Good afternoon, and welcome to Hallador Energy's Third Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, today's event is also being recorded. I would now like to turn the conference call over to Ms. Rebecca Palumbo, Investor Relations. Ma'am, please go ahead.

Thank you, Jamie. Good afternoon, everyone, and thank you for joining us on today's discussion of our third quarter 2017 results. I hope you have all had the opportunity to review our third quarter earnings release and our Form 10-Q, which was filed this morning with the SEC. This event is being webcast live, and you'll be able to access the replay of this on our website. As a reminder, 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, future coal sales 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 may be required by law. With me today are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Larry will begin with a review of our operating results, followed by prepared remarks by Brent. Brent and Larry will take your questions afterwards. With that, I turn the call over to Larry.

Thank you, Becky. Today, I want to go over the review of our operating results. Net income for the third quarter was $3.9 million, which resulted in $0.13 a share. We had $11.7 million of net income year-to-date or $0.38 a share for the nine months. Our free cash flow, which is defined as net income plus deferred income taxes plus depreciation, depletion and amortization plus ARO accretion and stock compensation less maintenance CapEx. Our free cash flow was $15.3 million for the quarter and $42.5 million year-to-date. Our adjusted EBITDA, which is defined as EBITDA plus stock compensation plus ARO accretion, was $21.2 million for the quarter, $65.5 million for the nine months. We reduced debt by $14.8 million in the quarter and $27.9 million year-to-date. We paid dividends in August of $1.2 million, $0.04 a share. And year-to-date, we paid $3.7 million or $0.12 a share. Our bank debt as of September 30 was $210.7 million. Our net debt was $196.7 million. Our debt target for the rest of the year is $202 million to $207 million of bank debt. And our debt-to-EBITDA ratio, which is our leverage ratio required for our bank and is a Sunrise-only calculation, was 2.42 times at the end of September. I'd like to now turn over the -- to go over the general statements and results to Brent Bilsland, our CEO.

Hi, everyone, and thank you for joining us today. I'm happy to report that Hallador has posted yet another respectable quarter. When we compare our company-wide cash costs for the first nine months of 2017 versus the first nine months of 2016, we have successfully lowered our cost structure by 9%. These reductions in our cost structure have enabled Hallador to generate $42.5 million in free cash flow for the first 9 months and $15.3 million for the third quarter. We have utilized our cash to delever our balance sheet and invest in our business. First, let's discuss the delevering. In the first 9 months, we reduced our bank debt by $27.9 million, of which $14.8 million was paid down this quarter. This is important as we have now lowered our debt-to-EBITDA ratio to 2.42x. As long as our leverage ratio remains below 2.5x, the interest rate we pay is reduced to LIBOR plus 300 basis points versus LIBOR plus 350 basis points. The step-down in interest rate equates to roughly $1 million savings over a year's time. Additionally, in the quarter, we were able to increase our liquidity to a healthy $83 million at the end of September. And then focusing on the balance of our free cash flow, we've been investing in Hallador and our business. We believe, at Hallador, you're either growing or you're dying. And by this, we mean you're either investing in your business or you're not. If you look back at our history in '14, we purchased Vectren Fuels. In 2016, we purchased reserves and contracts from our competitors. In 2017, we have invested in our wash plant, making it more efficient. Last week, we completed our new elevator at the Oaktown 1 mine, which will help reduce our labor costs. We anticipate delivery…

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator instructions] And our first question today comes from Lucas Pipes from B. Riley FBR. Please go ahead with your question.

Hey. Good afternoon, everybody and congrats, Larry, on the promotion. That's well deserved. That's awesome to see.

Thank you, Lucas.

So, I wanted to, Brent, follow up a little bit on your commentary regarding growth. You know that's not something we are accustomed to hearing in the coal industry. And maybe just from a very high level, if you could share a little bit more about where you see the growth opportunity. Is this more Hallador specific? Or is this tapping into changes in the industry dynamics in the thermal coal market, specifically in the Illinois Basin? And then, of course, I'm very intrigued by the investments in the rail load-out that you're working on. I wondered if you could give us a couple numbers around that, i.e., what is the investment in that facility. You may have said it and I may missed it. But if you could share the CapEx associated with it. And then also what you expect in terms of returns, be it from higher volumes or higher realized prices, I would appreciate your perspective on that.

