Hallador Energy Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 6 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Thank you for joining today's Hellador Energy Second Quarter 2023 Earnings Call. My name is Tia, and I will 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. I would now like to pass the conference over to your host, Rebecca Palumbo, Director, Investor Relations.

Operator

Please proceed.

Speaker 1

Thank you, Tia, and thank you everybody for taking the time to join us today. Yesterday afternoon, we released our Q2 2023 financial and operating results on Form 10 Q. It is now posted on our website. With me today on this call is Brent Bilsland, our President and our CEO and Larry Martin, our CFO. After the prepared remarks, we will open the call up to your questions.

Speaker 1

Before we begin, please note that the discussion today may contain forward certain 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 1 or more of these risks or uncertainties materialize Or if our understanding of assumptions prove incorrect, actual results may vary materially from those we projected or expected. For example, our estimates of mining costs, future sales, legislation and other 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, That may be required by law.

Speaker 1

For a discussion of some of those risks and uncertainties that may affect our future results, You can review the risk factors described from time to time in the reports we file with the SEC. As a reminder, this call is being recorded. In addition, a live and archived webcast of this earnings call is available on our website. We encourage you to ask questions during the If you are on the webcast and would like to ask a question, you will need to dial into the conference number And that toll free number is 1-eight33-four70-1428, And with that, I'll turn the call over to Larry.

Speaker 2

Thanks, Becky, and good afternoon, everyone. I'm going to go over the review of our operating results. And before I do, I want to Make the definition here of adjusted EBITDA, which is operating cash flows plus our interest expense Plus depreciation, plus asset retirement obligation reclamation and other And then less any effects of our subsidiary and equity method investments and less any effects So our net income for the Q2 was $16,900,000 Which resulted in $0.51 per basic earnings per share or $0.47 diluted earnings per share. For the 6 months Ended in June, we had $39,000,000 of net income, which resulted in $1.18 basic earnings Per share and $1.08 diluted earnings per share. Our adjusted EBITDA for the quarter was 35,300,000 And for the 6 months, dollars 69,300,000 Our bank debt decreased by $1,000,000 for the 2nd quarter and $11,000,000 for the 6 months.

Speaker 2

Our funded bank debt as of June 30th was $74,200,000 Our letters of credit were 11,200,000 And our net funded bank debt, which was our funded bank debt less cash was $71,900,000 Our leverage ratio, which It's defined with our bank as debt to adjusted EBITDA was 0.94. So

Speaker 3

I want

Speaker 2

to turn the call over now to our CEO, Brent Bilsland, to go over the highlights of the quarter.

Speaker 3

Thank you, Larry. Thank you, everyone, for joining today. Much like our Q1, we remain pleased with the progress we continue to make during the Q2 towards our company goals of increasing profitability, Increasing company liquidity and reducing balance sheet leverage. The realization of higher priced coal shipments led to Including to Mira, Without that, dollars 20.96 despite higher production costs. Coal production was strong and we were able to meaningfully increase our coal inventories throughout the quarter.

Speaker 3

We intend to leverage this increased inventory To further supplement our power production and position ourselves to take advantage of the increased power needs Anticipated in the summer months and throughout the second half of the year. Additionally, on August 2, after the close of the quarter, We finalized the new credit facility led by P&C Bank. The highlight of this new facility is the improvement of our liquidity position To $56,900,000 as of June 30. The strong sales from this quarter resulted in net income $16,900,000 in Q2 and the best net income we've had Over the first half of the year at $39,000,000 This growth enabled us to make great strides towards our goal of deleveraging our balance sheet. As we continue to execute on our overall plans, we believe that Hallador has dramatically improved Both the quality of our business with the addition of Hallador Power last October and the quality of our balance By reducing our debt to EBITDA multiple to 0.94x at the end of the second quarter.

Speaker 3

Our coal business continued to thrive with an average sales price of shipped coal during the quarter at $65.44 per tonne, Including shipments to Merum, $63.27 per ton I'm sorry, excluding sales to Merum. While some of those higher price shipments will tail off through the remainder of the year, we expect that the average price will remain above 50 Notwithstanding the increased cost, Our 2nd quarter margins before eliminations of Marim sales of $23.92 were an improvement of $6.85 over the Q1 of 2023. Comparing operating revenues from coal operations to the Q2 of 2022 Highlights the impact of these high priced contracts. We saw operating revenues from coal operations increased 73% over the same quarter in 2022 due largely to the increase in the average sales price for coal. Operating revenues in Q2 2023 include $23,600,000 sold to Miriam That was eliminated in consolidation.

