Hallador Energy Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 14, 2024

There are 6 speakers on the call.

Operator

Hello, and welcome to the Hallador Energy Companies Announces 4th Quarter 2023 Earnings Call. My name is Harry, and I'll be your coordinator today. And I would now like to turn the call over to Becky Palumbo, Investor Relations to begin. Please go ahead.

Speaker 1

Thank you, Harry. Good morning and this is for J. Calder Energy's call for the Q4 full year 2023 results. Today are Brent Fieldland, our President and CEO and Larry Martin, our CFO. Yesterday afternoon, Hallador released its Q4 and full year 2023 financial information in a press release.

Speaker 1

Today, we will discuss those results as well as our perspective on current market conditions and outlook for 2024. Following our prepared remarks, we will open the call 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 Securities and Exchange Commission and are also reflected in yesterday's press release. 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 underlying assumptions prove incorrect, actual results may vary from those we projected or expected. In EDG Mark, Paladore has no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future results or otherwise, unless lastly, Halodor will file its Form 10 ks sometime this week.

Speaker 1

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

Speaker 2

Thanks, Becky.

Speaker 3

Good afternoon, everyone. Before we get started, I would like to make a definition of adjusted EBITDA as operating cash flows 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 obligation reclamation plus other amortizations. For the Q4, Hallador incurred net or a net loss of 10,200,000 dollars 0.31 dollars basic earnings per share and $0.27 for diluted earnings per share. For the year ended December 30 1, 2023, we had $44,800,000 of net income or $1.35 per basic earnings per share and $1.25 for diluted earnings per share. We had adjusted EBITDA of $1,700,000 for the quarter and $107,300,000 for the year.

Speaker 3

We increased our bank by $29,800,000 for the quarter $6,300,000 for the year. Our funded bank debt as of the end of December 31 was $91,500,000 Our letters of credit were $18,600,000 dollars Our net funded bank debt was $88,700,000 Our leverage ratio for debt to adjusted EBITDA was 1.3x at the end of the year. I will now turn the call over to Brent Bilsland, our CEO.

Speaker 2

Thank you, Larry. First, I'd like to thank the Hallador team for their hard work and dedication on finishing a solid year for our company. While the Q4 highlighted some operational challenges and the episodic nature of our power revenues, I don't want those challenges to overshadow the positive year that we had as a company. In addition to near record margins on our Coal division for the full year, the continued integration of Howidore Power into our portfolio was a springboard to record net income, our highest revenues ever and a future sales book that is approaching 1,500,000,000 dollars and continues to grow as demand for energy and capacity increase. We are seeing success in selling contracted contingent energy at excellent prices.

Speaker 2

And in light of that, we are also focusing on capital expenditures to prepare the plant to support those contracts in future years. We are also very excited about a recently signed agreement and structure with Hoosier Energy and their distribution member, Wynn, REMC, that should allow us to attract industrial users of power such as data centers, AI providers and power dense manufacturers to the Merrim property. We believe leveraging our plant to help supply these large users of energy should allow us to operate the plant more efficiently in a volatile power environment and generate increased margins at or above what we can achieve in the traditional wholesale market. We are already seeing increased interest and excitement around the prospect of this type of offering. If we succeed in attracting high powered demand customer through this structure, it moves Hallador up the electricity value chain, providing additional margin and stability to our earnings for years to come.

Speaker 2

Combined with our increased volume of Ford Power sales, we believe these types of opportunities will continue to improve the long term outlook for the company and provide a stable platform to leverage both our power and coal assets in a responsible, sustainable and profitable manner. We have been very deliberate in structuring these bilateral sales contracts to limit our exposure to unplanned and for that matter planned outages and other unexpected challenges in what we expect to be an increasingly volatile power market. Negotiating deals in this way protects us from downside risk, but is also extremely bespoke process, which takes significantly more time than simply agreeing to firm power contracts and accepting that additional risk. The offshoot of this is that while we methodically build our sales book, we are subject to the whims of the spot power market, and more specifically, to the weather and other factors impacting short term electrical demand. As we saw throughout the last several months, when you have 60 and 70 degree days in winter, the typical energy prices we would expect to get see get thrown out the window and you end up in a situation where the plant simply does not dispatch.

