Hallador Energy Company (HNRG) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Hallador Energy Company Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. Please note, today's conference is being recorded. I would now like to hand the conference over to Becky Palumbo, IR Director. Please go ahead.

Thank you, Karen. Good afternoon, everyone and welcome to Hallador's third quarter 2014 earnings conference call. Yesterday afternoon, we filed our 10-Q with the SEC. You can access it on our website. This call is being webcast and will be available on our web site along with a copy of the transcript. Management present for the call today is Brent Bilsland, President and CEO, Hallador Energy; Andy Bishop, CFO, Hallador Energy; Larry Martin, CFO, Sunrise Coal; and myself, IR for Hallador Energy. Our remarks will include forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially. For example, our estimates of mining costs and regulations relating to the Clean Air Act and other environmental initiatives. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as maybe required by law. The format for today will be a discussion from management followed by a question-and-answer period. Brent Bilsland, Hallador's CEO will now discuss Hallador's third quarter results.

Hi. First of all, I would like to thank all of you taking the time to listen to our earnings call today. This is the first time Hallador has hosted a quarterly earnings call and this will be the format we anticipate using going forward. So if you any of you had questions, I encourage you to ask them during the question-and-answer period at the end. For 2014, much of management's time and effort and attention has been focused on purchasing Vectren Fuels, a transaction that has essentially tripled the size of our Company. In the first quarter, we analyzed the potential acquisition via a desk due diligence if you will. In the second quarter, we set that time negotiating the transaction and completing the physical due diligence, boots on the ground sort of thing. In the third quarter we obtained financing interviewed, background checked and hired two-thirds of our now employee base. We closed the transaction and began integrating our employees and assets into the Sunrise Coal way of life so to speak. In the fourth quarter we expect to complete the move with the Prosperity equipment to Oaktown and finish loading out remaining coal inventory that exists at Prosperity. Once we complete this that will enable us to move the remaining employee base which today accounts at Prosperity -- about 8% of total workforce is there from Prosperity equipment salvage type work into Oaktown coal production type work. So anyhow Vectren was basically the big challenge that we have spent all of our time on this year. Another challenge that we faced in ’14 is import rail service, which I think it surprised anybody in the coal industry. It’s been all over the headlines, how the railroads has struggled. Unfortunately we've not been immune to this issue. Of our eight customers, three have struggled to provide adequate freight to us in 2014, the other five are on schedule or ahead of schedule in some cases. However we have made some changes to improve transportation going forward. Don’t expect 2015 for transportation be the issue that it has in 2014. We've done a lot of work with the railroads to dramatically improve cycle times, what trains are on our property. We feel we've definitely made a big headway there. We have contracts that allow us now the option of loading coal at either Carlisle or Oaktown and we have verbal agreements with others who are tapering that or amending those contracts now. And what this does is if [indiscernible] says hey we want to bring your train today and we've got two already sitting at Carlisle, in the past we just had to let that train go because we couldn’t accept it. Now we have the ability to take that train on Oaktown and load it. And for 2014 we probably lost six trains at Carlisle alone, just the route being full, we couldn’t accept a train. We're also -- in 2015, we're going to handle more coal via truck. 30% of our production will be hauled via truck in 2015. And then also we're working to continue to add new customers. Every time we add a customer it kind of gives us flexibility. If one customer is long another one might be short and we can trade back and forth between the two, defer the [indiscernible] early on another contract, to kind of help the logistics issues this moved out. Anyhow all of these challenges -- the combination of the transportation and the challenge of acquiring Vectren Fuels has not helped to contain our cost structure throughout ’14. In 2014 our cash cost per ton had averaged $32.56 versus the previous year our cash cost averaged $28.37. This is a difference of $4.19 a ton. This trend is unacceptable to us, but we continue to believe that in 2015 our cash cost will return to $30 and less. Now we've said this before that we've kind of had our hands full here with the tripling in size. We've now had the Vectren transaction behind us for about 60 days and we are very encouraged by the results we're seeing especially in October out of the new assets and even the existing Sunrise assets as well. I realize one good month does not make a year but we're starting to get our arms around the new Company going forward and we'll continue to sharpen our focus on lowering our cost going forward into 2015. As we look ahead, as disclosed in our 10-Q, the balance of 2014 we anticipate shipping and we're contracted to ship 2.4 million tons at a price -- a base price of $43.24. In 2015 we now have 9.5 million tons sold at a price of $44.32, in 2016 3.4 million tons and $44.03 and in 2017 1.5 million tons at $44.39. Looking at the Q, we have few onetime charges that I would like to discuss. We have $7.9 million of one-time transaction cost associated with the Vectren purchase. In addition to that we ruled off 1.1 million of deferred financing cost that was related to our previous credit facility which -- we issued a new credit facility. We had to -- the push that was still unamortized. Looking forward on the new -- one dramatic change and also an interest is under the new facility our interest payments are approximately $1.2 million a month versus previously they were $35,000 a month. So quite a big change there. If you look at our debt facility to quit the transaction we secured a new $425 million credit facility with PNC and some leading 17 other banks. The facility is made up of a $250 million revolver with a $175 million term loan. As of September 30th, we had -- $398 million was the max available to us due to loan covenants and our outstanding balance was $345.6 million. Looking forward at management, we expect the pay our loan down to $300 million by year end and moving forward to Savoy, we put our marketing efforts on hold with Savoy because oil price had declined 40% here in the last month and we did receive a distribution from Savoy of $4.9 million to Hallador in October, the proceeds of which we used to reduce our bank debt to our loan covenants. One other thing we'd like to point out is our ownership in Savoy did decline in the third quarter from 45% to 40%. These are Savoy's management exercising all of the remaining stock options. So the one-time of it, that you may have no more stock options and that's behind us now. So that's all the remarks I have on the quarter. So I'm going to open it up to questions now.

