Hallador Energy Company (HNRG) Q2 2022 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Hallador Second Quarter 2022 Earnings Call. My name is Sam and I will be your moderator for today’s call. [Operator Instructions] I now like to hand the call over to Rebecca Palumbo, Investor Relations. Rebecca?

Thank you, Sam, and thank you everybody for taking the time to join us today. Yesterday afternoon, we released our second quarter 2022 financial and operating results on Form 10-Q that is now posted on our website. With me today on this call is Brent Bilsland, our President and CEO; and Larry Martin, our CFO. After our prepared remarks, our team will be available to answer your questions. Before we begin, please note that the discussion today may contain forward-looking statements that are statements related to future, not past events. In this context, forward-looking statements often address our expected future business and financial performance. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. For example, our estimates of binding costs future sales, legislation and regulations. In providing these remarks, we have no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise may be required by law. For a discussion of some of those risks and uncertainties that may affect our future results, you should see the risk factors described from time-to-time in the reports we file with the SEC. As a reminder, this conference call is being recorded. In addition, a live and archived webcast at this earnings call is also available on Hallador's website. We encourage you to ask questions during our Q&A. If you are on the webcast and would like to ask a question, you will need to dial into the conference. The toll free number is 844-200-6205, access code 393229. Now with that, I'll turn the call over to Larry.

Thank you, Becky, and good afternoon, everyone. Today we’re reporting our second quarter operating results. And before I get started, I want to define adjusted EBITDA as operating cash flows plus current income tax expense, less effects of certain subsidiaries and equity method investments, plus bank interest less the effects of working capital, period changes, plus cash paid on asset retirement obligations, reclamation, plus other amortization. We had a net loss for the quarter of $3.4 million or $0.11 a share. Our year-to-date loss was $3.5 million or $0.44 a share. Our adjusted EBITDA was $11.5 million for the quarter, $14.1 million for the year, and we increased our debt by $10.7 million for the quarter and $19 million for the year. Our bank debt at June 30 was $130.7 million. Our net debt was $121.9 million and our leverage ratio, which is debt to adjusted EBITDA was 3.27x. I will now turn the call over to our CEO, Brent Bilsland.

Thank you, Larry. In the second quarter, our accomplishments exceeded our expectations. We were successful in returning our operating cost structure to historical levels. We contracted for 2.2 million tons of forward sales over $125 per ton, dramatically increasing our future sales prices. We're successful in raising a total of $29 million over the second and third quarter to add to our liquidity. All three of these events, lowering our cost structure, increasing our sales prices and adding to our liquidity greatly improved our current and future financial position. Also during the quarter, we made significant progress towards closing the acquisition of the Merom power plant within the next few months, pending governmental and financial approvals. As we look to operating results, 1.6 million tons were shipped during the quarter at an average sales price of $40.23. This was $1.17 per ton lower than Q1 and is expected to be our lowest sales price quarter for the next several years. As we will experience roughly an $8 per ton increase in the third and fourth quarter, significantly more than that next year. Q2 production costs were $31.83. This represents a $7.71 per ton decrease over Q1. Productivity at the mine improved dramatically accounting for the majority of the cost improvement. During the second quarter, our operating cash flow was negative $2.7 million, due to increases in accounts receivable, inventory, parts and supplies, and cash spent on ARO reclamation. Our bank debt increased by 10.7 million, which as of June 30 stood at 130.7 million. Liquidity was $9 million and our leverage ratio came in at 3.27x. To put ourselves in better financial footing and to increase liquidity, we issued $10 million of convertible notes during the second quarter followed by an additional $19 million of convertible notes in the third quarter, equaling a total of $29 million. 10 million of the convertible notes were converted to equity during the second quarter. The company was successful in executing an amendment with our banks modifying our debt-to-EBITDA covenant and our debt service covenant for Q3. We project being fully in compliance with all future covenants. During the second and third quarter, we were successful in executing forward contracts, sales for coal averaging prices in excess of $125 a ton for the 2022, 2023, 2024 and 2025 time frame. These new contracts will dramatically improve our average sales prices. If you look at the first half of this year, we have averaged $40.77 per ton. In the last half of this year, we expect to average $49 per ton, expect that price increase to be a little bit more heavily weighted towards the fourth quarter than the third. When we look at 2023, we expect our average sales price to be at $58 per ton. So, this in effect will more than triple our margins going forward. In our prior earnings call, we had discussed our plan of taking up to 25% of our 2023 Oaktown production to the Merom power plant, as we felt that was the most valuable use of those tons at that time. However, soon after disclosing those plans, market conditions changed significantly and we felt it was better used to sell the majority of those tons to third-party customers. I think this is a prime example of the optionality the Merom power plant will afford us once we close on the transaction. You know, if Merom is the best use of tons, which I think the majority of the time it will be, that's where we'll take them, but like we just showed, if third party customers are willing to pay more than we feel worth at the plant, we're willing to execute on that plan as well. These contracts allow Hallador to generate 160 million of adjusted EBITDA in 2023. And we expect very little profit from Merom in 2022 and in 2023 as the plant is still limited. However, the cash flow will be so great that we project that we will be net debt free before the end of next year. So, we're very excited about that. If we're able to alleviate Merom’s fuel limitations, there's further upside to Hallador’s 2023 adjusted EBITDA. Looking at the closing of the acquisition, we feel we've made great progress towards closing the Merom acquisition on both the regulatory and the financial front. We anticipate closing will occur in the next couple of months, subject to attaining our final government and financial approvals. Our team, our operating partner in CAMS, our energy partner in [Aces] [ph] have all worked very hard to ensure a successful transition for Merom to perform as it should on day one. We've never been more excited about the future of Hallador. We're thrilled of our new sales contracts. We feel comfortable that we are on solid ground financially. and we look forward to the promising opportunity the Merom power plant brings Hallador and its shareholders. So, with that, I'll open up the line for questions and comments.

