Hallador Energy Company (NASDAQ:HNRG) Q1 2024 Earnings Call Transcript May 7, 2024

Hallador Energy Company isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions] I would now like to pass the conference over to Becky Palumbo, Investor Relations with Hallador Energy. Please go ahead.

Becky Palumbo: Thank you, Dagan. 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, Margi 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 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 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 expected. In providing these remarks, Hallador 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 Marjorie.

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 the sum of operating cash flow 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 reclamations 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 the $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, well within our covenant of 2.25. With that, I’ll turn the call over to our CEO, Brent Bilsland.

Brent Bilsland: Thank you, Marjorie. 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 3 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’s total contracted forward energy capacity and coal sales through 2029 and roughly – 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 if 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 8 new data centers and/or Bitcoin mining facility projects announced in the state of Indiana, where our Marine Power plant is located. We have also seen a major utility amend their integrated resource plan and publicly state that it previously underestimated new electricity demand growth by as much as 17 times. MISO 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’s SIC code to 4911 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 nonstandard mild weather throughout the Midwest impacted pricing and our power plant dispatch rates thus far in 2024. 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 launched a targeted request for proposals for power demand supporting new development at our Merom Power Plant. Responses are due in mid-May, but early indications point to a high level of interest. The RFP is available on our website for any interested parties that did not already received 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. In forward selling capacity, we target annual sales of around $65 million to help offset our fixed annual cost 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 – we’ve already sold a large portion of our future capacity, which we believe makes us our forward capacity sales goal readily attainable for the next several years.

As a condition of acquiring the Merom 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 cost, the 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 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 idle production at our higher-cost prosperity mine and substantially idle production at the Freelandville mine with minimal production until current reclamation projects are completed in late May or in 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 focused our 7 units of underground equipment on 4 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. However, at Oaktown, we saw mining costs in March decrease into the 30s on a per ton 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 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 Merom facility. We continued our build-out of what we consider to be a best-in-class independent power producer management team in April. And in April, we welcome Marjorie Hargrave as our new CFO.

Marjorie comes to Hallador with broad-based experience in power production and capital markets. Adding Marjorie is a continuation of the breadth and depth of the IPP talent we continue to add at Hallador. Over the last 2 years, we have been successful in hiring our President of Hallador Power, a 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’s current operational and future power acquisition capabilities. These prospects and our strong future sales position make us at Hallador very excited about the future of our company. I also want to thank Larry Martin for his 17 years of service at Hallador.

Larry has been a trusted adviser and a friend, and we wish him success and retirement later this year. That concludes our prepared remarks. I’ll now open up the call for any questions.

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