Thank you. [Operator Instructions]. Our first question comes from the line of Mark Levin from BB&T. Mark Levin - BB&T: Hey, Brent. Just a quick question on the cost. So if you go back to -- again if you go back to Q2, you guys did about $30.81 this quarter, cash cost of $35.06. Can you maybe -- I realize you'd just be sort of guesstimating, but maybe guesstimate the sequential increase of what contributed to the $4? Was it half rail, half integration? How do you kind of breakdown that sequential increase?

I'd say the first half of the year, we really struggled with rail which I've talked about this before. Unfortunately the way our Carlisle mine, which is the only asset we had at that time, the [indiscernible] base, it just didn't [ph] have a lot of coal in the yard. And so once the coal yard's full, you're down. And so we did run near as many hours as we normally run, which you just got a lot of fixed cost to start backing up on you then. And so I'm going to say the first half of the year, those were the big issues. In August, we also seem to get better, not perfect but better and we were able to implement some of the changes I discussed about earlier, slower cycle times, when the train was on it and the like. Really we just completely had -- [indiscernible] on a management anymore or ask anymore because we really have -- had a lot of late, late, late nights just trying to get the Vectren deal negotiated yet again. Two thirds of our employee base has worked for us for less than 70 days now. So we had to get all those people interviewed, figured out who is going to do what, background check, drug testing. And so we had a lot of our time, effort and attention focused on that. It also just happens to happen at the same point in time, where we are mining in areas of the mine that were full recovery. We don't -- we know from drilling that, that is not a condition that's going to exist for the life of the reserve, but there certainly will be multiple quarters at a time when we have to go through those areas in order to get to the better areas of the reserve and it's just one of those things that can evolve at the same time and you kind of focused a lot in the past about being a single portal risk. Maybe that's not a risk point of view but this is single point of cost point of view, that back when we just had Carlisle, those were the issues. Now we essentially have three underground portals and [indiscernible] whole mine and so we are much more diverse company. As far as where we are at in our process of when we talked in September about what was going to happen as far as making the transition and that sort of thing, we're right where we think we ought to be and we're happy with the changes that we've been able to make and not just in the new assets, but existing assets to improve result. We're very encouraged by what we're seeing from one of the buyers in October. Mark Levin - BB&T: So when you think about cash cost in Q4 and then I guess in ‘15 you talk about getting to 30 or below, can you maybe talk about how you expect the cost of trend I guess in Q4 and then why do you have such a great deal of confidence that you can get cost 30 or below in 2015?