Speaker 2

The continued depression of natural gas prices exacerbated this issue and our 4th quarter results were impacted by all of these factors. Just as an example, while the average spot price for energy at Miriam was around $69 in 2022, The mild winter and low gas pricing drove the average price down to about $31 in 2023. The spot market pricing really highlights the importance of the longer term contracts that we continue to put in place, especially as we continue to spend CapEx to ready the plant to support those sales. Since January of 2023, we have contracted nearly $500,000,000 in future energy and capacity deals. Many of these deals extend through 2028, with the higher contracted prices occurring in 2026, 2027 and 2028.

Speaker 2

In addition to the 4th quarter challenges at Merrim, we also continue to fight against geology, inflationary pressure and operational challenges in our coal division, alongside the continued retreat of the coal markets from the largely elevated pricing of the last couple of years. In response to these changing events, we took steps to support liquidity and to increase the efficiency of our operations. In December, we implemented an at the market offering program under our existing shelf registration statement as a tool to fund any short term financing needs. Under the ATM, we sold approximately 800,000 shares of Howador stock in December of 2023 and raised approximately $7,300,000 of equity. We sold an additional 700,000 shares or so of Hallador stock in January of 2024 and raised an additional $6,600,000 In addition, in February, several members of our Board further bolstered our liquidity through unsecured 1 year notes totaling $5,000,000 We are also starting to see capacity revenue come in, which in combination with the items I just discussed will add to the liquidity position and give us additional optionality as strategic opportunities like hedging, acquisition or other ways to improve our balance sheet present themselves.

Speaker 2

Our near term actions to improve liquidity will be done in a prudent and strategic manner to respond to changing events or to take advantage of market opportunities and furtherance of our long term outlook. In February, we also restructured our coal operations in an initiative designed to add efficiency to our operations and create higher margins in our coal segment. As part of this initiative, we idled production at our higher cost Prosperity mine and substantially idled production at the Freelandville mine, where we expect to finish reclamation late in Q2 of 2024. These moves should reduce our capital reinvestment for coal production in 2024 by approximately $10,000,000 thus reducing CapEx for our coal division from $35,000,000 to approximately $25,000,000 We are also focusing our 7 units of underground equipment on 4 units of our lowest cost production at Oaktown. As part of this initiative, we reduced our workforce by approximately 110 employees, which we expect to start creating OpEx savings once the warrant period expires in the Q2.

Speaker 2

While this was a difficult decision on a personal level, it was the right thing to do for the company and we believe that it will improve our operational efficiency relatively quickly. By focusing on our most efficient mining and highest margin coal, we expect to produce about 4,500,000 tons annually of higher margin coal as compared to 6,000,000 historical tons of production at the Oaktown Mining Complex. Additionally, in 2024, we have secured supplemental coal from 3rd 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 from third parties, while capturing upward swings in commodity markets for coal and electricity should further maximize margins while optimizing fuel costs at Merrim.

Speaker 2

As we enter the traditionally mild spring, seasonal electricity prices could remain weak. However, we remain excited about the transformation of Hallador from a commodity focused producer of coal to a vertically integrated independent power producer. We believe that this transition provides significant opportunity to capture the increased margins of the energy markets, to take advantage of the soaring demand for electricity and to step up the value chain in a more sustainable and future proofed industry that which we have traditionally that of which we have traditionally operated in. As evidenced by the ongoing build of our long term sales book, this deliberate movement into the electricity sector should materially strengthen our company and the products that we sell. As I said at the start of my comments, despite a challenging quarter, I'm very pleased with our annual results and the continued evolution of Hallador as a company.

Speaker 2

That concludes our prepared remarks. I'll now open the line up for questions.