Thank you. [Operator Instructions] Our first question comes from the line of Lucas Pipes with B. Riley Securities. Lucas, your line is now open.

Yes, hi. This is Nick Giles asking a question on behalf of Lucas. What does the 160 million of EBITDA assume for volume and cost respectively?

I'm sorry, I didn't catch your name.

Hi. Yeah. This is Nick Giles, asking a question on behalf of Lucas. How's it going?

Alright. Thanks. Larry, I don't want to misspeak on the cost. I know that we're bringing on some additional production next year out of the surface pit that is a little higher cost. And we've reported that number going forward as, Larry, I'll let you fill that in.

$34 to $35 in the fourth quarter and well $36 for next year

Got it. Okay. That's helpful. And then to follow-up there, does the 160 million, does it require the transaction to close at Merom or is it independent of the power plant acquisition?

That's independent. As we've said, we expect very little profit out of the plant unless we are able to secure additional tons for the planet, which we are working on. So, if we are successful in securing additional tons for the 2023 year, then there's upside to the profit potential beyond just $160 million.

Great, great. Okay, that's clear. Thanks for that color. And then I think last one for me. Do you need to make any investments in mine infrastructure equipment, hiring any labor to get to that $160 million target?

We've made great progress on the hiring front. That's an area that we've struggled since I think our initial plan started in September of 2021 that we had a goal of hiring an additional 200 plus employees. And I think we've now – last count, we've added about 190 of those. So, we're almost to the – our target number that we want to be at. As far as on the equipment front, no we have the equipment we have, our – well, I take that back. We have added some CapEx to reopen a surface pit in Freelandville, Indiana. And we've added a little bit of surface equipment to that – to the company to bring roughly 600,000 tons out of that pit for about – for basically fourth quarter of this year and in the balance of next year. So, coal prices we're seeing at levels that are just quite frankly unheard of. And we're seeing, you know, a little bit of turn to that as well. And so, to justify bringing on a little bit of higher cost production, which is why we're showing our cost jumping up into the $36 range because it is expensive surface mining coal. But when you can sell, as we've said, over 2 million tons north of $125, a ton, those margins work. So, gas prices have stayed strong. European prices have stayed strong. I think, I saw a price for power in Europe next August of $600 a megawatt hour. I mean, as long as that keeps happening, you're going to see U.S. coal flow to Europe and that's going to keep our market pretty tight. So, and we're seeing, you know, an extension of a lot of coal fired power plants that had announced to retire. I can name three, kind of in our backyard that have all now extended saying, all right, we're going to put a couple more years on these plants just because capacity is really hard to find, which is why capacity prices went from almost nothing to legal limit in this past auction. So, We still see more power plant retirements announced, which is going to keep capacity prices tight and elevated. We still see disruption in Europe, which is also keeping prices elevated and we're still seeing really for the next three years, pretty high natural gas prices. So, all of those things are good for Hallador’s business. And we're just tremendously excited about the future of being able to profit both as our coal company and with the addition of the Merom power plant, which we're feeling good about that transaction getting closed here shortly.