Speaker 3

Our healthy coal production during the Q2 allowed us Excuse me, it provides us with the flexibility to ship additional coal to Miram if the market so dictates And ultimately will allow us the option of generating more megawatt hours in the second half of the year than previously planned. This flexibility is especially important as Hallador Power completed its obligation of selling 100% Of the output to Merrim's original owner, even with some of the initial limitations on where and to whom we could sell our output, Howitzer Power contributed $9,200,000 in net income during the Q2. Starting in June of 'twenty three, As some of these contractual limitations expire, approximately 80% of our potential output from the plant became available to sell to the open market. As our operations at Hallador Power continue to develop, we are excited for the meaningful contributions that we expect Hallador Power to make in the second half of the year and beyond. On August 2, We successfully closed the new $140,000,000 credit facility led by P&C Bank.

Speaker 3

The facility consists of a $65,000,000 term loan with a maturity of March 2026 and a $75,000,000 revolver With the maturity of July of 2026. As stated before, as of June 30, Our liquidity improved to $56,900,000 This new facility is important for multiple reasons including providing us with additional flexibility to make forward power sales and to react quickly to market opportunities. We are encouraged by the general outlook on future power pricing and our increased liquidity Places us in a better position to potentially lock in future profits. As I said at the start of my comments, I'm incredibly pleased with the quarter results and the progress that Hallador continues to make as a company. With that, I'll open up the line to for any questions that anyone may have.

Operator

Absolutely. We will now begin the Q and A session. The first question comes from the line of Lucas Pipes with B. Riley. Please proceed.

Speaker 4

Thank you very much, operator. Good afternoon, everyone.

Speaker 3

Good afternoon, Lucas.

Speaker 4

My first question is on coal pricing. You have about 3 point back of the envelope, 3,600,000 tons unpriced For 2024. So I wonder what the mechanism might be for pricing those tons and where you see the market today. Thank you very much.

Speaker 3

Well, a large percentage of that business is Tons that are committed to ourselves at the Marim Power Plant that we have yet to price. And So we will look at the market indicators and basically set those prices, so that it's a fair transaction for both Sunrise and the Merrim Power Plant and there's rules around that that a market monitor We'll review. So I mean that's kind of how we do that. So if you look at the general Pricing curve, it will be something in that range.

Speaker 4

Got it. So and can you remind me how many tons are likely to go to Marin in 2024 out of your own production?

Speaker 3

We figure about 3,000,000 tons.

Speaker 4

So essentially the committed but unpriced Portion of your book should I think of that going to merit?

Speaker 3

Yes. 3 of the 3,600,000 This is what's committed and going to well, 3 of the 3.6 is what's going to Merrim.

Speaker 4

Got it. So we really just have like 600,000 tons that are uncommitted, unpriced

Speaker 3

Yes.

Speaker 4

That's helpful. Thank you. And then Two quick questions on the contract liability. As part of the consideration, I think you marked it to $184,500,000 as a PPA. Based on where power prices are today, could you give us a sense where that liability would stand?

Speaker 4

And then somewhat related the amortization of the contract liability of $19,600,000 during the quarter, would that be within Captured within your operating expenses on the income statement or where would how would that flow through? Thank you very much.

Speaker 2

Lucas, the contract liability runs through revenue, so it decreases Revenue and if you look at Note 15, part of the corporate and other eliminations $23,000,000 for the quarter, the lion's share of that, no, Decreases revenue. Increases revenue. And then the $23,000,000 is the intercompany sale So Sunrise sold coal to the power plant and the power plant did not burn that yet. So that's part of that elimination.

Speaker 4

Okay. Maybe we can follow-up on that offline, but Yes, that's okay. Yes. What got me on this question is that just when I look through the reconciliation of revenue, That's Page 22 on the 10 Q where it shows the capacity revenue, the delivered energy and PPA revenue That adds up to the $71,000,000 that you also show in the income statement and then there's the amortization of the contract liability of 19,600,000 To kind of back into, I guess, what would be a

Speaker 3

True sales.

Speaker 4

Yes, exactly, exactly. So I'm trying to

Speaker 5

figure out

Speaker 2

how to Yes. So the $19,000,000 is in revenue for the purchase Contract liability that we got, so right here we're just backing out that $19,500,000 out of revenue Show you what a normalized revenue will be after that is amortized.

