
|
6,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
of
Hallador Petroleum, LLP
minority
interest
|
|
|
|
|
|
|
|
|
1,722
|
|
|
1,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
162
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
|
|
90
|
|
|
24,194
|
|
|
(2,741
|
)
|
|
21,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
sale to
Yorktown (a related party)
(3,181,816 shares)
|
|
|
31
|
|
|
6,969
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
460
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
(824
|
)
|
|
(824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
$
|
121
|
|
$
|
31,623
|
|
$
|
(3,565
|
)
|
$
|
28,179
|
|
See
accompanying
notes.
Notes
to
Consolidated Financial Statements
(1)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of
Presentation and Consolidation
The
accompanying
consolidated financial statements include the accounts of Hallador Petroleum
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. We are engaged in the production of
coal from a shallow underground mine located in western Indiana, and to a lesser
extent, in the exploration, development, and production of oil and natural
gas
in the Rocky Mountain region. Segment disclosures are reflected on the
face of the consolidated financial statements. We also own a 32% equity
interest in Savoy Energy, LLC, a private oil and gas company which has
operations in Michigan.
As
discussed in Item 6. (MD&A), we have entered into significant related party
transactions with the Yorktown group of companies. Yorktown and its
affiliates currently own about 54% of our common stock and represents one of
the
five seats on our board.
We
have concluded to deemphasize our oil and gas operations and concentrate our
future efforts in the coal business.
Reclassification
Certain
amounts in
the 2005 Statement of Operations have been reclassified to conform with the
classifications in the current year's statement with no effect on
previously-reported net income.
Coal
Properties
Consolidation
The
consolidated
financial statements include the accounts of Hallador Petroleum Company (the
Company) and its majority-owned subsidiary Sunrise Coal, LLC
(Sunrise).
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. We have no coal
production and related inventories as of and for the year ended December 31,
2006. Our first coal sales commenced in February 2007.
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 Sunrise acquisition) through December 31, 2006, we
capitalized $403,000 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 our coal
reserves were obtained through leases. The cost of those leases is capitalized
and will be 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 we commence development of underground mines, and
include reclamation of support facilities, refuse areas and slurry
ponds.
Obligations
are
reflected at the present value of their discounted cash flows. We reflect
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.
Our
asset
retirement obligations (ARO) 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.
We
assess our ARO at least annually, and reflect 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 our ARO:
Balance,
January 1, 2006
|
|
$
|
10
|
|
Additions
incurred in connection with Sunrise acquisition
|
|
|
1,204
|
|
Accretion
|
|
|
15
|
|
Settlements
|
|
|
(329
|
)
|
Revisions
to
previous estimates
|
|
|
12
|
|
Balance,
December 31, 2006
|
|
$
|
912
|
|
|
|
|
|
|
Current
|
|
$
|
286
|
|
Long-term
|
|
|
626
|
|
|
|
$
|
912
|
|
Oil
and
Gas Properties
We
account for our oil and gas activities using the successful efforts method
of
accounting. Under the successful efforts method, the costs of successful
wells, development dry holes and productive leases are capitalized and amortized
on a units-of-production basis over the remaining life of the related
reserves. Exploratory dry hole costs and other exploratory costs,
including geological and geophysical costs, and delay rentals are expensed
as
incurred. Cost centers for amortization purposes are determined on a
field-by-field basis. Unproved properties with significant acquisition
costs are periodically assessed for impairment in value, with any impairment
charged to expense.
Our
ARO for our oil
and gas properties are not material.
The
carrying value
of each field is assessed for impairment on a quarterly basis. If
estimated future undiscounted net revenues are less than the recorded amounts,
an impairment charge is recorded based on the estimated fair value of the
field.
Major
Customers
During
2006 and
2005, the San Juan Basin’s gas and NGL production was purchased by Coral Energy
Resources, LP and Williams Energy Services.
Statement
of Cash Flows
Cash
equivalents
include investments, which includes mutual funds, with maturities when purchased
of three months or less.
Income
Taxes
Income
taxes are
provided based on the liability method of accounting pursuant to SFAS 109,
Accounting for Income Taxes. The provision for income taxes is based on
pretax financial taxable income. Deferred tax assets and liabilities are
recognized for the future expected tax consequences of temporary differences
between income tax and financial reporting and principally relate to differences
in the tax basis of assets and liabilities and their reported amounts, using
enacted tax rates in effect for the year in which differences are expected
to
reverse. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is
recognized.