Operator

And our first question today is from the line of Lucas Pipes of B. Riley. Lucas, your line is now open. Please go ahead.

Speaker 4

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

Speaker 2

Good afternoon, Lucas.

Speaker 4

I first wanted to touch on the liquidity and how you think about it. So the ATM a little bit late last year, earlier this year, there were the unsecured notes. Do you manage to a minimum cash balance or minimum liquidity balance? Would appreciate your thoughts on that. Thank you.

Speaker 3

Well, I think,

Speaker 2

look, we are in this until we finish filling out our sales book, which we think we have enormous opportunities in front of us to add to that position this year. There's a lot of RFPs out, a lot of interest. But in the meantime, we're very subject to spot prices of power, which is very much influenced by the weather or lack thereof. So when we think about liquidity, you can never have too much, right? But that being said, I mean, we are our Board of Directors owns roughly 31% of the shares.

Speaker 2

And so our interests are very much in line with the shareholders because we are substantial shareholders, including myself. And so it's a balance. We have to look at what do we think power prices will be for the year and how much liquidity do we need to fulfill our obligations of improving the plant, keeping the coal mines up in tip top shape. We probably had about as much as could go wrong in our Q4 as went wrong, right? We had half the plant offline, part of that was planned, part of that was off unplanned.

Speaker 2

We had moved a lot of equipment around at the coal mines, trying to get all 7 units in better production and finally in February decided we were going to focus on our 4 best units of production and we were going to buy some coal from 3rd parties. And so there's just a lot that goes into that question. I don't think we have an exact target number. I think it's more we're looking at our sales book and what the opportunities are and where we can get comfortable with margins locked in contractually and managing the liquidity until we reach that point in the road.

Speaker 4

Got it. Really appreciate that. And turning a bit to kind of the Q1 outlook, you already mentioned the weather hasn't been supportive. What insights would you be able to provide here at this point as it relates to Q1? How much of those issues kind of continued into the quarter?

Speaker 4

It sounds like they did at least on the coal side. And for the full year, what sort of volume should we anticipate at this point? And then on the power side, is that part of the discussion around kind of filling out the sales book or was that really more in regards to coal? Thank you very much.

Speaker 2

All right. So I'm not sure I got all your questions, Lucas. On the sales book, where we see opportunities is look, the market is short capacity, right? We've seen these power generation supply has been relatively flat for about 20 years. And then we've been in this transition period of maybe a decade of closing baseload and replacing it with non dispatchable resources.

Speaker 2

And that has shrunk the accredited capacity. And I mean MISO says they've got some reports out that say in the next couple of years if people retire assets as announced, the reserve margins go negative. So that won't happen. So but it just kind of shows how tight the situation has become from a generation point of view, particularly in MISO. And now you add in this explosion of AI, right.

Speaker 2

I mean the growth in that industry is just kind of unprecedented, right. And there's all sorts of reports. So I don't really know which numbers to believe. But essentially, these companies that are trying to race to develop AI, they can't find places to plug in. And so they're short capacity.

Speaker 2

We happen to be long capacity. And this is kind of happening everywhere, right? We've talked to a lot of different utilities about where they have interest in selling their other plants to us. And there's always some interest out there. But what's also been surprising is how many have said, yes, we know we show a retirement date and we're going to push that out because we're seeing all of this new demand suddenly show up from manufacturing from Europe, from AI, from EVs.

Speaker 2

So it's the long term trend from us, we are extremely bullish. The short term, we're depending on weather in the spot market until we fill this book out. But there are major RFPs out right now for power and capacity and we feel we have a high probability of success in obtaining some of that. We are extremely excited about this new structure. We were able to get Hoosier and win REMC to work with us on to try to attract high demand users of power to our site because we feel that look, either that's going to offer us better terms than we can get in the wholesale market or we're not going to do it.

