Q1 2024 Hallador Energy Co Earnings Call

Participants

Rebecca Palumbo; Vice President - Corporate Affairs; Hallador Energy Co

Marjorie Hargrave; Chief Financial Officer; Hallador Energy Co

Brent Bilsland; Chairman of the Board, President, Chief Executive Officer; Hallador Energy Co

Lucas Pipes; Analyst; B. Riley Securities

Jeff Bronchick; Analyst; Cove Street Capital, LLC

Presentation

Operator

Good afternoon. Thank you for attending today's Hallador Energy First Quarter 2024 Earnings Call. My name is Megan, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Becky Palumbo, Investor Relations with Hallador Energy. Please go ahead.

Rebecca Palumbo

Thank you, Dan, and thank you, everybody, for taking the time today to join our discussion on our first quarter 2024 earnings. With me today are Brent Bilsland, our President and CEO, and our newly appointed CFO, Marjorie Hargrave yesterday, afternoon, we released our first quarter 2024 financial and operating results in a press release that is now on our website. Today, we will discuss our results as well as our perspective on current market conditions and outlook for 2024. Following our prepared remarks, we will open the call up to answer your questions.
Before beginning a reminder that some of our remarks today may include forward-looking statements subject to a variety of risks, uncertainties and assumptions contained in our filings from time to time with the SEC and are also reflected in yesterday's press release. 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 expect In providing these remarks, he has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law to do so. We plan on filing our Form 10 Q later this afternoon. And with the preliminaries out of the way. I will now turn the call over to Margie.

Marjorie Hargrave

Thank you, Becky, and good afternoon, everyone. First off, I'd like to personally thank Larry Martin for all of his hard work at Hallador and for making this transition. So smooth and enjoyable. Larry will be on the call to assist in answering questions for this quarter.
Before we get started, I'd like to define adjusted EBITDA to refresh everyone's memory. Adjusted EBITDA is a sum of operating cash flow, less the effects of certain subsidiaries and equity method investment activity, plus bank interest less the effects of working capital period changes plus cash paid on asset retirement obligation, reclamation plus other operations.
For the first quarter of 2024, Hallador incurred a net loss of $1.7 million, which equates to a loss of $0.05 per share for both basic and diluted earnings. Our adjusted EBITDA for the quarter was $6.8 million and our operating cash flow for the quarter was $16.4 million. Of this $16.4 million. We used $14.5 million to reduce our debt and at quarter end our funded debt balance was $77 million and our net debt balance was $75.4 million. We also had $18.6 million of LCs outstanding as of March 31, 2024. Our liquidity at quarter end was $39.5 million and our debt to adjusted EBITDA or leverage ratio was 1.58 times well within our covenant of 2.25 times.
With that, I'll turn the call over to our CEO, Brent Bilsland for key margins.

