Good day and welcome to the Hallador Energy Second Quarter 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Becky Palumbo, Director of Investor Relations. Please go ahead.

Thank you, Phil. Thank you all for joining us today to discuss our second quarter 2018 results. We filed our second quarter Form 10-Q yesterday afternoon. It can be viewed on our website now. This call is being webcast and a replay will be available on our website along with the transcript later this week. Participating on today's call, with me are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Larry will begin with the financial overview of the quarter, followed by Brent with comments on operations. After management completes their opening remarks, we will open the line for Q&A. 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. Now, I will turn the call over to Larry to go over our second quarter highlights. Larry?

Good afternoon everybody. Before I start the review of the operating results, I want to give a few -- two definitions here. We define free cash flow as net income plus deferred income taxes, DD&A, ARO accretion, stock compensation, less maintenance CapEx and the FX of our equity method investments. We define adjusted EBITDA as EBITDA, plus stock compensation, plus ARO accretion, less the effects of our equity method investments and Hourglass Sands. So for the quarter, we had net income of 20 -- or net loss of $23,000 or $0.00 per share and year-to-date $2.1 million of net income or $0.07 a share. Our free cash flow for the quarter was $8.2 million and year-to-date, $18.9 million. Our adjusted EBITDA for the quarter, $17.4 million. Year-to-date was $37.1 million. We increased our debt by $9.8 million in the quarter, and we decreased at $1.5 million year-to-date. We paid dividends of $1.2 million for the quarter or $0.04 a share, $2.5 million year-to-date, also $0.04 a share. That's $0.08 a share. Bank debt was $200.5 million at June 30th and our net debt at June 30th was $187.8 million. Our debt target for the end of the year is $175 million to $180 million. Our debt-to-EBITDA at June 30th was $2.64 million. And I'll remind everybody, that is on a Hallador's basis this quarter starting in May versus the Sunrise level that we had our debt at before. I will now turn the call over to our CEO, Brent Bilsland for comments on the quarter.

Thank you, Larry and thank you everyone for joining us today. Yesterday, we filed an 8-K announcing some changes to Hallador's Board of Directors. Sheldon Lubar at age 89 has decided to resign. I want to thank Sheldon for providing Hallador with wisdom and guidance for the last decade and for the friendship he has shown me. Sheldon is a tremendous person that I very much enjoyed working with and I wish him the best in his future endeavors. With the departure of Sheldon, our Board decided to add his son David Lubar and additionally, Charlie Wesley IV to the Hallador Board of Directors. David Lubar, age 63, is President and CEO of Lubar & Co. based in Milwaukee, Wisconsin. At Lubar & Co., David oversees their investments in over 20 companies covering a wide range of industries. Currently, he serves as a Director of each of the Lubar Companies as well as Northwestern Mutual Life Insurance Company, BMO Financial Corp., and the Milwaukee Brewers. Through the years, David has attended several of the Hallador Board meetings as a guest and I have found his advice to be very insightful. Charlie Wesley IV, age 39, is the CEO of Thoroughbred Resources, a mineral holdings company with investments in both coal and frac sand. Charlie has served as Chief Planning and Commercial Officer of Ramaco Resources and prior to joining Thoroughbred, was Senior Counsel at Level 3 Communications, where he was responsible for the operation of the coal mining operation -- coal mining operations. Prior to Level 3, he worked at the law firm of Arkin, Gump, Strauss, and Hauer & Feld, and Strasburger & Price, focusing on international energy transactions. Originally, Charlie began his mining -- his career as a mining engineer for a coal company, so he's very unique…

Okay. We will now begin the question-and-answer session. [Operator Instructions] Okay. The first question comes from Lucas Pipes with B. Riley FBR. Please go ahead.

Hey, good afternoon everybody. Nice job performance on the cost side. I wanted to follow up a little bit on the reopening of Carlisle. And what I would like to start is how we should think about those volumes. Is this more temporary to feel as you put customer demand? Or is this really kind of -- do you have a multiyear plan to keep this mine opened? And then maybe more importantly, should we think about those volumes incremental to all the existing production or is there maybe a little bit of a switch to Carlisle?

