Summary of Significant Accounting Policies (Policy)

12 Months Ended

Dec. 31, 2017

Summary of Significant Accounting Policies [Abstract]

The consolidated financial statements include the accounts of Hallador Energy Company (the Company) and its wholly owned subsidiary Sunrise Coal, LLC (Sunrise) and Sunrise’s wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. We are engaged in the production of steam coal from mines located in western Indiana. We own a 50% interest in Sunrise Energy, LLC, a private entity engaged in natural gas operations in the same vicinity as the Carlisle Mine. We own a 30.6% equity interest in Savoy Energy, L.P., a private oil and gas company that has operations in Michigan. We have reached an agreement for Savoy to redeem our entire partnership interest for $8 million, which we expect to finalize in mid-March 2018. Our net after commissions paid will be $7.5 million.

Reclassification

To maintain consistency and comparability, certain amounts in the financial statements have been reclassified to conform to current year presentation.

Inventories

Coal and supplies inventories are valued at the lower of average cost or market. Coal inventory costs include labor, supplies, equipment costs (including depreciation thereto) and overhead.

Advance Royalties

Coal leases that require minimum annual or advance payments and are recoverable from future production are generally deferred and charged to expense as the coal is subsequently produced. Advance royalties are included in other assets.

Coal Properties

Coal properties are recorded at cost. Interest costs applicable to major asset additions are capitalized during the construction period. Expenditures that extend the useful lives 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. Other than land and most mining equipment, coal properties are depreciated using the units-of-production method over the estimated recoverable reserves. Most surface and underground mining equipment is depreciated using estimated useful lives ranging from three to twenty-five years. At the beginning of 2016, we changed from the straight-line method to the units-of-production method in computing the depreciation for continuous miners. This change in estimate reduced our DD&A expense for the year ended December 31, 2016, by $2.6 million. Due to idle equipment at Carlisle, we stopped depreciating specific underground equipment resulting in a $4.4 million reduction in depreciation for the year ending December 31, 2016.

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. See Note 2 for further discussion of impairments.

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 reserves.

Asset Retirement Obligations (ARO) - Reclamation

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 mine development. Obligations are typically incurred when we commence development of underground and surface mines and include reclamation of support facilities, refuse areas and slurry ponds.

Obligations are reflected at the present value of their future cash flows. We reflect accretion of the obligations for the period from the date they are incurred through the date they are extinguished. The ARO assets are amortized using the units-of-production method over estimated recoverable (proved and probable) reserves. We are using discount rates ranging from 5.0% to 10%. Federal and state laws require that mines be reclaimed 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 review our ARO at least annually and reflect revisions for permit changes, changes in our estimated reclamation costs and changes in the estimated timing of such costs. In the event we are not able to perform reclamation, we have surety bonds totaling $25 million to cover ARO.

The table below (in thousands) reflects the changes to our ARO:




	2017		2016
Balance, beginning of year	$	13,260	$	12,231
Accretion		861		1,029
Revision		(112)		-
Payment		(203)		-
Balance, end of year	$	13,806	$	13,260
Less current portion		(300)		(145)
Long-term balance, end of year		13,506		13,115

Statement of Cash Flows

Cash equivalents include investments with maturities when purchased of three months or less.

Income Taxes

Income taxes are provided based on the liability method of accounting. The provision for income taxes is based on pretax financial 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.

Net Income per Share

Basic net income per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include restricted stock units and are included in basic net income per share, using the two-class method.

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. The most significant estimates included in the preparation of the financial statements relate to: (i) fair value estimates relating to business combinations, (ii) deferred income tax accounts, (iii) coal reserves, (iv) depreciation, depletion, and amortizion, and (v) estimates used in our impairment analysis.

Business Combinations

We account for business combinations using the purchase method of accounting. The purchase method requires us to determine the fair value of all acquired assets, including identifiable intangible assets and all assumed liabilities. The total cost of acquisitions is allocated to the underlying identifiable net assets, based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and the utilization of independent valuation experts, and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates and asset lives, among other items.

Revenue Recognition

We recognize revenue from coal sales at the time title and risk of loss passes to the customer at contracted amounts and amounts are deemed collectible. Some coal supply agreements provide for price adjustments based on variations in quality characteristics of the coal shipped and are recorded in the period of shipment. As discussed below, we do not expect the new revenue recognition standard introduced by ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09) will result in a material change to our pattern of revenue recognition when it becomes effective

Long-term Contracts

As of December 31, 2017, we are committed to supply to our customers a maximum of 26.1 million tons of coal through 2024 of which 13.5 million tons are priced.

