Earnings Labs

Hallador Energy Company (HNRG)

Q4 2018 Earnings Call· Tue, Mar 12, 2019

$15.48

-5.55%

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Transcript

Operator

Operator

Good day, and welcome to the Hallador Energy’s 2018 Full-year Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Becky Palumbo, Director of Investor Relations. Please go ahead.

Becky Palumbo

Analyst

Thank you, Andrea. Thank you, everybody, for taking your time out today to join us for today's call to discuss our fourth quarter and full-year 2018 earnings. If you haven’t had time to review our Form 10-K and earnings release we issued yesterday, they are both posted on our website today. 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 followed by Brent with comments on operations and after management completes their opening remarks, we will open the line up 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 regarding 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. Also, I would like to remind you that we have a reconciliation of the non-GAAP financial measures that we discussed this morning in our press release issued yesterday, which again is posted on our website. So with that, I will turn the call over to Larry to go over our highlights. Larry.

Lawrence Martin

Analyst

Thank you, Becky. Good afternoon everyone. I will review the operating results for the fourth quarter and year-to-date. For the fourth quarter, net income was $2.6 million, $0.09 a share for the year $7.6 million, $0.25. Our free cash flow, which is defined as net income plus deferred income taxes plus DD&A plus ARO plus accretion and stock compensation, less maintenance CapEx and the effects of our equity method investments. Free cash flow was $9.3 million for the quarter $35.8 million for the year. Our adjusted EBITDA which is defined as EBITDA plus stock compensation plus ARO accretion less the effects of our equity method investments in our Hourglass Sands. Adjusted EBITDA for the quarter was $18.7 million and $74.1 million for the year. We decreased our debt by $11.5 million in the fourth quarter, $13.5 million decrease for the year. We paid dividends of $1.2 million in the fourth quarter $0.04 a share total was $4.9 million or $0.16 a share for year-to-date. Our bank debt at the end of the year was $188.5 million and our net debt was $170.6 million at the end of the year. Our debt target for the end of 2019 is $155 million to $160 million that is debt owed to the bank and our leverage ratio at the end of the year was 2.55 times adjusted EBITDA. Now, I will turn over the call to our CEO, Brent Bilsland.

Brent Bilsland

Analyst

Thank you, Larry. Well on previous calls, we have spoken a great deal about positioning Hallador to grow our sales and I'm happy to report that those initiatives have paid off. In 2018, or wholly-owned subsidiary, Sunrise Coal contracted 12 million tons of additional coal sale for the 2019, 2022 time periods. As a result, we are raising our 2019 sales guidance to 8.2 million tons annually from 7.3 million tons previously. Additionally, we are forecasting sales of eight million tons annually for the 2020, 2022 timeframe. Currently we have 78% of our production sold for the next four years at an eight million tons pace, I want to repeat that. We have 78% our production sold for the next four years at eight million tons pace. I do not know of another producer in the industry that is hedged that well for the next four years. Additionally, we have nearly doubled the number of power plants we serve from nine in 2017 to 17 power plants today located in eight different states. The total estimated co-consumption of our 2018 customers is roughly 43 million tons versus 16 million tons for our 2017 customer base. A 165% increase in demand providing exciting new sales opportunities going forward. When we look at customer concentration, in 2017, we served for nine plants in three states, estimated demand was 16.2 million tons. We sold 6.6 million tons thus making us roughly 40%, 41% of our customers supply. In 2018 we served 17 clients in eight states with estimated customer demand of 42.9 million tons. We sold 7.4 million tons which made a 17% of our customers supply. These new customers represent an average of roughly 3% of our sales, but each have the ability to become much larger customers in the future. So…

Operator

Operator

We will now begin the question and answer session. [Operator instructions] And our first question comes from Lucas Pipes of B Riley FBR. Please, go ahead.

Lucas Pipes

Analyst

Hey. Good afternoon gentlemen.

Brent Bilsland

Analyst

Good afternoon, Lucas.

Lucas Pipes

Analyst

Brent, I wanted to follow up a little bit on the domestic market. It seems like things have been tightening on the seaborne side however things maybe and softening a little bit over the recent weeks. Now, what is your sense at this point in time for prices in the domestic market, how utilities are positioned do they need to buy more coal would very much appreciate your perspective on that. And then of course, especially how Hallador is positioned in the mix of that? Thank you.