Well, I think that we did -- we moved a unit of people from Oaktown to Carlisle. On the tonnage side, I expect things to be, as far as capacity-wise, one unit in Carlisle, they're a little smaller than a unit at Oaktown just in how they're set up. We will not run as many days. Our current plan is not to run as many days in the second half of the year just due to holidays and probably less weekends, depending on what our sales position looks like. We wanted to build our inventory this year as we said we would. Quite frankly, production at Oaktown was remarkably good. And so we will look to draw that inventory level down as the year goes on. So, part of that's going to depend on what our sales look like for the balance of this year. We think the market has tightened up quite a bit because a lot of tons have gone to export that were not anticipated and we've had a good heating season this year. So, all those things, we think as the year winds down, we think that we have several customers that will be in the market looking to purchase spot coal. How successful we will be on those bids, time will tell. Looking to next year, as we've said before, we think that it's going to come down to buying season. But we think because of the Princeton Loop, we're talking to more customers than we have in the past. And so we think our potential for more sales is greater in 2019 than it is in 2018. The back half of the year, if you look at this, we're going to be shipping -- contractually, we're scheduled to ship at a 7.6 million ton pace -- excuse me, 7.8 million ton pace. And if we make additional sales, that's going to push us potentially to be running at a pace up over 8 million tons. So, we would need to run Carlisle to be able to hit those shipments because we're bumping -- that would be bumping up against Oaktown's capacity. So, we think we have an opportunity to keep Carlisle running next year, and we hope to be adding units there. But ultimately, it's going to come down to what the market needs us to do and what qualities the market needs us to do. We've -- the quality we get out of Carlisle is very similar to Oaktown 1 and 2, but it is a little less -- a little lower sulfur. So, when we ship to those Southeast markets, typically, that coal mill will come out of -- or it can come out of Carlisle if that's what the customer desires.

That's very helpful. I'm going to ask a follow-up question on the topic of Carlisle. So, should we be thinking about the movement of a production unit from Oaktown to Carlisle as kind of you maximizing your marginal costs in the short-term? Plus, like, there seems to be a little bit of a revenue component as well. Is that kind of the motivation? Or am I missing maybe a larger strategic point here?

Well, I think the point is with the larger shipments in the back half of the year, we would be -- if we're successful in making additional sales, we would be pushing Oaktown near its limit. And so if we move a unit down to Carlisle, get that up and running, it gives us more capacity. So, we had two loops on the CSX at Oaktown, we had two loops on the CSX at Carlisle. So, it doubles our ability to be able to load trains. If customers call us and say, hey, just hot summer lasted a little longer than we thought or exports sucked a little more out of the market than we thought, it puts us in position, then to be -- we think, to respond more quickly to opportunities in the market. And we see a high potential for more opportunities in the market later this year. So, we think it's kind of getting more capacity ready.

Got it. Got it. Now, that's--

Yes, and I want to add -- I'll add something there, too, Lucas, because, I mean, what Brent's saying, we're anticipating more sales, so -- and we can't turn this -- it's not a switch. So, we have to be ready for that by opening Carlisle now.

Got it. Very helpful. Can you tell us a little bit about the impact on the cost side for that move? So, kind of, simplistically, how I thought about it was Oaktown is a lower cost mine, that's why you're producing everything there instead of Carlisle. And now we add this additional layer, where you expect demand to be strong in the back half, so you want to build some inventories. Is there a cost to that, from a cost perspective, so to say? So, should we be kind of modeling higher production cost in the back half of the year?

Well, I mean--

Go ahead, Brent.

Yes, I think that if you looked at it this last quarter, Oaktown had really good production cost number. But at the same point in time, Carlisle was a $1.25 million drag, so to speak. So, when you look at the cost, our headcount's going to be roughly the same. We expect our tonnage -- we ran the same number of days, we think it would be roughly the same. We anticipate running a few less days and drawing down some of this inventory, depending, again, how impressive the market -- or how much demand in the market there is. If we see additional sales, we'll run it harder. If we see additional sales that have some term to it, we'll add units. And I think by having that open, it puts us in a better position to add units if those opportunities arise, and we think the potential for that is there. But from a cost perspective, we have given guidance of, if you take Oaktown and Carlisle combined costs, we're giving guidance of $28 to $30 a ton. And there'll be no $1.25 million drag as there has been in the past. Now we still have holding costs for Prosperity and we still have mining cost at Ace to add in, but those are smaller numbers. So, we would think that our total mine cost would be less of a spread just because Ace and Prosperity are less significant to the total of what Carlisle and Oaktown will do.