Earnings
per Share
We
follow the provisions of SFAS 128, Earnings Per Share. Basic earnings per
share are computed based on the weighted average number of common shares
outstanding. Diluted earnings per share are computed based on the weighted
average number of common shares outstanding adjusted for the incremental shares
attributed to outstanding stock options. Diluted earnings per share for
the year ended December 31, 2006 excludes 750,000 shares issuable for
outstanding stock options as their effect was antidilutive.
Use
of
Estimates in the Preparation of Financial Statements
The
preparation of
financial statements in conformity with generally accepted accounting principles
requires us 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 revenue and
expenses during the reporting period. Actual amounts could differ from
those estimates.
Revenue
Recognition
We
recognize oil and natural gas revenue from our interest in producing wells
as
natural gas and oil is produced and sold from those wells using the entitlement
method.
Concentration
of Credit Risk
Our
revenues are
derived principally from uncollateralized sales to two customers in the oil
and
gas industry. The concentration of credit risk in a single industry
affects our overall exposure to credit risk because customers may be similarly
affected by changes in economic and other conditions.
Long-term
Contract
The
Carlisle mine,
our primary asset, was under development during 2006 and first sales occurred
in
February 2007. A large portion of our current production capacity is contracted
with a public utility for several years. The coal is contracted at market prices
that were in effect July 1, 2005. We are 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 32 million tons.
Transportation
Currently,
we
depend on truck transportation to deliver coal to our customers. During 2007,
we
will use both truck and rail transportation. 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.
Stock
Based Compensation
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. Future amortization of transitional stock based
compensation expense is a follows: $460,000 (2007) and $115,000
(2008).
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 December 31,
2006, our 750,000 outstanding stock options had a remaining contractual maturity
of nine years and an aggregate intrinsic value of about $563,000. At
December 31, 2006, 250,000 stock options were vested and exercisable with an
aggregate intrinsic value of approximately $188,000. Pro forma loss for
the year ended December 31, 2005 would have been $183,000 or $(0.03) per
share.
The
total
compensation expense related to this plan was $460,000 for the year ended
December 31, 2006. The impact on earnings per share for the year ended December
31, 2006 was $(.04) per share.
No
options were granted during 2006.
New
Accounting Pronouncements
None
of the FASB
pronouncements issued during the last two years had, or will have, any material
effect on us.
(2)
NEW
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 began in December 2006. Our 1/3 of the land costs would be
about
$1.4 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 $700,000 (one-half of the $1.4
million discussed above). Our net ownership in the project would then be
1/6th.
For
accounting
purposes we deferred the $500,000 gain pending the decision to exercise the
option. In April 2007, we jointly exercised the option. We will be responsible
for our share of completion costs of the three wells and any future drilling
and
development costs.
(3)
INCOME
TAXES (in thousands)
The
(benefit)
provision for income taxes is comprised of the following:
|
|
|
2006
|
|
2005
|
|
|
Current
:
|
|
|
|
|
|
|
Federal
|
$
|
(116)
|
$
|
415
|
|
|
State
|
|
(2)
|
|
189
|
|
|
|
|
(118)
|
|
604
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
|
|
(297)
|
|
|
State
|
|
|
|
(162)
|
|
|
|
|
-
|
|
(459)
|
|
|
|
$
|
(118)
|
$
|
145
|
|
Our
income tax is
different than the expected amount computed using the applicable federal and
state statutory income tax rates. The reasons for and effects of such
differences are as follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Expected
amount
|
|
$
|
(320
|
)
|
$
|
115
|
|
State
income
taxes, net of federal benefit
|
|
|
(31
|
)
|
|
16
|
|
Permanent
items
|
|
|
110
|
|
|
|
|
Change
in
valuation allowance and other
|
|
|
123
|
|
|
14
|
|
|
|
$
|
(118
|
)
|
$
|
145
|
|
The
deferred tax
assets and liabilities resulting from temporary differences between book and
tax
basis are comprised of the following:
|
|
2006
|
|
Current
deferred tax assets:
|
|
|
|
|
Deferred gain from prospect sales
|
|
$
|
187
|
|
Long
-term
deferred tax assets:
|
|
|
|
|
Federal net operating loss carryforwards
|
|
|
1,313
|
|
Alternative
minimum tax credit carryforwards
|
|
|
70
|
|
Oil and gas properties
|
|
|
30
|
|
Stock-based
compensation
|
|
|
61
|
|
Valuation allowance
|
|
|
(342
|
)
|
Net long-term deferred tax assets
|
|
|
1,132
|
|
Long-term
deferred tax liabilities:
|
|
|
|
|
Investment in Savoy
|
|
|
120
|
|
Investment in Sunrise Coal
|
|
|
1,199
|
|
Total
long-term deferred liabilities
|
|
|
1,319
|
|
Long-term deferred liabilities in excess of long-term deferred
assets
|
|
|
(187
|
)
|
Net
|
|
$
|
0
|
|
At
December 31, 2006, we had federal net operating loss carryforwards of
approximately $3.5 million. These NOLs will expire in 2026.
