Hallador Energy Company (NASDAQ:HNRG) Q3 2022 Earnings Call Transcript

Hallador Energy Company (NASDAQ:HNRG) Q3 2022 Earnings Call Transcript November 15, 2022

Operator: Good afternoon and thank you for attending today’s Hallador Energy Third Quarter 2022 Earnings Call. My name is Jason, and I will be the moderator for today’s call. Lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I’d now like to pass the conference over to our host, Rebecca Palumbo, Investor Relations.

Rebecca Palumbo: Thank you, Jason, and thank you everybody for taking the time to join us today. Yesterday afternoon, we released our third 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 the prepared remarks, we will open the call up to 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 of the earnings call is also available on Hallador’s website. We encourage you to ask questions during our Q&A. And if you are on the webcast and would like to ask a question, you will need to dial into the conference and that toll-free number is (844) 200-6205, access code 840309.

And with that, I turn the call over to Larry.

Larry Martin: Thank you, Becky, and good afternoon everyone. I will start with our review of operating results. And before I do, I would like to define adjusted EBITDA as operating cash flow plus current income tax expense, less the effects of certain subsidiary and equity method investment activity, plus bank interest, less the effects of working capital period changes, plus cash paid on asset retirement obligations, reclamation, plus other amortization. For the third quarter, Hallador made net income of $1.6 million or $0.05 a share. We have lost $11.9 million net income or $0.38 a share for the year. Our adjusted EBITDA for the quarter was $18.4 million, $32.5 million year-to-date. Our bank debt was decreased by $17 million for the third quarter.

We had a positive borrowing of a net $2 million for the year. Our bank debt at the end of September was $113.7 million. Our net debt reduced by our cash was $106.7 million. And our debt-to-EBITDA for the three quarters is €“ or for the prior four quarters is 3.5x, well within our covenant of 4.5. I will now turn the call over to Brent Bilsland for our review of the quarter and beyond.

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Brent Bilsland: Thank you, Larry, and thank you everyone for joining us today. During €“ Q3 was transitional and very positive quarter for Hallador. During the quarter, we signed the contracts for $2.2 million tons of new coal sales at an average price of roughly $125 a ton of which a small percentage of deliveries began during Q3 and we’ll continue through the year in 2025, but the majority of these tons to be delivered starting in the fourth quarter of this year and throughout 2023. These contracts put us in a position to generate up to $160 million of EBITDA in 2023 and will be a significant driver of our efforts to move towards the position of being net debt free next year. During the quarter, we shipped 1.7 million tons at an average sales price of $49.01.

This represents a price improvement of $8.78 a ton over the prior quarter. We expect Q4 pricing to be similar and look for our average price to continue to improve through 2023 to a price of around $58 per ton. To meet these new orders we have been expanding our coal production by hiring additional employees and putting more units to work at our Oaktown mining complex. Also opening a small surface pit near Freelandville, Indiana, and moving our ACE in the Hole production to a small surface mine pit near Petersburg, Indiana at our former Prosperity mine. This has required us to increase our CapEx spending, which is up roughly $20 million year-over-year. And we have been successful in increasing our headcount 24% year-over-year. Thus, we have incurred greater employee acquisition and training costs.

Freelandville and Prosperity production began during the third quarter. Volumes from these new pits are expected to be higher costs and a forecast to represent approximately 8% of our 2023 production. In Q3, Hallador’s operating costs increased to $37.46 per ton. Our newer workforce and surface pits will ramp up to reach peak productivity and with exceptions of only slight easing of inflation 2023, we expect our mining costs to remain elevated in 2022, followed by potentially a small cost reduction in 2023. We believe that the increased market prices for coal clearly justify, excuse me, clearly justify taking on these increased costs and investments. To help fund our increased CapEx and improve our liquidity, we sold $29 million of convertible notes, $10 million of which were sold in Q2 and $19 million of which were sold in Q3.

The 10 million of notes issued in Q2 have been converted to Hallador stock bringing our current share count to 33 million shares. If all notes are converted to stock, this would equate to increasing our share count from 30.8 million shares at the beginning of Q2 to 36.1 million shares at some time in the future prior to year-end 2026, representing an approximate 17% increase in share count. Bank debt was reduced during the quarter by $17 million, bringing the balance owed at the end of Q3 to $113.7 million. Subsequent to the end of Q3 on October 21, we closed the acquisition of the one gigawatt Merom Generating Station from Hoosier Energy. At closing, we received net payments of $34 million. These funds were part of capacity payments owed to Hallador through our power purchase agreement with Hoosier.