Well, in Q4 we’re $35, and by Q1 of ‘15 our goal was to get to $30. What that cost us back in Q4, mining results are better. We still have a percent of our work force that is extracting equipment at another mine at which we're no longer running. So to get -- that is going to step down from $35 to $30 in the fourth quarter. Where we’re going to end up exactly, it’s too hard for me to say. There are too many moving parts where we’d be able to pin point that and Mark really, that’s -- we need another expert analyst to figure that kind of stuff out for us. Mark Levin - BB&T: Well, I don’t know if I can help you there. But let me say just segue just real quick then I’ll get back in the queue. ‘15, I think you already mentioned interest expense right now running on one-to-one but in ‘15, maybe some help with how to think about SG&A and also CapEx?

Mark, this is Andy. On SG&A $12 million I think would be good number for that. And on the CapEx $4 a ton. Say a run rate of 10 million tons, $4 a ton, say $40 million for maintenance CapEx. Mark Levin - BB&T: And in terms of growth next year and in terms of CapEx, that was behind maintenance?

There's not going to be significant besides that. We get -- a lot of the equipment we get from Prosperity. That could be a little bit high.

Thank you. And our next question comes from the line of Lucas Pipes from Brean Capital.

My first question is on kind of what you’re seeing in the marketplace right now. Just trying to back into what you've price during the quarter for ‘15 and ‘16 numbers? They're a little bit funky. So I was just curious if you could may be tell us kind of how you see the pricing evolve and how also customers are behaving in this type of market environment?

I’m not sure I understand the first part of your question Lucas, could you say that.

In terms of any tons that you contracted and priced for 2015 and 2016, what was the price on those that you contracted during the most recent quarter?

That’s not something we’re going to disclose, but I can tell you, part of the reason pricing kind of looks a little funny to you is some of 2015, 14 tons are kind of blended and extended into ‘16.

Okay. And in terms of --

So we just can’t really say now because we still have offers out of the utilities.

Okay. All right. And then maybe more switching to a higher level kind of strategic topic. When I think about $40 million CapEx, cash cost below $30, pricing still above $40, you’re pretty well positioned to generate a lot of cash in 2015 and beyond in my opinion, and some of your coal mining peers that are similarly well positioned have got a lot about MOP opportunities. Has this topic come up internally? How do you think about that opportunity valuation? It seems a lot more chap [ph] this small type of structure.

Well, I think our primary focus right now is to A -- Job No. 1 for us is drive our cost structure down. Job No. 2 will be the pay down debt. Once we get to a more comfortable debt position for us, again, previous quarter, our debt payments were $35,000 a month and now we've jumped to $1.2 million. So that's always been core to our group. We’re probably more conservative than some of the large competitors from that standpoint. So I think that’s going to be our next move. As far as MOP structure, we have casual conversations about it. I don’t see join the direction anytime soon.

And then maybe lastly on Savoy; production was a little bit weaker in comparison some of the prior periods. Anything in particular going on there, or was that more of a data point?

It was more of a data point. We did market Savoy for a period of six months and we were fairly happy with that process, [indiscernible] oil prices earnings commodity. So pricing dropped by over 20%. It just kind of makes it hard for two sides to get together. So we've really tabled that. Perhaps they have not drilled as aggressively as maybe they have in the past, because they were in kind of sell mode, but we're very -- we don’t have any problem with them. We are very happy with the assets. We're very comfortable with selling the asset. We're very comfortable to hold the asset. I mean its good management and good reserves and we're just going to keep blocking and tackling and creating value there. One thing that was unusual about the quarter was that they distributed to us and that’s really kind of been the first time that happened in the long, long time.

We've gotten tax cash distributions but this was over and above the cash distributions for taxes.

Thank you. And our next question comes from the line of Paul Sonz from Sonz Partners.

A question I had, Andy did you figure out what tax rate you think we're going to at least use to model?

Paul, 25%, plus or minus couple of points.

Do you expect any more payments from Savoy or was that just a one off and we shouldn’t expect to see another dealing like that?

I don‘t know if you are going to see those same type of distributions, but they are in the distribution mode. So we'll see if these prices rebound and get some more. But as we said, any cash we get goes out to the banks.

And talking about the cash, we have a dividend and looking at it, wouldn’t it make more sense just to cancel the dividend and use it to pay down debt?

We don’t want to do that, stop paying a dividend. I don’t think that would be -- go over too well.

Okay. In the Ohio River Terminal, is there -- I noticed in talking in the past about people coming to you and wanting to utilize it for some purpose or another. Is there anything that works on that?