Brent Bilsland

Throughout the first quarter, we continued our progress on transitioning the focus of Hallador from a coal production company to an independent power producer during the first three months of 2024 our electric operations, revenues exceeded that of our coal operations revenue. Additionally, we were successful in adding approximately $138 million in forward energy and capacity sales, growing our electric operations forward sales book to approximately $657 million as of March 31, 2024. This represents approximately 44% of Hallador total contracted forward energy capacity and coal sales through 2029 and roughly one of them of roughly $1.5 billion. However, we believe future forward sales from our electric operations will soon eclipse our forward sales from our coal operations since January, we have evaluated and continue to evaluate several major power and capacity sales opportunities, including one proposal made to us that is contracted will result in a more than $1 billion worth of potential forward power sales. We continue to see strong indicators that demand and pricing remain on an upward trend according to the Indiana Business Journal in the last 12 months, there have been eight new data centers and or bitcoin mining facility projects announced in the state of Indiana where our Ameren power plant is located. We have also seen a major utility amend their integrated resource plan and publicly state that had previously underestimated new electricity demand growth by as much as 17 times. Myself has released information arguing that their capacity reserve margin, meaning the amount of excess generating capacity in their system could go negative by as soon as next year. Monitoring the equity markets further strengthens our belief that investors and other IPPs are also anticipating similar increases in power demand demonstrated most clearly through the more than doubling of market capitalizations of at least two of those IPPs across the previous 12 months in support of our expectation that Hallador power sales will continue to exceed our traditional Sunrise Coal subsidiary. We anticipate changing Hallador as SIC code to 49 11 electric services from 1220 bituminous coal producer in the future.
On the electric side of the business, indicators for future power pricing appear much healthier than we have seen in recent months. We believe these indicators are supported by both our forward power sales book pricing and third party future power curves. Additionally, natural gas future prices are in contango, meaning future gas prices exceed spot gas prices that have been depressing overall power prices for the last several quarters. As we discussed last quarter, the dynamics of the natural gas market paired with the non-standard mild weather throughout the Midwest impacted pricing and our power plant dispatch rates thus far in 2024 for future prices seem to indicate improvement on both these fronts, which we view as a positive for our go forward operations in April, we also lost a targeted request for proposals for port power demand supporting new development at our Ameren powerplant responses are due in mid-May, but early indications point to a high level of interest. They are the RFP is available on our website for any interested parties that did not already receive the information. Our goal is for Hallador power to generate approximately 1.5 million megawatt hours on a quarterly basis, which equates to approximately 6 million megawatt hours annually during the first quarter, Hallador power generated 816,000 megawatt hours or 54% of our target despite an average price of $41.90. The favorable pricing is a result of experiencing sales prices as high as $250 per megawatt hour for limited times during the quarter, balanced against several days of pricing below our variable cost to produce on forward selling capacity, we target annual sales of around $65 million to help offset our fixed annual costs at the plant, which are currently approximated at around $60 million annually. We have already sold a large portion of our future capacity, which we believe makes us our skews. We have already sold a large portion of our future capacity, which we believe makes us of our forward capacity sales goal readily attainable for the next several years. As a condition of acquiring the Maren power plant, we agreed to sell 1.66 million megawatt hours of energy in 2024 and 1.6 million megawatt hours in 2025 at $34 per megawatt hour to the plant seller, representing 27% of our annual 6 million megawatt hour goal. Since this original transaction, we have been successful in selling over 5 million megawatt hours of energy to third parties at an average price of approximately $54 per megawatt hour over the years 2024 through 2029. This roughly $20 per megawatt hour jump and average pricing has us very excited about future sales. During the first quarter, our variable costs at the plant were $31.88 per megawatt hour. While we believe that we can typically achieve lower per megawatt hour costs, low energy prices during the quarter necessitated that we run our plant at slower speeds and resulted in more frequent than normal starts and stops to avoid selling below our costs. Our cost structure running in this manner is less fuel efficient than if we were able to consistently generate at 6 million megawatt hour pace, which we think could lower variable costs by as much as 10%.
Shifting to the coal side of the business, as previously discussed in late February, our coal operations segment undertook an initiative designed to strengthen our financial and operational efficiency and create significant operational savings and higher margins in our coal segment. This step helps to advance our transition from a company primarily focused on coal production to a more resilient and diversified IPP. As part of this initiative, we idled production at our higher cost Prosperity mine and substantially idle production at the free Leeville mine with minimal production until current reclamation projects are completed in late May or early June of this year.
As we have previously said, we expect this initiative to reduce our capital investment for coal production in 2024 by approximately $10 million. We also focus our seven units of underground equipment on four units of our lowest cost production at our Oaktown mine. We also reduced our workforce by approximately 110 employees. Mining costs for the quarter were $53.38 per ton. Our Videotel, we saw mining costs in March decrease into the 30s on a per tonne basis. While there are several factors that impacted this cost reduction we continue to monitor operations and strategic initiatives to better understand the longevity of these favorable conditions. Historically, Sunrise Coal has generated approximately 6 million tons of coal annually following the restructuring we expect Sunrise to produce roughly 3.5 million tons of coal on an annualized basis for 2024. If market conditions warrant. Our current operations are capable of producing at a 4.5 million ton annualized pace this year.
We have also secured supplemental coal from third party suppliers at favorable prices. This allows us to diversify self production supply risk and provides us with additional flexibility in our sales portfolio, the optionality to obtain low cost tons either internally or for ore from third parties, while capturing upward swings in the commodity markets for coal should continue should further maximize margins while optimizing fuel costs at our Ameren facility, we continued our out of what we consider to be a best-in-class independent power producer management team in April and in April, we welcomed Marjorie Hargrave as our new CFO. Margie comes to Hallador broad-based experience in power production and capital markets. Adding Margie is a continuation of the breadth and depth of the IPP. talent we continue to add at Hallador over the last two years, we have been successful in hiring our President of Hallador power, Chief Legal Officer with data communications expertise, our Senior Vice President of Power Marketing, and a manager of environmental engineering, all of whom are accelerating our continued development of Hallador current operational and future power acquisition capabilities. These prospects and our strong future sales position make us at how we are very excited about the future of our company.
Also want to thank Larry Martin for his 17 years of service at Hallador. Larry has been a trusted adviser and a friend. We wish him success in retirement later this year. That concludes our prepared remarks.
I'll now open up the call for any questions. Yes.