(4)
STOCK
OPTIONS AND BONUS PLANS
Stock
Option Plan
In
April 2005, we granted 750,000 options at an exercise price of $2.25 based
on a
March 2005 private transaction between one of our shareholders and a third
party. These options vest at 1/3 per year for the next three years and
expire in April 2015. There are no more options available for issuance.
During 2006 and 2005 no options were exercised and none were granted during
2006.
(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 we entered into a joint venture with Sunrise. The original Sunrise
members retained a 40% interest in the venture, and we agreed to contribute
capital of $20.5 million for a 60% interest.
We
expect the entire $20.5 million to be expended by the first half of 2007.
Through approximately 88% of the JVs cash flow, we will receive $20.5 million
plus interest at 10%. Thereafter, cash flow will be distributed 60% to us,
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), we 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), we have reflected Sunrise’s entire losses for
the period since acquisition. When Sunrise’s accumulated earnings exceed its
prior losses, we 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
|
|
|
308
|
|
|
|
$
|
7,808
|
|
|
|
|
|
|
Allocation
of
acquisition costs:
|
|
|
|
|
Current assets
|
|
$
|
1,892
|
|
Coal properties
|
|
|
35,400
|
|
Other assets
|
|
|
192
|
|
Liabilities assumed
|
|
|
(29,676
|
)
|
|
|
$
|
7,808
|
|
|
|
|
|
|
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
years ended December 31, 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.
|
|
Year
ended
December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Revenue
|
$
2,468
|
|
$3,057
|
|
|
Net
loss
|
$(11,640)*
|
|
$(2,153)
|
|
|
Net
loss per
basic share
|
$(0.96)
|
|
$(0.18)
|
|
|
Weighted
average basic shares outstanding
|
12,168
|
|
12,168
|
|
|
|
|
|
|
|
*
Included in the net loss for 2006 is an impairment charge of approximately
$5
million relating to the closing of the Howesville mine.
(6)
NOTES
PAYABLE
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%
(9.20% at December 31, 2006), 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.
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.
Sunrise
also has
two letters of credit related to the Howesville and Carlisle mines totaling
$2,083,000 which reduce the available borrowings under the $30,000,000 credit
facility.
Aggregate
contractual maturities of debt are $1,718 in 2007, $4,379 in 2008, $4,766 in
2009, $5,187 in 2010, $5,646 in 2011; and $3,522 in 2012.
(7)
EQUITY
INVESTMENT IN SAVOY
On
December 31, 2005, we acquired a 32% interest in Savoy Energy LLP, a private
company engaged in the oil and gas business primarily in the State of
Michigan. A value of $6.1 million was assigned for this investment. We
account for our interest in Savoy using the equity method of accounting. We
account for our interest in Savoy using the equity method of accounting.
Below
(in
thousands) are: (i) a condensed balance sheet at December 31, 2006,
and (ii) a condensed statement of operations for the year ended December 31,
2006.
Condensed Balance Sheet
|
|
|
|
|
|
Current
assets
|
$
|
10,360
|
|
|
PP&E,
net
|
|
10,702
|
|
|
|
$
|
21,062
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
5,974
|
|
|
Partners
capital
|
|
15,088
|
|
|
|
$
|
21,062
|
|
Condensed Statement Of Operations
|
Revenue
|
$
|
6,775
|
|
|
Gain
on
sale
|
|
73
|
|
|
|
|
6,848
|
|
|
|
|
|
|
|
Expenses
|
|
(5,348)
|
|
|
Net
income
|
$
|
1,500
|
|
No
equity income was recorded for 2005 as closing occurred on December 31,
2005.
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 reserves.
Such
amount was $127,000 for 2006.