Got it. That's very helpful. Really appreciate all the detail there. I guess just one last one would be, do you have – can you put some numbers around the incremental CapEx that you mentioned?

Yes. I'll prefer to Larry here too, so I don't misquote the number.

Yes. So, I think the incremental CapEx for the surface mine is about 6.5 million.

Got it. Got it. Well, really appreciate all the color and congrats on the progress so far and continue best of luck.

Thank you, Nick.

Thank you, Nick. The next question comes from the line of John Moran with Robotti & Company. John, your line is open.

Hi, Brent. Thank you. I had a – on the 2.2 million tons that you sold during the quarter. You have a disclosure on these forward sales in all of your 10-Qs that references customers options or ability to reduce tonnage or increase tonnage, how subject – how much of that would come into play on the new tons that you sold? For example, if the coal price collapses next year, can these customers walk away from portions of that - of those contracted tons?

The 2.2 million tons I referenced; those are fixed tons. There's no plus minus on the volumes.

So, that's a fixed price and no ability to get out of that?

Correct.

What about on the 2024 to 2027 volumes? How much of those that were in place prior to this – these new contracts would be subject to increasing volumes at, I guess, what I call, stale pricing, if any?

So, we disclosed, what, 7 million tons of sales, I think, in the 2024 through 2027. We were successful in selling some of the 2.2 million ton, like I said, it wasn't that 2022, 2023, 2024, 2025 timeframe. Anything beyond that was legacy? We do have – hang on here, let me look some up. Yeah. The legacy out in that 2026, 2027 timeframe is unpriced, so we have volume commitments, but not pricing commitments. So, you would see those pricing come up.

Okay.

And maybe 200,000 to 300,000 of that 7 million is – can go up or down by 200,000 or 300,000.

Okay. And the rest of it's either – the rest of it's either unpriced or fixed?

Correct.

Okay, great. And then just a question about Merom, so assuming that closes as you expect, what will that look like next year? You said, you're fuel limited, can you say – I assume some of that information is public. I don't know where to find it, but, so they must have contracts with third-party producers. So, I guess there is no coal available for next year. So, can you say…

I think there's been – there is some fuel purchase for that plant. That fuel will be dedicated to generating [indiscernible] electrons, and we've set a price with them on that, but we expect again that price – that plant to run at low capacity factors. It will run, it will make a small profit, but it, you know, this – hey, John, you were the guy on the last call who said if you can sell coal versus take it to the plant at these higher prices, why wouldn't you do that? And I think it was, you know, a couple nights later, we saw an offer to us at pricing that was above our expectations. So, we made the decision to do just that. And so, instead of taking, you know, a couple million tons to the plant, we took it to the market. So, like I said, it's not that there's no fuel for the plant, it's just fuel limited. So, it's not going to run a lot of hours, we do see some opportunities to acquire additional tons to bring to the plant, but those deals are not finalized. And so, we'll assume they're not going to happen until they do.

Yeah. I mean that decision. [Multiple Speakers]

All we wanted to really point out was traditionally we've been about $50 million of EBITDA. We are now fully contracted for 2023 and at the prices we're talking about and the production cost numbers that we're expecting, we think that will generate $160 million of adjusted EBITDA, which we basically had tripled our business that will generate enough cash flow to pay off all of our debt, almost here in the next, let's just call it 13 months.

So, I think the decision seem like it make a lot of sense. I was just trying to figure out, for example, if the plant will be running at 25% capacity and you make a little bit of money or breakeven in that – I just don't know what the Merom economics look like from that standpoint as well. So, I – or can you say…

We haven't released any of the economics on the Merom plant and we will not do that before closing. All I'll tell you is, it's correct. It's going to run at a very low capacity factor. There's parts of the years that will run more than others, so it gets a little confusing as to why did it run harder in the first quarter than it ran in the third quarter. But at the end of the day, if we are successful in finding more fuel for the plant, there's upside to our projections, right? Power prices are still pretty healthy. Capacity prices are extremely healthy. And so, for all those reasons, we're excited about the potential of this company. And you're talking about a company that has a market cap of a little over $200 million and it's going to do $160 million of EBITDA. It's going to pay off $131 million of bank debt in that timeframe. I think that's punching above our weight.