I mean a new idea locking the door every couple of months. I don’t think we have anything significant going on there today.

Okay.

That terminal is really more of an access point that enable -- we've looked at other projects in the past in that area and we think that future projects, that becomes a key asset. Today it is nothing [ph]. It's something that we own and it’s kind of a non-factor our company. We hope we can go onto something substantial.

Last question. Last time in the September call, we asked about whether you felt that it would be easy to replace -- to find buyers for the coal that we lost out of Indianapolis, and I wondered if there was anything you could say publically about replacing buyers for that tonnage.

Well I think that, if you look -- a few years ago we didn’t sell any coal to the Florida market. Today we sell 15% of our production to the Florida market and we still see that Southeast part of the world, that business growing for us. So that’s kind of where we're at. Would we like to still have Harding Street [ph] forever? Absolutely we will. But it doesn’t look like that’s going to be the case. But again its 1.3 million tons out of 9.5 million, 10 million tons of our sale. So we feel comfortable we can get that replaced.

Is there anything that you guys want to say about what the market for your particular kind of coal looks like in terms of pricing or do you want it just lean back until after the sales season is over.

You tell me what the weather forecast is going to be and I'll tell you what pricing is going to look like. Right now the gas prices jump roughly $0.40 in a week, a week and a half, and this has such a dramatic effect on our coal pricing. And here we've got, I'm not sure what part of the world you are in Paul, but I think is going to be 26 degrees here in Indiana tonight and if we get -- if winter shows up, pricing is going to be good, winter doesn’t show up, pricing is going to be soft and that's just kind of the market we're in right now.

Let me ask you this, because that you're sold out for '15. So when you're contracting to sell coal now into '16 and '17 and how does that -- I'm not familiar with the forward curve and what looks like. And is that affected at all by pricing, by getting a really cold winter, this winter. Does that really affect a couple of years out?

We typically see utility more want to hook up for a two-year deal. So anybody we're talking to about '15, '16 is probably part of the conversation, '17 isn't. And the Indiana market five years ago, companies were rolling new five, six and a half year contracts, we signed some of those. But natural gas has become a bigger factor and coal especially in the Florida market has become a little bit of swing feel. So because of that, because of more uncertainty of what coal burns are going to be, you see utilities playing a little closer to the vest. And that can be good for us and that can be bad for us. On the good side is if they are short and winter shows up and summer shows up, you're going to see dramatic movement in pricing. So I think coal pricing going forward will be more volatile than it was five years ago. So yes. Anyhow I don't know if that answers your question or not but…

I am not sure that, that when you talk about two year contracts, how people -- I mean whether this winter cold or not, I don't know how much that matters but they matter. I guess it matters.

Are the inventories skewed very well in your customers?

I'd say our coal -- other ones that have transportation issues, it's not because they don't want the coal. And those guys are really -- three of our customers are really concerned about their coal inventories going into winter. But transportation has been difficult for those with those three guys. The other ones, they seem to be in really good shape. So it is improving, but at the end of the day we need some winter and show up to really get pricing exciting. So we're happy. We're happy with our contracts. We're not under pressure to sell because we're in a really sales position for next year. We've really got 12 months to get 2016 put to bed. All the customers that were selling through the '15, they still need to buy coal in '16, but they are still focused on -- three of them are very focused on how do I get my inventory up today and the others, I think they're trying to kind of see what the market will bring.

Thank you. [Operator Instructions]. Our next question comes from the line of Matt Klody from MCN Capital.

Quick question. If you go through your filings in the pro forma information that you provided, which I think your pointing out the Prosperity mine because you are guys are shutting that down. If I'm reading that correctly, once that mine is -- that higher cost mine is poured out, the remaining Oaktown mines in first half of '14, were they running cash cost around kind of $30, $31?

We don't really want to get into get into splitting out each mine month-by-month and you got to realize for Oaktown, we only have one month of that going into the quarter. So our big thing is, is going forward what you're going to -- we have created a very large mining complex and we think it's most beneficial our shareholders to focus on and the report as the giant mining complex that we've created. And so that's why we've chosen not to break that out. If you want to ask me if Carlisle had a great quarter, it didn't. There are a lot of reasons for that. But we think we're on the right path and we don't take it lightly that we have said we can get mining cost to $30 next year and we realize our reputation depends on that. So that's our number one goal.