(8)
RESERVE
DATA (UNAUDITED)
Our
reserve
estimates for the years ended December 31, 2006 and 2005 were prepared by Edwin
James, a sole-proprietor consulting petroleum engineer, based on data we
supplied. Savoy's reserve estimates were prepared by Netherland, Sewell
& Associates. Be cautious that there are many uncertainties inherent
in estimating proved reserve quantities and in projecting future production
rates.
Proved
reserves are
the estimated quantities of oil and natural gas which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed reserves are those reserves expected to be recovered through
existing wells with existing equipment and operating methods.
Analysis
of Changes in Proved Developed Reserves *
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Oil
|
|
Gas
|
|
|
|
(BBLs)
|
|
(MCF)
|
|
Balance
at
December 31, 2004
|
|
|
3
|
|
|
1,433
|
|
Revisions
of
previous estimates
|
|
|
(1
|
)
|
|
(41
|
)
|
Discoveries
|
|
|
-
|
|
|
112
|
|
Production
|
|
|
(2
|
)
|
|
(104
|
)
|
Balance
at
December 31, 2005(1)
|
|
|
0
|
|
|
1,400
|
|
Revisions
of
previous estimates
|
|
|
-
|
|
|
(182
|
)
|
Production
|
|
|
-
|
|
|
(128
|
)
|
Balance
at
December 31, 2006
|
|
|
0
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
*We
have no
significant proved undeveloped reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
interest (32%) in Savoy's Reserves:
|
|
|
|
|
|
|
|
Proved developed
|
|
|
43
|
|
|
572
|
|
Proved undeveloped
|
|
|
39
|
|
|
527
|
|
|
|
|
|
|
|
|
|
---------------------------
(1)
Our oil reserves
are not material.
The
following table
(in thousands) sets forth a standardized measure of the discounted future net
cash flows attributable to our proved developed reserves (hereinafter referred
to as "SMOG"). Future cash inflows were computed using December 31, 2006 and
2005 gas prices of $7.53 and $8.69, respectively. Future production costs
represent the estimated future expenditures to be incurred in producing the
reserves, assuming continuation of economic conditions existing at
year-end. Discounting the annual net cash inflows at 10% illustrates the
impact of timing on these future cash inflows.
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Future
gas
revenue
|
|
$
|
8,400
|
|
$
|
12,350
|
|
Future
cash
outflows - production and abandonment costs
|
|
|
(3,300
|
)
|
|
(3,600
|
)
|
Future
income
taxes
|
|
|
(2,000
|
)
|
|
(3,500
|
)
|
Future
net
cash flows
|
|
|
3,100
|
|
|
5,250
|
|
10%
discount
factor
|
|
|
(1,600
|
)
|
|
(2,450
|
)
|
SMOG
|
|
$
|
1,500
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
Equity
interest (32%) in Savoy
(About
50%
relates to proved undeveloped reserves)
|
|
$
|
3,600
|
|
$
|
4,400
|
|
The
following table
(in thousands) summarizes the principal factors comprising the changes in
SMOG:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
SMOG,
beginning of year
|
|
$
|
2,800
|
|
$
|
1,800
|
|
Sales of oil and gas, net of production costs
|
|
|
(700
|
)
|
|
(875
|
)
|
Net changes in prices and production costs
|
|
|
(1,230
|
)
|
|
2,160
|
|
Revisions
|
|
|
(400
|
)
|
|
(165
|
)
|
Discoveries
|
|
|
|
|
|
450
|
|
Change in income taxes
|
|
|
750
|
|
|
(750
|
)
|
Accretion of discount
|
|
|
280
|
|
|
180
|
|
SMOG,
end of
year
|
|
$
|
1,500
|
|
$
|
2,800
|
|
ITEM
8. ITEM 8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
applicable.
ITEM
8A. 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 has been no change in our internal control over financial reporting
during the quarter ended December 31, 2006 that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
8B. OTHER INFORMATION
None.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
CORTLANDT
S.
DIETLER, 85, has been one of our directors since November 1995. From April
1995 to October 1999 he was CEO of TransMontaigne Inc. and was Chairman of
the
Board from October 1999 until its sale to Morgan Stanley in September
2006. He also serves as a director of Forest Oil Corporation, Cimarex
Energy Company, Nytis Exploration Company and Ellora Energy Inc.