All right. Thanks a lot. I also wanted to just complement the company and the directors on the capital raise. I don't think anybody like dilution, but it seems like it's a little over 10% and hit a decent price in reasonable terms. So, anyway for what it's worth. Thank you.

Well, I appreciate that. Thank you, John.

Thank you, John. [Operator Instructions] Okay. We have a question from [Robert Baker] [ph], a Private Investor. Robert?

Yeah. Hi. Thank you for taking my questions. I was, well, my first one, I was curious about the 2.2 million tons priced at a 125 to 200, you know any context you can give around that as far as, is that, kind of, more where the overall market is currently pricing at? Was it a customer who was extremely short? Just trying to lock in tons or anything you can provide on that would be appreciated?

Well, we actually transacted with five separate customers. You know, the market is backward dated, meaning that, you know, coal in 2022 is, you know, more valuable than 2023, and coal in 2023 is more valuable in 2024. What we're seeing generally is, I think, utilities are pausing from buying a little bit, they're going to get into the RFP, go out for RFP here in September, October, and see where market prices are. I think we're trying to get a handle on what railroad and transportation performance is going to be like in the third and fourth quarter. I mean, it's one thing to buy tons. It's another thing to actually get them shipped. [CSX] [ph] has done a reasonably decent job with us thus far. I would say about 85% of everything that we have scheduled that has been shipped, but our moves are typically a little simpler than some of the other people out there trying to go to export. As gas, we basically keep seeing gas pricing, high priced gas keeps extending out further and further. And as that happens, we think that adjust power price is up further and further. So, it'll push higher pricing out to curve is what we think will happen. As long – and again, as long as there is disruption in the market, meaning that we had a tight market, and then Russia's and Ukraine's, you know, altercation, whatever you want to call it, that has created enormous disruption to the market. Again, Russia is the third largest coal exporter in the world. And now you've got Europe basically saying we won't take those BPUs. The largest natural gas exporter in the world. Europe's saying, we won't take those BTUs or not. Yes. But Europe is saying or Russia is saying, I don't know, because those GPUs aren't flowing and so, Europe is getting those from the United States. We've seen several contracts for LNG to leave the United States and go to Europe and other countries. There's been just an enormous amount of activity of new contracts being signed is a 20-year term contracts? So that removes a lot of gas from the United States, which then, kind of gas is a competitor to coal. So, we've gone through this period, which is where our legacy contracts came from with five years, six years, seven years of really cheap gas. And now we've, kind of entered into this environment where the price of gas has doubled or tripled depending what timeframe you're looking at. So, because of that, the market then looks to get more of its electrons from coal, and there really hasn't been a dramatic supply response from coal production due to nobody's putting in new minds. It's been hard to hire people. It's been hard to get capital. All those reasons has, kind of kept a lid on, we've seen some supply response that hasn't been dramatic and you're not going to see the U.S. coal production double. It just isn't going to happen. So, from that perspective, we're excited about the future. We're seeing pricing that we've quite frankly never have seen before. and selling coal versus in the mid-30s versus selling coal in the 130s. It's a magical experience. You don't have to [tell] [ph] very much of it, but there's all sorts of pricing charts out there to show where it's all trading at. Transportation is hard, but it is moving. And so, we think as long as gas and as long as there's disruption in the market, we're going to see pricing continue to push out the curve. Now, will it stay above $125 a ton? Your guess is as good as mine. High prices tend to secure high prices, but we don't see – we don't think it's going back to 30s anytime soon. So, for that matter, we think that we're seeing average prices now up around $50 to – our average price moves to $58 next year, we make great margins with that. We produce a hell of a lot of cash flow at that. And we just see a lot of opportunity, particularly with the addition of the plant. That's a very beneficial thing to our company and we're looking forward to getting that transaction behind us.

Great. Thanks. My next question, you kind of already started to answer when you mentioned CSX doing about 85%, and there was in the Q3 2022 activity, you know, it didn't mention the delivery of all the tons could be delayed by transport logistics. I was wondering if you could elaborate on that a little bit where yes, it's one rail line in particular or kind of all of them or yeah, just any more detail or elaboration on that?