Question and Answer Session

Operator

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remind that question, please press star followed by two again to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question as your previous questions are registered.
Our first question goes to the line of Lucas Pipes with B. Riley Financial's Your line is open.

Lucas Pipes

Thank you very much, operator. Good afternoon, everyone. And first, I want to add my congratulations to Larry and my best wishes for his retirement. Brian?
Thanks, Brent. I want to touch on your kind of forward sales position on the power side, there is that nice jump in 2026 versus 2025 to $55.37 to $36.06. And I wondered if you could remind us and what what drove that. And I have a suspicion, but I would be curious to hear more about that. And could you maybe walk us through a pro forma revenue build up of the Power segment, assuming on kind of the for more power price market holds? And also you sell the remaining capacity? Thank you very much.

Brent Bilsland

Yes. So as stated on the call, we sold a fair amount of 2024 and 2025 energy to the seller of the plant as a condition of selling a plant at $34 a megawatt hour. And what we're trying to what we stated on the call is that and we essentially have sold over 5 million megawatt hours since that time, two other participants and including well to any other market at $54. And so we continue to see fairly strong pricing in the forward sales curve, and it's just a result of and you can't pick up the paper any day and not and not read it or hear about how all this new demand we're seeing from AI. and EV.s and onshoring, and we've got my So expressing their concerns about could their reserve margin go negative next year which I don't know if that's possible, but it's kind of speaks to the tightness of of the market. And and so as we continue to make forward sales, we're encouraged by the pricing that we see also as outlined, saw an offer made to us for over over $1 billion worth of future energy and capacity sales. So the reason, yes, we don't have that contracted yet and that deal may or may not happen, but there's a number of RFPs going on right now, plus plus RRFP. associated with it's mostly data center type customers trying to get them to locate on or near the property. So we think there's a lot of competition and one of the things we just kind of wanted to state is that if you look back, I think in the third quarter, we had something like we added $300 million in sales in the fourth quarter like $400 million in the Power division this quarter, $138 million.
But we feel that is going to be the potential for some very large traction transactions this year is there. And so we just kind of wanted to signal that to the market that so we're hopeful that we can we can transact sometime this year on some very profitable and looped and large transaction.
So I think that was the first part of your question. When we look at what's the revenue line of the power plant, it's basically made up of energy and capacity sales. And so we have not been as hedged as we would like to be in the fourth quarter of last year and first quarter of this year. Which has meant we've been selling in the spot a large percentage of our of powered division in the spot market, which at times can be very high prices. We saw prices as high as $250 a megawatt hour in January. But we also see times where it's below our cost structure and we're turning our plan off or we're slowing it down at night or something like that. So the goal is to to contract a higher percentage of our forward sales so that we can get the plants up up and operating and leave them on, right. And so we say that our goal of 6 million megawatt hours a year, that's something that we think is attainable and something that we are working towards. So look, so look for more on that front out of us and the future.

