HNRG

Hallador Energy Company 10-K Summary (Fiscal Year Ended Dec 31, 2009)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009. Hallador Energy Company (formerly Hallador Petroleum Company) is a Colorado corporation focused on coal production through its wholly-owned subsidiary, Sunrise Coal, LLC. The company operates the Carlisle underground coal mine in western Indiana. In late 2006, the company shifted strategy to deemphasize oil and gas operations, retaining only a 45% equity interest in Savoy Energy, L.P. (Michigan oil and gas) and certain overriding royalty interests (ORRI). In September 2009, Hallador acquired the remaining 20% interest in Sunrise Coal, achieving 100% ownership.

Key Financial Metrics

Liquidity: The company generated $45.2 million in operating cash flow. It maintains a $30 million revolving credit facility with approximately $24 million available after letters of credit. Management anticipates no liquidity issues in the foreseeable future.

Material Changes vs. Prior Period

• Revenue Growth: Coal sales revenue increased 67% to $117.4 million, driven by a 37% increase in production volume (2.65M vs 1.93M tons) and a 22% increase in average selling price.
• Profitability: Net income attributable to Hallador more than doubled to $20.2 million. This was aided by a reduction in the equity loss from Savoy Energy (from $2.3M in 2008 to $1.7M in 2009) and the absence of the $1.4M impairment charge taken on the Savoy investment in 2008.
• Cost Increases: Cost of coal sales per ton rose to $24.69 from $20.91 due to mine expansion inefficiencies, temporary adverse mining conditions, and higher government-imposed costs. Employee count at the mine increased from 230 to 309.
• Acquisition: The company completed the acquisition of the remaining 20% interest in Sunrise Coal for $32.6 million (cash and stock), consolidating 100% ownership.

Guidance, Outlook, and Risks

Outlook: Management expects coal market conditions to improve in 2010 due to economic recovery and inventory normalization at utilities. The average contracted price for 2010 is projected at $41.50/ton, slightly lower than 2009. Cash mining costs are expected to remain in the $24-$25/ton range. Capital expenditures for 2010 are budgeted at $22-$25 million.

Contracts: Over 85% of coal production for the next four years is contracted to three major customers (Duke Energy, Hoosier Energy, Indianapolis Power & Light) at average prices over $40/ton. However, only 37% of expected 2014 production is currently contracted, and no contracts extend past 2014.

Risks and Contingencies:

• Regulatory/Climate Change: Potential federal legislation (e.g., cap-and-trade) or EPA regulations on greenhouse gases could increase costs or reduce demand for coal. The company opposes the current cap-and-trade bill.
• Tax Policy: The proposed 2011 federal budget includes a repeal of the percentage depletion allowance for coal companies, which would adversely affect income and cash flows.
• Competition: Natural gas prices have declined, increasing the risk of fuel switching by utilities. Peabody Energy is the dominant competitor in the Illinois Basin.
• Reserve Accuracy: Future performance depends heavily on the accuracy of coal reserve estimates, which are subject to geological and economic uncertainties.

Investor Verification Checklist

• Contract Duration: Verify the extent of uncommitted reserves (approx. 70% of total) and the lack of contracts beyond 2014.
• Cost Structure: Monitor if the $24-$25/ton cost target is sustainable given rising labor and regulatory costs.
• Regulatory Impact: Assess the potential financial impact of the proposed repeal of percentage depletion and new EPA greenhouse gas regulations.
• Debt Covenants: Review the $37.5 million term loan and $30 million revolver terms, noting restrictions on dividends and required financial ratios.
• Oil & Gas Exposure: Evaluate the performance of the 45% stake in Savoy Energy, which continues to report losses and impairment charges.