Matt, as you and everybody else on the call probably knows, we have to file presumption reports for each mine on a quarterly basis and that's available to the public on the [indiscernible] website.

Okay, and Andy, you said cash generation next year, $12 million?

$12 million.

$12 million, okay. Got you.

Thank you. And our next question is a follow up from the line of Mark Levin from BB&T. Mark Levin - BB&T : Yes, just one last question as it relates to rail, Brent. To the best extent possible, when you think about driving cost or the impact of rail or poor rail service on those three customers, how many dollars a ton if you had to guess do you think that impacted cost? Was that a $2 hit, a $3 hit, a $1 hit? Is there a way to maybe quantify how much impact would have come from rail alone or is this geology productivity, integration and all that stuff. I’m just trying parse out the different pieces as you try to get to that $30 number next year.

That’s a tough one Mark. I mean at the end of the day it would a guess, right. Mark Levin - BB&T: Right, sure.

We know that we weren’t allowed to run the hours that we normally run. We still have all the fiscal overhead. So the only way to really answer that is to kind of look back to previous year and the previous year we had good rail service and our recoveries are little bit better. I think you’re trying to nail down what percentage of that was recovery and what percentage of that was rail and I want to give you a number, but it would really flat out probably be a guess. Mark Levin - BB&T: I appreciate the honesty. Just trying to encapsulate your degree of confidence of getting the cost structure below the $30 level or at the $30 level and it sounds like you’re confident in it but obviously it’s continued upon the rails as you point out getting better and then also the recoveries getting better as well.

Yes, why we feel better about rail; A, we've made some structural changes of how -- we've done a lot of flexibility post the Vectren transaction versus previous to that and we’ve made some changes with how we go about loading a train and how all of that -- haul that hand upwards and getting them back. We feel we've dramatically improved that. And then from a contractual standpoint, the three customers that are struggling, we’ve changed some things contract-wise for two of them specifically that we think alleviates the problem almost completely as of the end of the year. So one could still struggle but it becomes less significant. Also the western asset, we've done a lot more -- they're just a much bigger facility. Carlisle was originally designed to be a two unit mine. There's five units of equipment there. So the yards which we can serve coal, it's a 200,000 tons whereas the Oaktown complex, I think they’ve had as much as a 1 million tons on that yard. So we don’t want to have that kind of inventory because that creates a whole new host of other problems but it’s able to weather that storm better than Carlisle is and because of how we now have our contracts, we think we can utilize the availability of the rail better and leverage that for better performance. So we feel much better starting first quarter of ‘15 about transportation that I did in previous two quarters of this year, or three quarters of this year. So I feel much better about that. And geology wise we’re going to have good months, we’re going to have bad months. That’s just part of this business. We don’t work in a factory. We have to mine through the area and sometimes we have to get to look on the other side. Yes, but that's spread over three mines and we’ve gone from four units of production to nine to 10, that are actually running every day and then we’ve got another three units of backed up equipment. So typically in the past we’ve run 40 units of equipment with one backed up. Now we’re running -- now we have 13 units of equipment which we run, eight to nine. So hopefully it will make this more consistent going forward and we're just really -- pretty pleased with what’s going on at the Oaktown complex. I think whenever we try to go in to buy something, we've got limited information and we have to make some assumptions and now we’ve got more data points, we've run it for over 60 days. And we feel confident that our game plan is going to be successful. Mark Levin - BB&T: Make sense. Last question [indiscernible] but increased in last three months on Bulldog? Any change there for better or worse or stays slow?

I think for the better. We've had an informal hearing. We've gone through there. We will have a formal hearing coming up here in the next 30 40 days. Once your permit is deemed complete, there is a timetable that then finally starts. And we're on that timetable and the current schedule is, is we come out of that with an approved permit in March. So that seems to be advancing fine. Like any coal project there is people out there that are in love with it but there is also probably a quieter group of people that are very much excited about it and we're completely committed to develop a mine there.

Thank you. [Operator Instructions]. And I see no further questions. I'd like to turn the turn the conference back to management for closing comments.

Well again, we thank all of you for your time, and again we're excited about where we're at. We feel we're on our timetable exactly where ought to be at this juncture and we look forward very much to next year. And hopefully we will have better results to share with everyone. Thank you.

Thank you. Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect. Everyone have a good day.