Lucas Pipes

So should we assume Thank you for this. Brent. Should we assume that you what theme kind of more hedged in the future?

Brent Bilsland

Yes, Southern Rail, we've been trying to do that in a very low-risk way, right? We've talked in the past about unit contingent plan contingent type transactions and that if we can't produce, we don't have to cover. So those those have been slower to put together, but we've been successful in putting those together of and so we we will hopefully continue to do more of that.
None of that is there a guarantee. We're just seeing a very large level of interest from a lot of different players. And so that's so that's got us encouraged.

Lucas Pipes

Very helpful. If you were to do something kind of behind the meter with the data center at site, what would be a good benchmark for the power pricing. Would it be based on kind of myself pricing in the curve? Or would this be bilateral agreements were prices could deviate from from those benchmark?

Brent Bilsland

Well, we'll see. I mean, we'll have we don't have the results back from the RFP. We're expecting those data points later this month. But certainly, you know, those type transactions will have to compete with what we can do in the more traditional markets. So we feel that competition is it is good for us.

Lucas Pipes

Thank you. And can you speak a little bit to the of connectivity at the site. Would your site qualify for any data center or could there be limitations due to constraints on the bandwidth of your car Tympany so we have a one gigawatt interconnection at Atomera.

Brent Bilsland

I believe the transmission line flowing in and out of that substation there are out of 1.6 gigawatts. And so it offers an interesting situation where we can potentially supply a customer directly from the plant or those electrons can be purchased from from the grid.

Lucas Pipes

Thank you for that. So but in terms of the kind of fiber access? No, no constraints you're aware of?

Brent Bilsland

We'll pretty much every location has to do some level of fiber build in to the location, right? Because these are very potentially hook. I guess the first question is, what will the size of the facility be it and whatnot?
So those are all questions that we've yet to answer. But again, we kind of mentioned earlier that our Chief Legal Officer kind of comes from the data communications world. So we've been able to tap into that network of people and get really good advice. So we think that in talking to the customers and talking to our advisors that this is very feasible and and there seems to be a high level of interest.

Lucas Pipes

Very helpful. Thank you very much for that, Brent, and best of luck, Larry, again, best wishes to you all. I'll turn it over. Thank you.

Brent Bilsland

Thank you.

Operator

Thank you, Lucas. As a reminder, to register your question, please press star followed by one on your telephone keypad. Our next question will go to the line of Jeff press project with Cove Street Capital. Your line is now open.

Jeff Bronchick

Well, now ladies and gentlemen, Hey, Brett and forensic. Maybe just go over the cash flow implications. What we have today and the current structure is in place and sort of an expectation for cash needs over the balance of the year as far as you can see and then help us walk through what but the model look like under you get rid of the contractual, a low sales and you're signing these conceptual big contracts. How does the cash flow model look going forward?

Brent Bilsland

Well, you got a lot of questions wrapped up in one there. So I think we're clear that we don't give out forward-looking guidance. I think we can talk at a high level of and you know what are cost structure looks like and what our revenue looks like.
Right?

Jeff Bronchick

So I guess you are not looking for guidance or what I'm saying is you guys have woken up and said, we're changing the model and the model change clearly has cash flow implications, which are, you know, transitory, as you know, at least transitory, really not good. And therefore, you guys are tapping different versions of liquidity to kind of keep the engine rolling. And I'm just curious, I understand transition issues, but on a higher level, what an independent IPP that's publicly traded company should look like what as far as a cash flow profile, I'm talking free cash flow.