Okay. First, touching on the growth. I think that we are big believers in that we talked about the coal companies that have invested, and there are coal companies that have just sucked all the cash out of their business. We feel we are in the camp of that. We have continued to invest in our business and we have continued to reduce our cost structure. And we feel that puts us into an advantage to continue to make good returns regardless of weak market pricing. The two changes, I think, that we fundamentally see are we continue to see higher cost production come offline. And as we look -- I mean, there's coal companies that are struggling. We've looked at a lot of them. And at the end of the day, regardless of who buys them or whether they just go away, we see less tons being produced from those assets than have been produced in the past. From our standpoint, we think that the rail facility, the Princeton Loop, which is -- which we are budgeting a $10 million facility, we view that as a game-changer for us in that there's a lot of demand that can only be accessed by the NS railroad. And we've never had access to that market. Starting in the spring of next year, we will. So that gives as a whole new customer group to call upon and try to sell our low-cost production to. Secondly, we have a lot of customers that say to us, well, we have some plans that are on the NS and we have some plans that are on the CSX and I have to be careful to only buy coal from you that are CSX served. This way, not only do we have access to both the CSX and the NS, customers can feel more comfortable buying larger blocks of business from us because they know that, well, if I have a problem at a CSX plant, I can always take the coal to the NS plant and keep my position where I want it to be. So, with that, I think we've said for a long time what's unique about Hallador is, is that we're a company that's operating in about 60% of capacity. We are hopeful that the addition of the rail facility will help us utilize more of our capacity going forward.

That's a very helpful perspective. Can I just switch topics? Your costs in the third quarter, they're a little higher than the year-to-date figures. So, I think you also gave guidance for the fourth quarter that was somewhere in between the two numbers, if I recall correctly. So, as you think about 2018 and how Oaktown is positioned on the cost curve and the improvements that you alluded to, what do you think is a good number to put in our model just for Oaktown coal?

Well, for -- yes, for Oaktown coal, it's depending on the sales contracts that Brent talked about coming in, but I'll give you -- I mean, if we do 7.2 million to 7.5 million next year, Lucas, you've seen where our costs were in the first quarter, they were in the 20 -- below $25 million. At a 6-million-ton level, you're -- we're more at the $28 cost structure for the year.

In the third quarter, we just didn't produce as much coal shipments. Shipments were decent, but our production was slowed down. It's just a decision we needed to do to adjust inventory levels. So that's why we saw an increase in costs.

And so, the cost performance will depend a lot on volumes. Is there any additional color that you could share with us regarding what will -- coal volumes to be at the high end of the range that Larry just mentioned, call it 7 million plus tons versus low 6 million tons? What do you think, Brent, is going to be the main driver of the whole -- the high end or low end of that range?

One more comment on cost. Also in the third quarter, we have the Fourth of July holiday, which is a shutdown week. So that also helped drive our costs higher in that time period. As for overall sales, will we be at the higher end of the range or the lower end of the range? I think that we feel that we've fairly consistently, in the last couple of years here, have run in the 6, 6.5 range and we feel that the market today is stronger than it was a year ago. Gas prices have been fairly consistent in the last 13, 14 weeks, kind of staying in that $2.80 to $3.20 range. Coal is in the mine in Indiana at those prices. What's probably the biggest development is exports have really continued to be much stronger than I think our sales and others have anticipated. And we haven't been exporting coal. But the Central App coal, a lot of that has been going to export. Some the NAP's been going to export. Some of the Illinois Basin coals that hit the river well have been going to export, and it's just created a lot of tons that don't -- that haven't gone to export in years past are going there now. So again, we're in our -- we're right in the middle of our sales negotiation period. But to us, it certainly appears that there's a high probability we will ship more tons in '18 than we did in '17. And how much of a factor our rail loop will play in that remains to be seen, but it's certainly something that we think is opening doors for us.

That's great to hear. Really appreciate all the color. And best of luck and thank you.