Very helpful. I'm going to squeeze one last one in. If, knock on wood, the summer stays hot and you'll be in a position where customers want more coal, so if kind of one of the scenarios you described prevails, you're looking to add an additional unit or more. Would you have to add capital to accommodate an additional production unit or two or three? When would you have to add capital?

So, we -- I don't think we would have to add a lot of capital. We have primarily the units there. I mean, would we have to buy some batteries for some battery cars? Probably. But I don't see significant capital via investment being made. It would really just be adding 65 to 70 employees to bring that unit online. And then we would have the debate on depending on what the quality was, would be bring that online at Carlisle or would be bring that online at Oaktown? And we'll just have to see what the market tells us.

Got it. Got it. From a pure cost perspective, where -- would you bring it on?

From pure cost perspective, Oaktown is -- has more economy of scale than Carlisle, so the cost structure there should be slightly better. But quality matters, too. So we sell more 5.25-pound coal. It probably would come out of Carlisle. If we sell more six, six and a half pound coal, it probably would come out of Oaktown.

Make sense. All right. Well, I will leave it here. This is very helpful and best of luck.

Thank you, Lucas.

Thank you, Lucas.

Okay. [Operator Instructions] The next question comes from Arthur Calavritinos with ANC Capital. Please go ahead.

Thank you. Good afternoon guys. On the last Q&A -- or last -- Lucas' question there, you mentioned the back half of the year and you mentioned earlier, there might be some opportunities. And I'm wondering, it sounds more constructive and bullish than what I thought. And I'm wondering, as I look at this business, what are you guys seeing out there that may have surprised you on the upside for the back half of the year? Just a little bit more industry color. And then on the financial side, I assume you guys are going to take down methodically the term loan as you just go forward like every quarter. And that's it.

Yes, I think on the market side, answering that question first. The export market has been strong and we may actually ship some export coal ourselves for the first time ever. So, the export market has been strong. I think it's sucked a lot of tons out. You've seen other industry execs, I think Alliance came out and said that exports were going to be 27% of their sales this year. I think you've seen Foresight Energy, I saw their release, they came out and said that they had done quite a bit of coal to export. So, I think that has substantially tightened up the market. And then coal demand has just been good. We've had a very hot somewhere in the Midwest, in most of the U.S. And so generators are running harder than I think they anticipated. Gas prices have stayed decent. Not fantastic, but decent, but good enough that coal is dispatched in Indiana in front of gas. So, for those reasons, I think the -- I think buyers, typically at the beginning of the year, are buying somewhere between 80% and 90% of their needs and we're seeing what the summer burn is and then they're filling in with spot in the back half of the year. And so we've just had several customers say that there's going to be a solicitation late summer and we'll see how successful we are or aren't on getting those. But when we looked at our book and we see how many customers have expressed interest in buying later this year, we thought it was appropriate to get Carlisle kind of up and running and in position, so that we can take advantage of market opportunities if and when they arise.

Okay. And then when you talk to your sales and customers, when you look at the international markets and it seems to me like everybody's talking about it -- or shipping, what do you think that permanency is? How do you -- do you think it's like a blip? Do you think it's a more secular, slow rise going forward? Just any other color you may have on that. Because you're right, everybody's talked about the international side and everybody, to me, has been very pleasantly surprised.

Well, I think the same that's going on. If you look around the world right now, power plants, new coal-fired power plants in the world that are currently under construction, when you look at that nameplate capacity, those plants have the capacity to burn an additional 500 million tons. So, that's 500 million tons of new coal-fired demand that's going to show up in the market.

About 80% of the U.S. burn, basically.

Yes, or U.S. is -- produces somewhere around 750 million, give or take. So now I think 150 million tons of that demand is in India. They had shown they will burn high-sulfur coal out of the Illinois Basin, so the Illinois Basin is producing 108 million, 110 million tons. And suddenly, you've got a 150 million tons of new demand that is capable -- doesn't mean they'll buy it all from us, but they're capable of buying Illinois Basin tons. And you've got other countries like Turkey, who have come out and traditionally burned low-sulfur coal and suddenly come out and said, well, we will burn higher-sulfur coal. So, there are new markets opening up for the Illinois Basin in the export world that weren't there before and because of that, more tons are being shipped out of the country. Now, there's always the risk of tariffs and that sort of thing, so it's definitely a more volatile market. But when you look fundamentally at the demand, there is new demand there and it is significant, especially when you consider how small the Illinois Basin tonnage is relative to that new demand. The answer to your other--

Yes, in the remarks -- I'm sorry, but what was interesting is what you said was, for the first time in this company's history, you're shipping internationally. Did I get that right, like when you said that earlier?