Brent Bilsland

That's what I'm trying to get at is yes, I think what we're trying to say is look on a revenue side. We've got I mean, we clearly state what our what our prices are right that our average prices are for the energy somewhere between $36 a megawatt hour average in 2025 to as high as $55.37 in 2026. As for the as for the energy capacity. We're targeting $65 million in sales. Some years are better than that.
Some years are worse. But if you divide that by 6 million megawatt hours, that's going to be a little over somewhere between $10 and $11 a megawatt hour, right? So total those two lines together and you have and depending on the year, somewhere between $47 and $56 or excuse me, $66 a megawatt hour. That's the revenue line. On the expense side, Bob, we have a cost structure that's going to be in the in the up variable costs this quarter was around $32 bucks and the of fixed cost that, assuming a $60 million cost divided by 6 million megawatt hours would be $10, right?
So so now in our $60 margins, $40 cost to $20 margin, 6 million megawatt hours, that's $120 million. If we can hit all of our goals, we'll see if we're successful in hitting all of our goals.

Jeff Bronchick

But isn't it isn't by definition, BIPP. world mean you're never going to stuff. You don't want to sell out 100% of your capacity at the prices that the buyers want and I and vice versa. So there's always a contracted versus spot, hence, is that the IPP. model highly variable and here you've got cash in the next year, you'll be doing converts from the Board. I mean, just help me out on how you're looking through this over multiple years. Let's assume you guys execute perfectly. That's what I'm trying to get to.

Brent Bilsland

I think I think on the capacity side, we've clearly list out that we have a high percentage of our capacity sold. So obtaining that goal because of the high likelihood of doing it because we've already got a high percentage of it sold, right. I mean, if you're looking at percent of capacity contracted, it's 100% this year, 32% next year at 77% the year beyond that at 64% a year beyond that. So we don't have a lot of work to do to obtain that goal for. We've got to be work is on the energy side of the business, which is why we think in the next handful of months that we have participated in RFPs of our customers. And we've lost an RFP, our target data center or industrial uses of power through an agreement with Hoosier energy that we announced last quarter.
So we'll see how successful we are. But we would like to get a decent percentage of our of Platt contracted out so that we can get both units up and running at least have both units running at minimum load, which would be about 65% of our generated output to run at minimum load all the time. So that that's kind of the goal. And that's what I think we're looking at and then the coal side of the business, our power plant is one of our largest customers. And so that kind of has an internal hedge on our cost structure being able to produce coal at costs and deliver it to ourselves.
We do purchase some coal from outside parties just to kind of diversify that risk. And that seems to be working out as well.

Jeff Bronchick

Thank you very much.

Brent Bilsland

Thank you.

Operator

Thank you. And as a reminder, to register a question, please press start by one on your telephone keypad. Next question. We'll go to the follow-up of Lucas Pipes with B. Riley Financial's. Your line is now open.

Lucas Pipes

Thank you very much for taking my follow-up question, Brent, I wanted to ask you about kind of some recently unveiled the EPA Clean Power rule. At what point would you consider making investments? What do you think is the legal outlook for this group? Appreciate your thoughts. Thanks.