DAVID
HARDIE, 56 is
the Chairman of the Board and has served as a director since July 1989. He
is the President of Hallador Investment Advisors Inc., which manages Hallador
Equity Fund, Hallador Fixed Income Fund, Hallador Alternative Assets Fund and
Hallador Balance Fund; he also is a General Partner of Hallador Venture Partners
LLC, the General Partner of Hallador Venture Fund II & III. Mr. Hardie
is and serves as a director and partner of other private entities that are
owned
by members of his family and is also a director of Sunrise Coal, LLC. Mr. Hardie
is a graduate of California Polytechnic University, San Luis Obispo and Harvard
Business School, OPM.
STEVEN
HARDIE, 53
has been a director since 1994. He and David Hardie are brothers.
For the last 23 years he has been an investor in common stock and private
equity. He is the Vice-President of Hallador Investment Advisors, which
manages Hallador Equity Fund, Hallador Fixed Income Fund, Hallador
Alternative Assets Fund and Hallador Balance Fund. He also serves as a director
and partner of other private entities that are owned by members of his
family.
BRYAN
H. LAWRENCE,
63, has been one of our directors since November 1995. He is a founder and
senior manager of Yorktown Partners LLC which manages investment partnerships
formerly affiliated with Dillon, Read & Co. Inc., an investment-banking firm
(Dillon Read). He had been employed with Dillon, Read since 1966, serving
most recently as a Managing Director until the merger of Dillon Read with SBC
Warburg in September 1997. He also serves as a Director of TransMontaigne,
Inc., Crosstex Energy, Inc. and Crosstex Energy, L.P. (each a United States
public company), Winstar Resources Ltd. (a Canadian Public Company) and certain
non-public companies in the energy industry in which Yorktown partnership holds
equity interests, one of which is Sunrise Coal, LLC. Mr. Lawrence is a graduate
of Hamilton College and has a MBA from Columbia University.
VICTOR
P. STABIO,
59 is our President, CEO, CFO and a director. He joined us in March 1991
as our President and CEO and has been active in the oil and gas business for
the
past 31 years. Mr. Stabio is a director of Sunrise Coal, LLC.
BRENT
K. BILSLAND,
33, has been President and a director of Sunrise Coal, LLC since July 31, 2006
and has been a member in Sunrise since 2005. Previously, Mr. Bilsland was
Vice President of Knapper Corporation, a family owned farming business from
1998
to 2004. Mr. Bilsland is a graduate of Butler University located in
Indianapolis, Indiana. Mr. Bilsland is a 4% owner of Sunrise Coal, LLC and
is
not a shareholder of Hallador Petroleum Company.
We
do not pay our directors or reimburse expenses incurred by them while sitting
on
our board.
Our
Code of Ethics
is filed as Exhibit 14 to this Form 10-KSB.
ITEM
10. EXECUTIVE
COMPENSATION
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
Name
and
Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation
|
Nonqualified
Deferred Compensation
|
All
Other
Compensation
|
Total
|
(a)
|
(b)
|
(c
)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
|
|
|
|
|
|
|
|
|
Victor
P.
Stabio, CEO
|
2006
|
$140,000
|
$50,000
|
$0
|
$245,000
|
$0
|
$0
|
$0
|
$435,000
|
In
April 2005, we granted 750,000 options at an exercise price of $2.25 per share
to our employees of which 400,000 were issued to Mr. Stabio. No options
were exercised during 2006 and 2005. At December 31, 2006, Mr. Stabio's
in-the-money value of his options was about $300,000.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
|
Option
Awards
|
Stock
Awards
|
Name
|
Number
of
Securities Underlying Unexercised Options(#) Exercisable
|
Number
of
Securities Underlying Unexercised Options (#)
Unexercisable
|
Equity
Incentive Plan Awards Number of Securities Underlying Unexercised
Unearned
Options (#)
|
Option
Exercise Price
|
Option
Exercise Date
|
Number
of
Shares of Units of Stock That Have not Vested
|
Market
Value
of Shares of Units of Stock That Have not Vested
|
Equity
Incentive Plan Awards Number of Unearned Shares, Units or Other Rights
That Have Not Vested
|
Equity
Incentive Plan Awards Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
|
(a)
|
(b)
|
(c
)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
|
|
|
|
|
|
|
|
|
Victor
P.