Brent Bilsland

Analyst

We believe that utilities do need to buy more coal and some will take a peek and see what the weather has done, but we have seen several utilities report that their coal inventories levels decreased over the winter months. And some will jump on that earlier than others, every utility has their strategy, but we are seeing a couple RFPs now that quite frankly have surprises that they were so big and so early. So we think that there are several domestic utilities that that needed by coal.

Lucas Pipes

Analyst

That is good to hear and do you see longer term contracts as well? Or do they more top things off on a short-term basis?

Brent Bilsland

Analyst

We signed several contracts that were in the two to four year range. So definitely saw a return to term contracts that we haven't seen for several years.

Lucas Pipes

Analyst

Very good to hear. Great. And then can you maybe provide us a little bit more color on how the restart of Carlisle has been progressing? Any unexpected issues? How would you think about costs at this operation going forward would appreciate you update on that situation? Thank you.

Brent Bilsland

Analyst

Well, so in late July, we restarted that or sometime in July, we restarted that mine. There is a period of time there were a unit production was shutdown at Oaktown. Some of that equipment and those people were moved to Carlisle, retrained, we restarted at mine anytime mine is set for almost three years. There is certainly a lot of work to be done to bring that mine back into production conditions. And, but for the most part we ran it at one unit mostly because we thought sales would develop, but they hadn't, maybe there is a couple month delay there from the time we thought they would development and actually developed. But by, I think December 18th, we added a second unit and we have been pleasantly surprised what those cost numbers have looked like since we have added that unit. Certainly there is the potential to run maybe a single minor unit there later this year, if sales continue to progress like we think they might, which will - any production up in any mine helps the cost structure. And we think in general that is going to help Hallador's cost structure. I mean traditionally we have run somewhere between 6.3 million tons and 7.4 million tons and now we are forecasting 8.2 for this year. And we certainly think the market again - we have commented from coal inventories, dramatic improvement over the last three years. And I think there is always people say, well the export market is not in the money today, and that is a correct statement. But I mean, the export market can move $30, $35 in a 30-day window. So when the export market decides it wants to come in and buy, that is pretty fast movement. And so certainly…

Lucas Pipes

Analyst

This is great to hear and congratulations on all that progress. I want to quickly touch on the sand side. Any update on Hourglass?

Brent Bilsland

Analyst

We are still working now and still talking to customers. It's our goal to get our permits in place to where we potentially could be contracting to open something late this year. That being said, we are not in that position at this moment. We are working to get there. So we still like that business. We still liked that market and we are still going to work on it every day.

Lucas Pipes

Analyst

Got it. Great. I will turn it over for now. But really appreciate all the color and good job.

Brent Bilsland

Analyst

Thank you Lucas.

Lawrence Martin

Analyst

Thanks Lucas.

Operator

Operator

[Operator Instructions] And our next question will come from Ethan Park of Extract Capital. Please go ahead.

Ethan Park

Analyst

Hi, Brent and Larry. Congratulations on the increased sales guidance for 2019. That is great.

Brent Bilsland

Analyst

Thanks Ethan.

Ethan Park

Analyst

I mean maybe that is related to the last question, but let me kind of further ask about the upside for your sales number. So I noticed on those 10-K that your annual capacity was 10.5 million tons, so if you can sell more coal in 2019 or 2020. Can you comment on how much in ramp-up costs may be associated to ramp-up from that 8.2 million ton guidance to 10.3 or 10.5 even? And also, if you can elaborate a little more on the what the per ton production cost may be at 8.2 and 10.5 that will be helpful for me?

Lawrence Martin

Analyst

Well, Ethan, the 10.5 sales of [indiscernible] we have extra units, we have talked about this before, we always have units at all of our mines. So if something happens we can move from that unit to idled unit and keep production going. So we are set up where we can get to the 10.5 with very minimal capital investment. There is a few things we have to do, but nothing major that we would have to do to invest to get to that 10.5 million tons. The cost structure - it would come down for sure, with Oaktown ramping up to be over seven million that it operated out last year. So I mean, I think our cost structure will come down below that 28 to 30 range per share with that 10.5 million tons sold. I mean we have for any business if you are operating at full capacity, you are going to be your lowest cost structure.

Ethan Park

Analyst

Yes. Okay, thank you.

Brent Bilsland

Analyst

Thank you.

Operator

Operator

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

Brent Bilsland

Analyst

Thank you everyone for taking the time today to join us, we are very excited about what 2019 holds for our Company and for our shareholders and with that, we will conclude today’s call. Thank you.

Operator

Operator

The conference has now concluded. Thank you for attending today’s presentation, you may now disconnect.