Brent Bilsland

Well, look, I think I think the the world is trying to balance a couple of different things. On one hand, we want to keep the lights on 24/7 and we seem to have for the first time in 20, maybe 30 years, you know, significant growth in demand for electronics. And at the same time, the world desires lower carbon emissions. So that's kind of the tug-of-war that I think goes on there. And the challenge that we're all being guard guided to and the grid, it took 100. It is 50 years or so to build. And it's designed for a system of baseload power and spending generation and on it and in many cases, it needs on-site fuel.
And so we're trying to transition to something else in a short period of time. And that's going to be really, really challenging. And so we've seen this new carbon plant come out of I suspect it will be stayed and eyes in. And I've read different legal theories and the like that, you know, it's probably headed to the U.S. Supreme Court. And if I had to bet I would bet. They'll bill. I probably say it was unlawful. But But regardless of that to me, it does give a path for our business to run through 2039 and that would be with co-firing with gas, which we have for the last nine months, have been studying to see that as an alternative of a lever that makes sense for us to pull.
So we're continuing to evaluate that and we're continuing to evaluate these new rules. There's going to be a lot of changes, but I think at the end of the day. The fact that always went out is the lights must always stay on it. And if they don't, they'll be new leaders, right? Because people just aren't going to accept rolling blackouts in this country. And so I think physics prevails, that doesn't mean that the desire is there or not working towards that path. I just think we have to do so in a very responsible way. And so to all this is probably going to take much longer than what politicians and headlines would have you believe I mean, it wasn't that long ago, three, four years ago, they were saying that we were going to be carbon-free by 2030 and 20 than it was 2035. And now we have a pathway for the existing fleet to stay on until 2039. And if this rule stays around, it essentially means that any new gas plant builds have to have carbon capture and storage, which to me makes it extremely challenge, Jane, for anyone to build a new gas plant. So it kind of means that we're probably going to rely on the existing fleet and some capacity for much, much longer, but there'll certainly be a lot of lawyers that spend time analyzing these bills. I mean these rules were 1,400 pages long. So they're very detailed and specific. And I think the industry is still trying to figure out, you know exactly what what the exact interpretation is because it gets very specific for each fuel source.
But to me, it's a near death blow to a new gas plant build, which further makes All right. So how do you how do you expand the grid? You can't build new gas. Nobody's building new coal, everyone has tried to build a new nuclear plant has has has huge, huge cost overruns by two times or more so and the capacity accreditation that we're seeing myself hand out to wind and solar is 5% of nameplate, right?
So you got to build 20X of whatever wind and solar is to get out, but you got to 20 gigawatts of solar to get one gigawatt of capacity. I mean that's that that math is very problematic. So and I don't think there's any easy answers or solutions here, but we are becoming more and more convinced about the longevity of our business, the profitability of our business and mostly because we are kind of transitioning the Company from a business that has a shrinking demand to a business that has a growing demand. And I think that has great benefit for the long-term shareholders of Hallador very helpful.

Lucas Pipes

Thank you, Brent. Two, two follow-ups on this first and co-firing with natural gas, how much would that cost to make a plant change for that? How long would it take and then on the back of your thesis that you just articulated, are you looking at acquisitions of other coal-fired power plants, be it in myself or across the banks?

Brent Bilsland

Yes. So we're still like I said, we're still evaluating what what a co-firing the plant would look like, and there's different ways of doing that. So we're not really ready to come out of the cost estimate, though it's though it is feasible.
And then secondly, Al, he's now got interrupted. The second part of your question again, Lucas was one of it, and this has? Yes. Yes, I think we're always in the market and we're always having some level of conversation with someone about acquisitions and what that might look like. It's definitely something that as we talked about on the call, we continue to build out our team of experts and kind of bolster our capabilities to, you know, acquire plants, operating plants and increase the overall value of those assets.
And I think that's that's what we're trying to do. And that's part of the reason of the BRFP. with the with the different data center groups to see if that's another way that we can add value on to the platform that we have.

Lucas Pipes

Brent, I appreciate all the all the insights there. Again, best of luck.

Brent Bilsland

Thank you, sir.

Operator

But thank you again to ask a question, please press star one followed by press. Please press star followed by one on your telephone keypad. We will pause here briefly as questions get registered, there are no additional questions waiting at this time. So I'll pass the conference back over to Brent Brent Bracelin for closing remarks.

Brent Bilsland

Well, I just want to thank everyone for their time today and their continued interest in Hallador. Thank you.

Operator

Yes, that concludes the Hallador Energy First Quarter 2024 earnings call. Thank you. For your participation. I hope you have a wonderful rest of your day.