These funds €“ with these funds, we paid down an additional $27 million of bank debt. That’s when including the 17 million of bank debt paid in Q3. Total debt was reduced by $44 million or 34% of the third quarter’s beginning outstanding balance, bringing our total bank debt on October 22 to $87 million and further increasing our liquidity. This combination of debt reduction and rising EBITDA is quickly deleveraging our balance sheet, which we anticipate being less than 2.5 times debt to EBITDA by the end of the fourth quarter, and expected to be approaching a ratio of less than one times by the end of the first quarter of next year. Our goal at Hallador is to deleverage our balance sheet and to create multiple uncorrelated revenue streams that take advantage of our unique place in this energy market.

The acquisition of Merom is a significant step forward in this pursuit as it provides us the ability to monetize our coal production through both capacity and energy sales, while also providing us a platform for potential future investment, including new generation and energy storage. As capacity payments are currently covering most of the fixed cost of the plant, Merom provides optionality to Hallador in both the coal markets and the energy markets. Starting in 2024, our Sunrise Coal subsidiary has the flexibility to sell up to 3 million tons, which represents 43% of our coal production annually to Merom, if the economics of energy sales dictate or divert some portion of set times to third parties if the economics of outside coal sales creates a higher value.

In 2024, Hallador anticipates 4 million tons of annual coal sales to outside parties while maintaining the flexibility utilizes remaining coal production to generate up to six and a half million megawatt hours of annual energy sales at Merom. We believe that this flexibility gives Hallador a tremendous opportunity to take advantage of the most favorable economic conditions in each market. With that, I’m going to open up the line to questions from the audience.

Q&A Session

Operator: Our first question comes from Lucas Pipes with B. Riley Securities.

Unidentified Analyst: Thank you, operator. This is actually Nick asking a question on behalf of Lucas. Once you hit the net debt target in 2023, how would you describe your capital allocation objectives? Do you think M&A could play a role or capital returns more likely in that case? Thank you so much.

Brent Bilsland: Well, like I said, I think, we’ve got the contracts in place to be net debt free or we at least forecast €“ we think we can hit that target in 2023. But certainly we deleveraging extremely quickly, which is great, which is where we want to be and that’s kind of who we are. So I don’t know that we’re in any hurry to make any decisions as to what to do with excess capital. We probably wouldn’t do anything until 2024. I think you’ll see us look to what are the opportunities to use our capital to make forward energy sales and be able to lock in margins and position the company from that perspective. I think that’s some of the things that we’re looking at today, but all things are on the table. We’re not currently in any M&A discussions, but the right opportunity came along, I guess, we would consider it.

But for now, our primary goal, as stated, is to deleverage the balance sheet and focus on creating ways to get what I call uncorrelated revenue streams. So what I say that is for a long time, our revenue stream has been selling coal with Merom we have the ability to sell capacity, sell energy, potentially use the landfill there to create say gas from other utilities and create revenue there. We’ve got some permit work to do that, but we see other opportunities around that facility at some point in time as that become a €“ but we repower that site with solar battery. I think those saying €“ right now the market is saying it needs the capacity, so we plan to invest in that plant and have it serve the market for quite some time. So €“ but those are our thoughts today, Nick.

Unidentified Analyst: Got it. Got it. Now, that’s very helpful. Thanks, Brent. And maybe just on Merom, what kind of breakeven price should we think about on a dollar per megawatt hour basis as far as those tons that you plan to dedicate to Merom today? Thank you so much.

Brent Bilsland: That’s just not I remember that we’ve released to the public yet. So I would say this that because we have at cost coal production that we can put to that plant. We feel that plant has the lowest dispersed cost of any coal-fired power plant in MISO. So we think it’s definitely positioned in very good shape to be in a position to run if that’s the best use of our fuel.

Unidentified Analyst: Got it. Got it. Okay, that’s helpful. That’s all for me for now. I’ll jump back into queue, but thanks for the color.

Operator: Our next question comes from Kevin Tracey with Oberon AM. Your line is now open.

Kevin Tracey: Great. Thanks for taking my question. So, Brent, in the 10-Q there was a note that you acquired $17 million of coal inventory with the Merom acquisition. So I understand who your original plans were to shut up the plant next May. So am I right in thinking coal supplies beyond May will be tough and given spot prices are in the triple digits that Merom probably won’t operate much in the second half of next year?

Brent Bilsland: Yes, I think that €“ so I think your question was do we have a lot of fuel post May of 2023? The answer to that is no. And so we do not expect that plant to operate much from say June to December of 2023 with current fuel procurement that could change, but that’s the position we’re in today.