Speaker 4

Yes. So essentially the

Speaker 3

$71,000,000 So the

Speaker 2

top number the $71,000,000 is GAAP accounting, which includes the purchase price And then the $51,000,000 would be normalized revenue if we had no purchase price adjustment.

Speaker 4

Got it. So the

Speaker 2

$51,000,000 is sold power, capacity and power.

Speaker 4

Yes. Yes. But just to be clear here, the And again, maybe you can follow-up on this offline, but your essentially the $71,000,000 is a more market based Figures, is that right?

Speaker 2

More market based back in October.

Speaker 3

Yes. I mean, so one of the issues here is when you negotiate A transaction such as this takes a lot of time, right? And so the price the seller would say, well, hey, look, I've got the Coal purchased to generate my electrons through May of 2023, right, because that was when they intended to close the plant. And so they're saying, well, look, I'll enter in an agreement with you where we Sell you coal at a certain price and buy electrons at a certain price. And then When we get to the closing of the transaction, which was probably quite some time later, we

Speaker 2

have February to October, we have

Speaker 3

to mark that to market, right? And there was a lot of volatility in the market last year. So that's Essentially what happened and now we're accounting for that mark to market.

Speaker 2

So yes, I mean, so in February, we were close to market. By the time we closed in October, the market had taken off as everybody knows. So we had to mark those Contracts to market at the time. So Lucas, you're right in saying that the 71 is market, But it was marked in October, not necessarily marked today.

Speaker 4

Got it. Okay. So really what so this is all helpful. Thank you. So I guess what I'm trying to get at is market today, Where would you put it both on the dollars per megawatt hour and then the capacity revenue?

Speaker 3

Well, that's not something that we disclose because we always have ongoing trading As far as selling of capacity and selling of energy, but there are certainly market curves out there that you can look at for Indiana Hub, we actually sell to the Miram Hub, but there's a more public market of the Indiana Hub. I think that can give you A feel for what electrons are selling for at various periods of time. Capacity is a little tougher. The capacity market auction is the most Visible mark to market, but We have found that those pricings have been all over the place. And so to us, the market The MISO capacity auction prices have really not been very correlated to the actual price the I think we've said in past quarters that we feel that we are able to sell capacity at prices that Yes.

Speaker 3

Relatively cover our fixed costs.

Speaker 4

Okay. Got it.

Speaker 3

Yes. Most of our has been sold through bilateral agreements with various utilities and trading companies and very little Volume for us is actually sold through the MISO auction.

Speaker 2

So and Lucas, I'd like to also point out here you asked about the $19,500,000 We also in that same In the same transaction with Hoosier, we also sent we sold power under market from In October, we also got a coal contract way under market in October as well. So that is what the $12,900,000 is on Page 22 for the amortization of the contract asset. So they kind of they offset a little bit. We sold power Less than market in October because of because we started February, we also got a coal contract less than market that we had to pay less than market for.

Speaker 5

Got it.

Speaker 4

Okay. That's kind of what the

Speaker 3

table on Page 22 is trying to Add even more clarity too is, hey, here's how many megawatt hours we sold, here was our capacity revenue, Here was the price we got per megawatt hour and here was our cost per megawatt hour. And we've mentioned here on the call what our net income Was for the plant. So

Speaker 4

I we're trying

Speaker 3

to have more clarity there. We realized the GAAP accounting around the purchase asset and liabilities Can make it a little challenging to follow.

Speaker 4

Yes. Now this is helpful. Okay. Hey, really appreciate the color. Best of luck to the entire Hallador team and I will turn it over.

Speaker 4

Thank you.

Speaker 5

All right.

Speaker 3

Thank you, Lucas.

Speaker 2

Thanks Lucas.

Operator

Thank you, Mr. Pipes. We will pause here briefly to allow questions to generate in queue. The next

Speaker 5

Great. Thank you. Brent, so I appreciate this Page 22, all the disclosures you've added here. I'm going to ask you for another one. So I think what most investors are keen to know is kind of what the non fuel cost Of the power businesses, there's obviously a lot going through kind of the fuel expense line with this amortization of the coal contract asset And this intercompany sales from Hallador and so on, do you have the kind of fuel expense in the quarter paying you or would you be willing to disclose that?

Speaker 3

Well, that's not something that we've prepared to disclose today, but we'll certainly Take that into consideration for future quarters.

Speaker 5

Okay. Yes, that would be great. Maybe I could ask in a This variable expense that you've disclosed, I think it came in at roughly $11 or sorry, dollars 30 per megawatt hour. Do you have a sense or what kind of the non fuel Variable cost per megawatt hour should be on an ongoing basis.