Stabio, CEO
|
266,666
|
133,334
|
|
$2.25
|
|
|
|
|
|
EQUITY
COMPENSATION PLAN INFORMATION
|
Plan
Category
|
Number
of
Securities to be issued upon exercise of outstanding options, warrants
and
rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved by security holders
|
750,000
|
$2.25
|
0
|
Equity
compensation plans not approved by security holders
|
0
|
0
|
0
|
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table
is as of April 16, 2007.
Name
|
No.
Shares
(1)
|
%
of
Class (1)
|
|
|
|
David
Hardie
and Steven Hardie as Nominee for Hardie Family Members (2)
|
3,550,370
|
29
|
|
|
|
Victor
P.
Stabio(6)
|
341,603
|
3
|
|
|
|
Cortlandt
S.
Dietler (3)
|
100,000
|
1
|
|
|
|
Bryan
H.
Lawrence (4)
|
6,607,166
|
54
|
|
|
|
Lubar
&
Associates (5)
|
686,566
|
6
|
|
|
|
All
directors
and executive officer as a group
|
10,332,473
|
85
|
|
|
|
(1)
|
Based
on
total outstanding shares of 12,168,135. Beneficial ownership of
certain shares has been, or is being, specifically disclaimed by
certain
directors in ownership reports filed with the SEC.
|
|
|
(2)
|
The
Hardie
family business address is 3000 S Street, Suite 200, Sacramento,
California, 95816.
|
|
|
(3)
|
Mr.
Dietler’s
address is P. O. Box 5660, Denver, Colorado 80217. All shares are
held by Pinnacle Engine Company LLC, wholly owned by Mr.
Dietler.
|
|
|
(4)
|
Mr.
Lawrence’s address is 410 Park Avenue, 19th
Floor, New
York, NY 10022. Mr. Lawrence owns 50,000 shares directly, and the
remainder is held by Yorktown Energy Partners VI, L.P., an
affiliate.
|
|
|
(5)
|
Lubar
&
Associates address is 700 North Water Street, Suite 1200, Milwaukee,
WI 53202.
|
|
|
(6)
|
Includes
266,666 options exercisable within sixty days of April 16,
2007.
|
|
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
.
Our
Audit Committee
consists of all board members other than Mr. Stabio. Our Compensation Committee
consists of Messrs. David and Steven Hardie and Mr. Lawrence. We have no
nominating committee. None of our committees have charters.
We
do not have an audit committee financial expert serving on our audit
committee. We believe that the additional costs to recruit a financial
expert exceed the benefits, if any.
We
had one board meetings and four audit committee meetings during 2006 and all
members attended at least 75% of the meetings.
As
discussed in Item 6. (MD&A), we have entered into significant related party
transactions with the Yorktown group of companies. Yorktown and its
affiliates currently own about 54% of our common stock and represents one of
the
five seats on our board.
ITEM
13. EXHIBITS
(a)
Exhibits
3.1
|
Restated
Articles of Incorporation of Kimbark Oil and Gas Company, effective
September 24, 1987 (1)
|
3.2
|
Articles
of
Amendment to Restated Articles of Incorporation of Kimbark Oil & Gas
Company, effective December 14, 1989, to effect change of name to
Hallador
Petroleum Company and to change the par value and number of authorized
shares of common stock (1)
|
3.3
|
Amendment
to
Articles of Incorporation dated December 31, 1990 to effect the
one-for-ten reverse stock split (2)
|
3.4
|
By-laws
of
Hallador Petroleum Company, effective November 9, 1993 (4)
|
10.1
|
Composite
Agreement and Plan of Merger dated as of July 17, 1989, as amended
as
of August 24, 1989, among Kimbark Oil & Gas Company, KOG
Acquisition, Inc., Hallador Exploration Company and Harco Investors,
with
Exhibits A, B, C and D (1)
|
10.2
|
Hallador
Petroleum Company 1993 Stock Option Plan *(5)
|
10.3
|
First
Amendment to the 1993 Stock Option Plan *(5)
|
10.4
|
Stock
Purchase Agreement with Yorktown dated November 15, 1995 (6)
|
10.5
|
Hallador
Petroleum, LLP Agreement (6)
|
10.6
|
Subscription
Agreement - by and between Hallador Petroleum Company and Yorktown
Energy
Partners VI, L.P, dated December 20, 2005.(7)
|
10.7
|
Purchase
and
Sale Agreement dated December 31, 2005 between Hallador Petroleum
Company,
as Purchase and Yorktown Energy Partners II, L.P., as Seller relating
to
the purchase and sale of limited partnership interests in Savoy Energy
Limited Partnership
(8)
|
10.8
|
Letter
of
Intent dated January 5, 2006 between Hallador Petroleum Company and
Sunrise Coal, LLC
(9)
|
10.9
|
Subscription
Agreement - by and between Hallador Petroleum Company and Yorktown
Energy
Partners VI, L.P., et al dated February 22, 2006.
