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

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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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Lucas Pipes with B. Riley Financial. Your line is now open.

Lucas Pipes: Thank you very much, operator. Good afternoon everyone. First, I want to add my congratulations to Larry and my best wishes for his retirement.

Brent Bilsland: Thanks, Lucas.

Lucas Pipes: 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 versus just the $36.06. And I wondered if you could remind us what drove that? I have a suspicion, but would be curious to hear more about that. And could you maybe walk us through a pro forma revenue buildup of the Power segment, assuming kind of the forward 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 the plan at $34 megawatt hour. And what we’re trying to – what we stated on the call is that we essentially have sold over 5 million-megawatt hours since that time to other participants and including – well, any of the market at $54. And so we continue to see fairly strong pricing in the forward sales curve. And it’s just a result of – I mean, you can’t pick up the paper any day and not read or hear about how all this new demand we’re seeing from AI and EVs and onshoring. And we’ve got MISO expressing their concerns about could the reserve margin go negative next year, which I don’t even know if that’s possible, but it kind of speaks to the tightness of the market.

And so as we continue to make forward sales, we’re encouraged by the pricing that we see. We also as outlined saw an offer made to us for over $1 billion worth of future energy and capacity sales. So the reason 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 our RFP associated with 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, but we feel that there’s going to be the potential for some very large transactions this year is there.

And so we just kind of wanted to signal that to the market that we’re hopeful that we can transact sometime this year on some very profitable 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 has as we would like to be in the fourth quarter of last year and first quarter of this year, which has meant we have been selling in the spot a large percentage of our power 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 are turning our plant off or we are slowing it down at night or something like that.

So, the goal is to contract a higher percentage of our forward sales so that we can get the plants up and operating and leave them on, right. And so we have stated 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 for more on that front out of us in the future.

Lucas Pipes: So, should we assume – thank you for this Brent. Should we assume that you would be kind of more hedged in the future?

Brent Bilsland: Yes. That’s our goal. We have been trying to do that in a very low-risk way, right. We have talked in the past about unit contingent, plant contingent type transactions in that if we can’t produce, we don’t have to cover. So, those have been slower to put together, but we have been successful in putting those together. And so we will hopefully continue to do more of that. None of that is ever guaranteed. We are just seeing a very large level of interest from a lot of different players. And 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 the site, what would be a good benchmark for the power pricing? Would it be based on kind of MISO pricing in the curve, or would this be a bilateral agreement where prices could deviate from those benchmarks?

Brent Bilsland: Well, we will see. I mean we are – we don’t have the results back from the RFP. We are expecting those data points later this month. But certainly, those type transactions will have to compete with what we can do in the more traditional markets. And we feel that competition is good for us.

Lucas Pipes: Thank you. And can you speak a little bit to the 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 connectivity?

Brent Bilsland: So, we have a 1-gigawatt interconnection at Merom. I believe the transmission line is flowing in and out of that substation there are around 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 the grid.

Lucas Pipes: Thank you for that. But in terms of the kind of fiber access no constraints you are aware of?

Brent Bilsland: Well, pretty much every location has to do some level of fiber build into the location, right, because these are very – potentially I guess the first question is what will the size of the facility be and whatnot. So, those are all questions that we have 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 have been able to tap into that network of people and get really good advice. So, we think that and talking to the customers and talking to our advisors that this is very feasible and there seems to be a high level of interest.

Lucas Pipes: Very helpful. Thank you very much for that Brent. Best of luck. Larry, again, best wishes to you all. I will turn it over. Thank you.

Brent Bilsland: Thank you.

Operator: Thank you, Lucas. [Operator Instructions] Our next question will go to the line of Jeff Bronchick with Cove Street Capital. Your line is now open.