Speaker 2

Well, we've disclosed in the past that our He covers that cost, our capacity revenue. I think that's all we're willing to do this quarter.

Speaker 5

Okay. And just to be clear, the capacity revenue covers the fixed costs, right, not the variable costs. Are you talking about Capacity revenue covering kind of all of your non fuel Yes.

Speaker 3

No, it covers

Speaker 2

no, you're correct, fixed cost. We stated that

Speaker 5

in the

Speaker 2

last 3 quarters that our capacity revenue covers fixed costs. Yes. So you're asking are you About nonfuel variable costs, is that what you're asking about?

Speaker 5

Yes, yes, yes. That's what I'm asking, yes.

Speaker 2

I mean, it is in the variable cost and it is, I mean, the lion's share of our variable cost is fuel.

Speaker 5

Okay. Fair enough. And then can you talk about what the inventory position looks like at Miriam? I mean, you talked about hopefully being able to generate more electrons in the second half of the year than maybe you envisioned at the beginning of the year. Yes.

Speaker 5

Where does inventory band at Miriam? And then I think you have 4,000,000 tons of kind of contracted price tons To sell to 3rd parties in the second half, is there a chance that your customers might be willing to defer some deliveries Outside of this year and that might unlock more inventory to burn at Miriam?

Speaker 3

Well, I mean as far as what our customers are willing to do that kind of changes on a daily basis. But yes, I mean I think what we said in the call is And what we've said in prior calls is the power the power or coal prices last year took off. We sold A large percentage of our coal to 3rd parties, and now because our production has been Well, it has exceeded sales. We are generating inventory in the first half of the year that We think that we'll be able to burn profitably in the second half of the year. That's going to be dictated by the price of power, Right.

Speaker 3

These are not contracted for power sales for the most part. So the benefit and the burden Of having our power book 20% contracted, 80% open market for the balance of the year Is we think we can achieve higher prices than what we're previously contracted for in the first half of the year, but that will be up to the market, Right. I mean, some of that is weather dependent, some of that is gas price dependent. Power prices change every day. All we're saying really is We have more fuel and because of that we'll be looking to burn And generate more megawatt hours in the back half of the year.

Speaker 3

It was maybe another way of saying is there's potential Depending on power prices, for the power plant to make more money in the second half of the year than in the first half of the year, but that is wholly dependent upon What we see in the market as far as the price of power? We just have the inventory to do it should the market show its values that make sense.

Speaker 5

Okay. So would you say the power plant is not inventory constrained or to the extent the power prices are Favorable in the second half of the year. Could you run the plant at a high capacity factor? Or is there a point where You might run out of inventory.

Speaker 3

No, we feel we could run at a high capacity factor if the market showed us the appropriate pricing.

Speaker 5

Okay, great. And then on the cash flow, so the free cash flow conversion hasn't been great in the first half of the year. But now that you've completed your coal purchase contract acquired with Miriam, is it fair to say that you're going to burn down A lot of that coal inventory in the second half and free cash flow should be quite robust in the second half. And I didn't hear you say, I think the prior goal was Hopefully, it'd be net debt 0 sometime early next year. Is that something that you reiterate?

Speaker 2

Q2, yes. We think we'll be net debt free. And to answer your question on the inventory, We plan on drawing inventory down as much as possible at the end of the year. I think we had like $9,400,000 increase In inventory, which as you point out, decreased our cash flow, we expect that to turn around And then some because we will draw our inventories down. It's dependent upon higher prices, dependent upon customers show up, but our plan is to draw inventory Down to a very low inventory balance at the end of the year.

Speaker 3

Depending on power prices.

Speaker 2

I said that. Yes.

Speaker 5

Okay. Okay. The last

Speaker 2

one is a little bit more. On power prices. We have the coal sold To a third party, so they're obligated to come and get it whether they I mean, there'll be something there if they don't come and get it. I mean, it'll be a carryover, Some kind of settlement, but and then power prices.

Speaker 5

Okay. And lastly, on the coal cost Per tonne is kind of low 40s and a good expectation going forward?

Speaker 2

We think we can get those lower. 2 years ago, we were at 32. I don't know if we're ever get back there with inflation, but we are working on things at the mine to help geology, to help mining And more efficiency, we think we can get them down from 41, but I'm not going to throw a number out there. But we are working on lowering them and think we can.