For 2017, we derived 92% of our coal sales from five customers, each representing at least 10% of our coal sales. 83% of our accounts receivable were from four of these customers, each representing more than 10% of the December 31, 2017 balance.

For 2016, we derived 90% of our coal sales from five customers, each representing at least 10% of our coal sales. 78% of our accounts receivable were from four of these customers, each representing more than 10% of the December 31, 2016 balance.

For 2015, we derived 82% of our total revenue from these customers. Each of these customers represented at least 10% of our total revenue.

We are paid every two to four weeks and do not expect any credit losses.

Stock-based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally two to four years) using the straight-line method.

New Accounting Pronouncements

New Accounting Standards Issued and Adopted

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). ASU 2015-11 simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with the lower of cost or net realizable value test. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard was applied prospectively and effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of ASU 2015-11 did not have a material impact on our consolidated financial statements.

New Accounting Standards Issued and Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new guidance will classify leases as either finance or operating (similar to current standard’s “capital” or “operating” classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently in the process of accumulating all contractual lease arrangements in order to determine the impact on our financial statements and do not believe we have significant amounts of off- balance sheet leases; accordingly, we do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated financial statements. We continue to monitor closely the activities of the FASB and various non-authoritative groups with respect to implementation issues that could affect our evaluation.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. We have adopted the new standard as of January 1, 2018. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.

Our primary source of revenue is from the sale of coal through both short-term and long-term contracts with utility companies whereby revenue is currently recognized when risk of loss has passed to the customer. Under the new standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As part of our assessment process, we applied the five-step analysis outlined in the new standard to certain contracts representative of the majority of our coal sales contracts and determined that our pattern of recognition is consistent between the new and existing standards. We also reviewed the expanded disclosure requirements under the new standard and have determined the additional information to be disclosed. In addition, we reviewed our business processes, systems and internal controls over financial reporting to support the new recognition and disclosure requirements under the new standard. Upon adoption of this new standard, the Company believes that the timing of revenue recognition related to our coal sales will remain consistent with our current practice, but expanded disclosures including presenting revenues for all periods presented and expected revenues by year for performance obligations that are unsatisfied or partially unsatisfied as of the date of presentation will be required. We have elected the modified retrospective transition method which allows a cumulative effect adjustment to equity as of the date of adoption. Because we do not anticipate a change in our pattern of revenue recognition, we anticipate that the transition will not have a material impact on our consolidated financial statements. Although we don’t consider it material, one source of variable consideration we receive relates to reimbursement from certain customers for expenses incurred for new government impositions adopted, which we may recognize sooner than our current recognition practice.

In November 2016, the FASB issued guidance regarding the presentation of restricted cash in the statement of cash flows (ASU 2016-18). This update is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We have adopted the new standard as of January 1, 2018.

In January 2017, the FASB issued new guidance to assist in determining if a set of assets and activities being acquired or sold is a business (ASU 2017-01). It also provided a framework to assist entities in evaluating whether both an input and a substantive process are present, which at a minimum, must be present to be considered a business. This update is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted in most circumstances. The standard does not have an impact to the Company’s historical recognition of asset acquisitions and business combinations. However, we expect there will be an impact to how the Company accounts for assets acquired in the future.

Subsequent Events

In January 2018, we declared a dividend of $.04 per share to shareholders of record as of January 31, 2018. The dividend was paid on February 16, 2018.

In February 2018, we formed and made an initial investment of $4 million in Hourglass Sands, LLC, a frac sand mining company in the State of Colorado. We own 100% of the Class A units and will account for Hourglass Sands LLC as a wholly owned subsidiary of Hallador Energy Company. Class A units are entitled to 100% of profit until our capital investment and a return is returned, then 90% of profits are allocated to Class A Units with the remainder to Class B units. A Yorktown company associated with one of our directors also invested $4 million for a royalty interest in the sand project.

We currently control a permitted sand reserve near Colorado Springs. We are negotiating to have a third party wash our sand and expect to truck test shipments to customers in the DJ Basis this summer. We believe we control the only permitted frac sand mine in the State of Colorado. We do not anticipate Hourglass Sands, LLC to be profitable in 2018, but are excited about its growth potential in future years.