We have not yet signed any export deals, but we certainly are -- we see the potential to do export deals in the near future.

Okay. Got you. Got you. Interesting. Okay. Okay, then the second was just on the finance question, just on the deck.

Yes, on the finance side, our goal is always to pay down debt. And what a little unusual about this quarter is, is that we increased our debt, and that was really just a finance -- it was associated with bank fees associated with our -- extending our -- or signing a new four-year credit facility.

Yes, so, the fee's like, what, $7 million or $8 million or something like that? You guys said--

$6 million.

That's, yes, unbelievable. All right.

And then we increased our inventory quite a bit. So, part of that was -- materially, that's what we were trying to do. But also, we had excellent production. So, some of that was a little bit of surprise just because production was so good, recovery was up, but we'll take it.

Okay. And then one last one just for the industry, and you guys have been great over the past year, it's just industry in nat gas talking about it. Normal Q4, like October last year, was very bearish. Normal Q4 weather, heating degree days, inventories are where they are, any market color? Because it seems to me like the market is, like, really tighter than it should be because of the international flow. So, with guys inventory, they may think they have enough in the United States, but maybe it's tighter than they think. Just any color you may have on that.

Well, I think you're definitely seeing capacity utilization come up. I mean, Alliance has started their Gibson County North Mine. We have restarted our Carlisle Mine. So, we've seen a large amount of coal get flown -- or get exported out of the country. So, if the market does need more coal, the market is definitely tighter than it was a year ago because of the exports; because of a lot of coal got burned up this summer. And quite frankly, there's just not a lot of idle mines sitting around that can come back on. A lot of the idle mines have been permanently closed. We closed our Prosperity Mine. I could name of a handful of other mines in the State of Indiana and elsewhere that have permanently been closed. So, from a capacity standpoint, I think the Illinois Basin is trending at a much higher percentage of capacity today than it was a year ago. So, that certainly has the ability to start pressuring prices higher.

Okay. All right, beautiful. All right. Thank you.

The next question comes from Ajay Lele with Southpaw. Please go ahead.

Thanks very much and well done in the quarter. I was just wondering if you could please help us with regard to your foresight on the next five years, plants that are not retiring. Just wanted to get a sense of how you think about -- how you come to that assessment and what some of the factors are. I understand you're in a -- typically in regulated jurisdictions. And how do they make their decisions? Is it -- are they going to step down burn? Or like, what -- just a bit more color around what -- that assessment.

Well, announcements are what announcements are. We're stating that through 2023, we don't know of any customers that are announced to close. Then as far as what will the industry do, I think if you look at utilities, utilities make money by getting guaranteed rate of return on assets. And so for utility to grow its earnings, it needs to be constructing something. During the Obama years, there were a lot of new rules that created compliance issues, and utilities to -- invested to comply. So, they either put a lot of capital into their larger coal-fired power plants or they closed their smaller plants and built gas and a little bit of renewables. So, that has been the trend. Now, enter Trump, Trump has been quickly, in my opinion, unwinding a lot of the Obama era rules. In spring, he got out of Paris Climate Accord, he has asked the EPA to re-review effluent guideline limitations. That's a big one for our industry. Some of the WOTUS rules have changed. So, I think slowly, but methodically, this administration is unwinding a lot of the rules that were used to justify closing power plants. And I think you'll see a few rush here to make announcements try to get in before all the rules change. But quite frankly, I think even the governing bodies that look at that are looking and saying, hey, we know all these rules are going to change. Take ELGs, for example. I mean, EPA has stated that they're going to come out -- that they are currently studying the ELG rule and that they will come out with a proposed rule yet this year and have a comment period, and then the rule will go final next year. That rule right there will determine a lot as to what plants will be viable in the future and what won't. And we are under the assumption that that standard will be one that our current customers can comply with. We'll have to wait and see how that comes out. But I think the tide has definitely moved back in the direction of, I think, these coal plants will stay online longer than what people had originally thought.