Speaker 5

Okay. Thanks very much guys.

Operator

Thank you. Thank you, Mr. Tracy. We have a follow-up question from the line of Lucas Pipes with B. Riley.

Operator

Please proceed.

Speaker 4

Thank you very much, operator. Thank you for taking my follow-up question. Just looking at the megawatt hours sold in the Q1 and Quarter 2023, we had that drop from $12.62 to 1043. With such a seasonal and kind of looking ahead, at what level do you look to

Speaker 3

Well, again, that's somewhat power price dependent, Lucas. In the Q1, 100% of the output Was committed to the seller of the plan and That essentially was the pace that they wanted us to run at. In the Q2, 2 of the 3 months We're in the same managed the same way. So really June was the first time that We were in position to sell the majority of our electronics to market and that kind of dictated the pace of the plan. So But you're also in the shoulder month right there, right?

Speaker 3

I mean you've got April, you got

Speaker 2

2 shoulder months in the Q2 and only 1 I mean, March really isn't

Speaker 3

Correct. And April wasn't very hot. You typically expect your plant to run more in July, August, September, those are hotter months than April, May, June. And we'll see what winter brings. Does winter show up in November?

Speaker 3

Does winter show up in December? Does it show up in January? So the Power business is a much more seasonal business, particularly when We have more market exposure versus What we're seeing what we've typically experienced in just the coal business, right? Typically the coal business, you've got it under contract And it really just kind of comes down to, well, AI visibility on the sales, what are my cost of production and what volume I'm going to be at. Said another way, I think that longer term, you'll see the plant probably run more at 1,500,000 megawatt hours per quarter, those will be probably a little more aggressive In the heating and cooling season and a little lighter in the shoulder seasons from a volume perspective.

Speaker 3

That's where we'd like to be.

Speaker 4

And in June, was the utilization rate higher Or lower than in April, let me.

Speaker 3

Prices were pretty soft in June. It was pretty mild here in the Midwest. Quite frankly, Yes, we haven't heat showed up basically in the 1st 3 weeks of July. So July was pretty good.

Speaker 5

I think

Speaker 3

it's been relatively mild here

Speaker 2

in the

Speaker 3

1st week of August, but we'll still see What the summer brand and gas prices affect is too. That said, I think long term, I think the margin potential of the Power business is very good. And so I think we haven't really had You'll look to see us Price a little bit more of our power going forward and hopefully next quarter we can Be in a position to disclose some more of that. And I think the market will be pleased with the pricing that we're seeing. But that We'll talk about those deals when they're signed and we can report

Speaker 4

That's helpful. Thank you. Then back to Page 22, Right. You net out the amortization, you show that average price per megawatt hour of delivered energy MTPA revenue $32.89 per megawatt hour and you show that cost on a variable basis of $30.05 Are those two metrics maybe the best to kind of where the market is today To model this business going forward?

Speaker 3

I don't think on the sales side, That is not market today. I think on the cost side, yes, you're starting to see a couple of quarters here of where our costs You know, our app for the plan for that's both fuel and variable costs.

Speaker 2

Because realize like Q2 Lucas, as Brent said, is a shoulder month, so it's lower prices to begin with and It was quite cool in April, May and June wasn't that great either.

Speaker 4

So kind of when

Speaker 2

I say cool, not cold. Yes, yes. Excuse me?

Speaker 4

Yes, that's clear. So in other words, the kind of At current market prices, the average price per megawatt hour Delivered energy and the PPA revenue would be somewhat higher.

Speaker 3

Significantly, yes. Again, look, as it kind of gets into what time period are we talking about, right? I mean, if we're talking about spot power tomorrow, If the temperature is mild and gas prices are cheap, that's not going to be a very good price. If we're looking further out on the curve, I think we're pretty excited about what we see out there. So it's I just don't want to First of all, we have ongoing negotiations.

Speaker 3

I don't want to tip our hand, but also I don't want to Confuse the market either because pricing today is potentially very different than pricing 2 years from now.

Speaker 4

Got it. So, no, that's very helpful. Again, thank you for taking my follow-up question and again best of luck.

Speaker 3

I appreciate you. Thank you.

Operator

Thank you, Mr. Pipes. There are no additional questions left at this time. I will pass it back to Brett for any closing remarks.

Speaker 3

I want to thank everybody for their interest And Hallador and joining our call today and we look forward to reporting more great results to you all in the future. Thank

Operator

you. That concludes today's conference call. Thank you. You may now disconnect your

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