(10)
|
10.10
|
Subscription
Agreement - by and between Hallador Petroleum Company and Hallador
Alternative Assets Fund LLC dated February 14, 2006.
(11)
|
10.11
|
Subscription
Agreement - by and between Hallador Petroleum Company and Tecovas
Partners
V LP dated February 14, 2006.
(11)
|
10.12
|
Subscription
Agreement - by and between Hallador Petroleum Company and Lubar
Equity Fund LLC dated February 14, 2006.
(11)
|
10.13
|
Subscription
Agreement - by and between Hallador Petroleum Company and Murchison
Capital Partners LP dated February 14, 2006.
(11)
|
10.14
|
Continuing
Guaranty, dated April 19, 2006, by Hallador Petroleum Company in
favor of
Old National Bank (12)
|
10.15
|
Collateral
Assignment of Hallador Master Purchase/Sale Agreement, dated April
19,
2006, among Hallador Petroleum Company, Hallador Petroleum, LLLP,
and
Hallador Production Company and Old National Bank (12)
|
10.16
|
Reimbursement
Agreement, dated April 19, 2006, between Hallador Petroleum Company
and
Sunrise Coal, LLC (12)
|
10.17
|
Membership
Interest Purchase Agreement dated July 31, 2006 by and between Hallador
Petroleum Company and Sunrise Coal, LLC. (13)
|
14.
|
Code
Of
Ethics For Senior Financial Officers. (14)
|
21.1
|
List
of
Subsidiaries
(2)
|
31
|
SOX
302
Certification
(14)
|
32
|
SOX
906
Certification (14)
|
-----------------------------------------------
(1)
Incorporated
by reference (IBR) to the 1989 Form 10-K.
|
(8)
IBR to
Form 8-K dated January 3, 2006
|
(2)
IBR to the
1990 Form 10-K.
|
(9).
IBR to
Form 8-K dated January 6, 2006
|
(3)
IBR to the
1992 Form 10-KSB.
|
(10)
IBR to
Form 8-K dated February 27, 2006
|
(4)
IBR to the
1993 Form 10-KSB.
|
(11)
IBR to
the 2005 Form 10-KSB.
|
(5)
IBR to the
1995 Form 10-KSB
|
(12)
IBR to
Form 8-K dated April 25, 2006
|
(6)
IBR to the
1997 Form 10-KSB.
|
(13)
IBR to
Form 8-K dated August 1, 2006.
|
(7)
IBR to
Form 8-K dated December 31, 2005.
|
(14)
Filed
herewith.
|
|
|
*
Management
contracts or compensatory plans.
|
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
fees incurred
for 2006 and 2005 were:
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Audit
Fees
|
$
|
130,000
|
|
$
|
100,500
|
|
Audit
related
fees
|
|
40,000
|
|
|
|
|
Tax
fees
|
|
32,000
|
|
|
21,500
|
|
Total
fees
|
$
|
202,000
|
|
$
|
122,000
|
|
Audit
related fees
consist of fees paid related to the Sunrise Coal, LLC acquisition audit and
related SEC filings.
Pre-approval
Policy
In
2003 the Audit Committee adopted a formal policy concerning approval of audit
and non-audit services to be provided by Ehrhardt Keefe Steiner & Hottman PC
(EKSH). The policy requires that all services EKSH provides to us be
pre-approved by the Committee. The Committee approved all services
provided by EKSH during 2006 and 2005.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
HALLADOR
PETROLEUM COMPANY
|
|
|
|
|
|
|
|
|
|
Dated:
April 16, 2007
|
|
BY:/S/
VICTOR
P. STABIO
VICTOR P. STABIO, CEO
|
|
|
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
/S/
DAVID
HARDIE
DAVID HARDIE
|
Chairman
|
April
16,
2007
|
|
|
|
/S/
VICTOR P.
STABIO
VICTOR P. STABIO
|
CEO,
CFO, CAO
and Director
|
April
16,
2007
|
|
|
|
/S/
BRYAN
LAWRENCE
BRYAN
LAWRENCE
|
Director
|
April
16,
2007
|
|
|
|