Speaker 2

But we feel just from the early indications and please keep in mind, we just signed this agreement like a week ago. So we're early in this process, but we will be running an RFP to see who's in the long term wholesale market. Certainly, you're going to see us add to both positions and I hope this year in a very meaningful way. On the coal side of the business, Merrim is a significant customer of our Sunrise Coal division. And if you look, you'll see in the 10 ks when we released that, we went ahead and contracted that business to ourselves just to try to add more clarity and set that price out for the next handful of years.

Speaker 2

And when we do that, it really kind of shows that materially for the next 4 years, we're extremely well hedged or sold contracted on the coal side of the business. So I think that answered 2 of your questions. I can't remember what the 3rd was.

Speaker 4

This was very helpful. The third one was on the outlook for Q1 and the full year. I do have another question on the MOUs, maybe since you mentioned it, I'll raise this one first. Is this an MOU for behind the meter power essentially? And then how quickly do you think you could see something materialize?

Speaker 4

And I'd assume you'd have some construction that would need to take place to build out of a data center, what have you. So kind of best case, when could you supply power to a customer? Thank you.

Speaker 2

Yes. So we will go out for RFP this spring, hopefully next month. We're trying to get that in order to see what the demands of the markets are. We have, I think, a fair amount of flexibility on what we can offer customers. And quite frankly, I don't know what the build times will be.

Speaker 2

We've had some customers without an RFP knock on our door and say they'd like to begin construction in 3 months. I think that's probably too aggressive. Could we see something as early as next year? Possibly. But we're not really far enough along in those conversations to give any guidance around what the timing is.

Speaker 2

I think what we're excited about is just what we've seen other companies do both in Indiana and throughout the Midwest. We've seen some really large developments and those prices don't get published, but they do get whispered. And if that holds true, we're excited about what that could potentially be. Again, until we see an RFP results, it's really hard to say. We're just excited about the opportunity.

Speaker 2

And then as far as our Q1, we saw 1 week of really cold extreme weather. So the power plants performed well through that period and that was a profitable time. And the rest of winter so far has been extremely mild. I mean, it's we've had some 60 and 70 degree days in both February March in Indiana. So we don't know what that means.

Speaker 2

We're heading into the shoulder season here next month. That traditionally is low power demand, but winter is traditionally high power demand and that hasn't proved to be the case. So we'll see if this turns out to be a hot summer. We're encouraged by we've got extremely cheap gas today. And then when you start to get out to October, November, we have reasonable gas prices again up in the 3s and 3.50 range every month thereafter.

Speaker 2

So the power curve is seeing that and it has remained robust so far, but short term prices have been cheap. And so we'll just manage through that And that's why we're going to we will keep a very close eye on liquidity to make sure that we are successful. And there could be some opportunities again here with the MOU that we just signed.

Speaker 4

Yes. Directionally, would you expect Q1 to be worse than Q4?

Speaker 2

Well, I'm not prepared to give guidance on Q1 at a 10 ks earnings call. So we'll wait and see what those results are. Quarter is not over.

Speaker 4

Helpful. Thank you. I'll do one last one. Why was it necessary for Hoosier to be part of the MOU?

Speaker 2

So we as Hallador are only allowed to sell wholesale power. And when you start attracting customers for data centers and what lot, that is industrial power. And so that technically has to be sold through a structure that involves Hoosier and their distributive cooperative win REMC. And so we basically negotiated with them for a period of time to say, hey, there's an opportunity here for everybody. Let's work together and see if we can have success.

Speaker 2

And those guys have just been terrific partners every step of the way and continue to do so. And as such, I think we have a real opportunity to not only create value for Hallador, but create value for Hoosier win it win our EMC and their customers.

Speaker 4

Got it. Really appreciate all the color. Brent, to you as a team, all the best of luck. Thank you.

Speaker 2

Thank you, Lucas.

Speaker 3

Okay. It seems we

Operator

have no further questions in the queue for today. So I would like to hand back to Brent Bilsen for any concluding remarks. My apologies. We do have we have just had a question registered. And we have a question on the line here from Robert Ziegler.