Thank you.

[Operator instructions] Our next question comes from Arthur Calavritinos from ANC Capital.

Hey guys. Thank you. One question on the -- two questions actually. On the debt, right, you did a great job paying it down. And I assume you're going to keep this facility for a while because I'm looking at other coal companies' price in the fixed income market, and they price at a -- and I'm sure you guys have, priced at a much higher cost of capital. So, I'm not sure when this thing matures. And if it does, I think it might be '19, but I'm not sure if that's right. Are you going act to keep this piece of paper out there and extend it? If we could get a couple of comments on that.

Well, currently, our credit facility expires in August of 2019. We have worked very aggressively to try to delever our balance sheet, and I'm very proud that we got it down to 2.4 times. What we decide to do as far as when will we refinance that, I don't know that we've made that determination yet. I don't think there's pressure on us.

I know, I agree. I don't think there's pressure at all. But I'm just saying it's a great piece of paper when I look at the cost of capital that's out there for other coal companies, they're in the high yield market issuing paper. So, what I'm thinking is, will the game plan be just to have it extended? Or whatever it is at the same -- you'd probably get the same type of rate, that's all I'm saying. Because when I look at what's going on out there, there's a lot of higher cost of capital on the fixed income side. That's all.

Yes. And I think that as we get into next year at some point in time, we'll certainly sit down with our bankers and have those discussions about what the right game plan is. We haven't worked on refinancing to date as we have plenty of runway, and I think that we want to get our sales position kind of put to bed before we would have those types of discussions.

Okay. And then on the gas...

But I agree with you. I think we have a good deal on our bank debt.

Okay. And then on the nat gas side. I'm seeing -- I'm on delay here, but about $3.15, $3.25 for Jan of '18. I was talking about coal company. How does the transmission mechanism work as gas prices go up? Let's say we get a $4 number Dec or Jan or Feb. Is it just the switching cap in first, so you're moving more volumes and then price follows? How -- if you could walk me through that so I can understand it better. And that's it.

Well, I think that natural gas pricing determines how big the coal market will be nationwide and then the coal market competes against coal. And so right now, we've been in a period of time where the coal market has been oversupplied, but we've seen a lot of correction in the past 12 months from a coal inventory standpoint, from a natural gas inventory standpoint. We spent much -- most of the year with natural gas inventory levels being above the five-year average. And currently, they're below. Export markets have certainly been very welcome. When will we see price appreciation? I think the issue right now is that most suppliers have a larger open position than they traditionally have. Now when we look at the market, we know that x amount of coal has to be purchased, then we think that because of the quality and the cost structure, and the now transportation flexibility that we offer our customers, we all think we have a handle on roughly where our sales positions will be. Once capacity starts to get locked up as you move up of how much coal you're going to ship, I think pricing will rise and I think it's going to be a faster rise than it's been in years past just because there's fewer players. So, I hope that answers your question.

No, no. And in the past, let's say like 5 years ago plus, when you have like times when it was coal demand went up and gas stable, it was really volume-driven. What I'm saying now is we can have a situation that's volume and price-driven because the capacity is left and overreliance on that gas. It seems like if we have an up-cycle in demand, you may get it from -- we'll get it from volume and price it seems like. With the lag, but versus five years ago, we may be -- we might have just got it more with volume. Would that be accurate or...

Well, again, supply equals demand. Right now, I think because of the larger open positions, pricing has yet -- I mean, it's -- pricing has improved from where it was four months ago, but it hasn't returned to the price levels it was two, three years ago yet. But we're certainly keeping an eye on this because I think we have seen Central App prices move fairly dramatically in the last month. And I think we've seen Northern App prices move pretty aggressively in the last month. And I think a lot of that is driven by API 2 seeing a fairly dramatic increase in the last couple of months. And all of this -- all ships rise with the rising tide, and I think it will be moving in the direction of the Illinois Basin soon.

Okay. All right. Got it. Thank you.

[Operator instructions] And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Well, hey I have no further remarks, but I appreciate everyone joining our call and we look forward to what the future brings. Thank you for joining us today.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.