I think that all forms of transportation are struggling, whether that CSX, NS, or truck, everybody's running at their maximum. So, you know, we sell the coal. We produce the coal, but it's our customer's responsibility to deliver the freight to us. So, once we load it, once we load the transportation they provide, that's when title transfers and that's when we effectively have made a sale. So, one of the things we have to be diligent on is to make sure that we're working with our partners to CSX, primarily, and trucking companies to make sure that our product is flowing to the customers, and what I'm saying is, there's been a lot of press out there of poor railroad performance. I've usually found that the railroads take a little time to get wound up, but once they get going, they perform pretty well. They've struggled with COVID, they've struggled with hiring people just as we have. We have seen on our front it's gotten a little easier to hire people here, I would say, in the last two months. you know, is that a reasonable success that we're experienced and others aren't? I don't really know, but from our standpoint, we've made gains there. So, anyhow, we feel good about transportation at this point. It is something we're keeping an eye on.

Okay. Thanks.

And just to be clear, when we said all of our tons, we didn't mean every single ton could get delayed. We met all of our contracts to any – to all of our customers could have some delays. We didn't mean a 100% delays.

No. No. Okay. Yeah. I didn't – I wasn't interpreted as a 100%. Just said, yes. You know, delivery of, well, I guess I wasn't sure if it was just referring to 2.2 million tons or potentially all tons could have, how would I want to – yeah, I wasn't quite sure if it was specific to the [indiscernible]?

Yeah. There is a percentage of any ton we deliver that could be delayed, but I mean, it's not – it's just every customer, as Brent said, all transportation is having issues now. So, any customer we have could have some carryover or delays this year. They are picking it up and doing a lot better.

Okay. Alright. That's good. And another question regarding labor needs. I think it was, I hope I have the name right, Nick asked about it. And you had mentioned that you had been able to hire a 190 [of] [ph] 200 employees, and I just wanted to clarify, was that 190 of 200 that you needed to hire for Oaktown and separate from the hiring you have to do for Prosperity and Freelandville?

That's correct. I think we want to add 210 at Oaktown. We've done about 190, 185 of that, something like that.

So, just to try to give you scale of, and we’re not quite where we need to be at Oaktown, but we're getting much more comfortable with – on the hiring front. Now, you know, we've had much higher turnover with new hires than we have with historical employees. I think we are starting to see some experience people come back, people that have left to try [indiscernible] company, you try to work at a car manufacturer or something like that. We're starting to see those. So, you know, some of those people have found that, you know, the grass isn't greater on the on the other side of the fence. So, they've come back, which is great. Those are people that, you know, know the drill and are very efficient when they show up. Correct. We will be hiring some people associated with the surface mines, both at Prosperity and that, but you got to think about it this way, I mean, so we're winding down [Ace] [ph] as it mines out and we're winding up Prosperity and Freelandville. So, some of those people will be moved from Ace and some of those people will be new hires. We found it's much easier to hire surface miners than undergrounders. So, we haven't really experienced any trouble with that. Where we've struggled over the last year has been to hire undergrounders and keep them.

Okay. I understand. Alright. And then last question, I was wondering, you mentioned the possibility of being net debt free at some point in 2023, you know, as that progresses throughout the year, what thoughts of any, you know, the board has regarding what to do with cash flow as leverage comes down? And, I mean, in terms of either dividends or buybacks or so forth or, you know…?

Yeah. I think at this juncture, we've been raising money to make sure that we have enough liquidity to get to our high priced contracts. We want to get the Merom plant closure behind us, make sure there's no surprises there. And we'll see where the opportunities bring next year as far as the room for additional investment at the plant or are there other plans that can be acquired or does it make sense to buy in stock? Those are all things that we'll lay out what the opportunities are next year and address those with our Board at this time. But to date, we're not in the mode of [buying stock] [ph].

Okay. Very great. Yeah. Thanks for answering my questions. Appreciate it.

Thank you.

Thank you, Mr. Baker. [Operator Instructions] Okay. That concludes our Q&A session for today. I'll hand the call back to Brent for any concluding or additional remarks.

Thank you everybody for your time and we look forward to executing on all the things we've laid out today. So, thanks again, and we'll talk to you next quarter.

That concludes the Hallador second quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.