Operator

Robert Ziegler, your line is now open. Please go ahead.

Speaker 5

Hi. It's Roger Ziegler, your individual investor. Thanks again for your time, guys. So in recapping, the and one question and a comment. Is there anybody else in the coal industry who is making or has made this transition into integrated vertical integrated independent coal producer and a power producer as you are?

Speaker 5

That's my first question, I guess.

Speaker 2

To my knowledge, how old was the only company that has acquired and has interest to acquire more coal fired power plants in a public structure. And so we're happy and excited about what we were able to do at Merrell. We think there are other possible opportunities out there to replicate. And so we will but as far as other people in the industry doing this, I know of some others that are buying plants in a private structure, but I'm unaware of anyone doing it in a public structure. It's not to say it doesn't exist, it's just to say I'm unaware of it.

Speaker 5

Okay. And I think you've pretty much answered this, but just for how we should think about the say the 2024 outlook, there's some tremendous opportunities. It sounds like you're really building for like on a 3, 4 year build out. But the is it as simple as if you get in Indiana and maybe the surrounding power areas get it finally get a hot summer following the 2nd warm winter in a row. Is that going to just be like it's going to springboard net gas coal and your power markets considerably, correct?

Speaker 5

I mean, is it that simple?

Speaker 2

Yes. I mean, power markets can move so quick. I mean, we can see spot prices one day be $20 a megawatt hour and 3 days later they're $2.50 I mean, but those are weather driven events. We're trying to get to a contracted sales book and we're having a lot of success to do that and doing that and doing so. And we have a huge amount of business out for bid as we speak.

Speaker 2

But we'll see how successful we are in securing those contracts. But I think we have multiple customers, multiple avenues, particularly with the MOU now to add to that. And what excites us is we see Hallador and its traditional margins that it made in coal and then we see what if you look at our sales table in the 10 ks when it gets published in the next day or so. Look at the pricing for power, particularly when you get out in the 26%, 27%, 28% range, our margins are dramatically higher. And we think we can continue to have success contracting for power and capacity at higher margins.

Speaker 2

We haven't gotten our sales book filled out as fast as I would have liked, but I think our team has done a terrific job. And the way we're going about it and you have to find willing dance partners And they're showing up. It just takes more time because it's a very bespoke process in filling that out. And so our earnings are going to be a little episodic depending on weather here for the next handful of quarters. We were the market changed so dramatically from our earnings call in November, what we saw the power curve there for December, January, February versus what it actually ended up being, was completely a different number just based on the fact that we had what some people are calling the warmest winter in history, right?

Speaker 2

We don't know what that means for the spring and the summer. If it's hot, one thing about it, the windmills MISO has a very high percentage of windmills. It has very little solar panels that have been built, very little, like 0.5 percent of their generation. But the wind tends not to blow on hot days. So we're actually seeing theoretically, we think we'll see a peak in the summertime versus where we used to see it in the wintertime.

Speaker 2

So that's what we're looking at. We're in contract discussions with customers to see how soon we can start pulling some of these higher prices forward. And so that's what our team will be working on this summer. And we'll just have to see how it plays out. Hopefully, we see some warm weather that would certainly be helpful.

Speaker 2

But long term, we're just extremely excited because we think the earnings potential of the company has dramatically improved. And we feel that our future sales book is starting to demonstrate that to the public. So what I don't know from a shareholder perspective, will investors be focused on this quarter and next? Or will they be focused on what we're building that's later this year and early into next year and beyond. So stay tuned.

Speaker 5

Yes. To say you're basically spring loaded is seeming to be an understatement with the things you have in place here. So good luck on that and appreciate it.

Speaker 2

All right. Thank you for your question.

Operator

Thank you. We have no further questions in the queue. So I'd now like to hand back to Brent Bilton for some closing remarks.

Speaker 2

I want to thank everyone for taking the time today to tune into our call and your interest in Hallador Energy, we greatly appreciate it. Thank you.

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