Thank you.

You're welcome.

The next question is a follow-up from Lucas Pipes with B. Riley FBR. Please go ahead.

Yes, thanks for taking my follow-up. And actually I had a very similar -- I have a very similar question to the previous one, not about your plants, but about the industry more broadly. And I wondered kind of like within the Illinois Basin market, you described it as 108 million, 110 million tons of U.S. output. How many tons would you say are being -- on the demand side -- U.S. demand side, being retired over the next three years, five years? What would be your guess?

That's a hard question to answer, Lucas, for multiple reasons. Some of that power plant retirements that have been proposed. First of all, they're not burning Illinois Basin coal, they're burning Powder River Basin coal. Secondly, quite frankly, I think there's two or three power plants that have been proposed, but they blamed it on ELG. And I think by that time the regulators hear that, we're going to have a new rule. So, I think my number would be less than what some analysts might say or some of the things you might read at the coal conference. But I don't really feel comfortable putting my number out there.

Got it. Okay. Well, that's fair enough. That was it for my follow-up question. Thank you.

Again, I think, in general, Lucas, the point we want to make is -- the point we keep trying to make is, for at least the next five years, we have a really good runway. We have a good book of business. We don't have -- we don't foresee our customers closing in the next five years. And quite frankly, we are picking up new customers. We picked up two this year. We think we have the potential to pick up two or three more new customers next year. So, I think that's the overall point we're trying to make. Everybody reads so much headlines about plant closures. I think the biggest wave of that is over. And I think that there are fewer mines to support the ones that are left, and I think we've got a good book of business. I mean we're nearly 60% covered for the next five years. And we've added transportation outlets, like the Princeton Loop. And we've shown that we have a cost structure that has historically been one of the lowest in the Illinois Basin. So, we think that we will continue to create positive cash flow. We will continue to pay down our bank debt, we're very mindful of that, and we -- that is priority number one. And then secondly, we think what we're seeing as far as expansion for us in the frac sand world has enormous potential. So, that's kind of Hallador in a nutshell.

Very, very helpful. And I appreciate that you were able to mention frac sand there in your response. Anything to add in terms of progress on that front over the past three months?

Well, we're -- like I said on the call, we're producing raw sand now, shipping it to a third-party. We are getting that prepared. We've got to make some modifications to the plant. And then we anticipate shipping sand to customers starting in the fourth quarter. And then we will -- we think that this is something that can be profitable for us in 2019. But to what level, we're figuring that out as we go. But we feel good about this business. I think it's -- the trend right now is that operators are figuring out that the volume of sand is probably more important than the quality of the sand and that is allowing them to step down a little bit in quality. And when you do so, there are a local sands that can meet the need of the oil producers. And so we think that this trend is well-established and accelerating. And we think that, at least in Colorado, that we can be on the front edge of this trend.

All right. Very helpful. In 2019, any sense how much you would produce frac sand?

No, that's still something we're trying to -- at this initial stage, our capacities are going to be somewhat limited, and we're trying to figure out exactly what the demand level looks like. And then we may look to build a new plant if the market demands that. That would be a good thing. That means that we saw enough volume and term to make a secondary investment makes sense. If it's -- if the market stays smaller, we'll continue producing sand through a third-party with very little additional investments. So, that's kind of the phase we're in right now, is trying to better understand this business. But quite frankly, we're excited about it.

Yes. Yes. Very good. Sorry, I know we're on a whole different topic now, but I'll keep going. The new plant, I assume that would be built or constructed near the mine site, is that correct? And then if so -- first, if you could confirm that. And then secondly, if you were to go ahead with the plant, what would the capacity be approximately? And how much would it cost in terms of capital? Thank you.

Lucas, I'm sorry. What was the first part of your question?

Where the new plant would be constructed, at the mine site or further afield?

I think that we're still evaluating. It's something we're working on every day as to where would Phase 2 be built and what exactly would that look like. And depending on where it's at that and how big it is, is dramatically going to affect what the capital requirements are for that. But I can tell you this, that we would be looking for a contract that would support a capital build.

Got it. Make sense. Okay, well, I will leave it here. I appreciate that.

All right. Thank you, Lucas.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Brent Bilsland for any closing remarks.

I want to thank everyone for their time and interest in Hallador Energy. And we look forward to talking to you next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.