Hallador Vitality Firm (HNRG) This fall 2023 Earnings Name Transcript

Hallador Vitality Firm (NASDAQ:HNRG) This fall 2023 Outcomes Convention Name March 14, 2024 2:00 PM ET

Firm Individuals

Becky Palumbo – IR

Brent Bilsland – CEO

Larry Martin – CFO

Convention Name Individuals

Lucas Pipes – B. Riley

Operator

Hiya, and welcome to the Hallador Vitality Firm’s Proclaims Fourth Quarter 2023 Earnings Name. My identify is Harry, and I will be your coordinator right this moment. [Operator Instructions].

Now I would now like to show the decision over to Becky Palumbo, Investor Relations, to start. Please go forward.

Becky Palumbo

Thanks, Harry. Good morning, [indiscernible] Hallador Vitality’s name for the fourth quarter and full yr 2023 [indiscernible] right this moment are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Yesterday afternoon, Hallador launched its fourth quarter and full yr 2023 monetary — in a press launch. Right now, we’ll focus on these outcomes in addition to our perspective on present market circumstances and outlook for 2024.

Following our ready remarks, we’ll open the decision to reply your questions. Earlier than starting, a reminder that a few of our remarks right this moment might embody forward-looking statements topic to a wide range of dangers, uncertainties and assumptions contained in our filings from time-to-time with the Securities and Alternate Fee and are additionally mirrored in yesterday’s press launch.

Whereas these forward-looking statements are primarily based on info presently accessible to us, if a number of of those dangers or uncertainties materialize or if our underlying assumptions show incorrect, precise outcomes might range materially from these we projected or anticipated.

In offering these remarks, Hallador has no obligation to publicly replace or revise any forward-looking statements, whether or not on account of new info, future outcomes or in any other case, except [indiscernible]. Lastly, Hallador will file a Kind 10-Okay someday this week.

And with that stated, I’ll flip the decision over to Larry.

Larry Martin

Thanks, Becky. Good afternoon, everybody. Earlier than we get began, I wish to make a definition of adjusted EBITDA as working money flows much less the consequences of sure subsidiary and fairness methodology funding exercise plus financial institution curiosity much less the consequences of working capital interval modifications plus money paid on asset retirement obligation reclamations plus different amortizations.

For the fourth quarter, Hallador incurred a web lack of $10.2 million, $0.31 fundamental earnings per share and $0.27 per diluted earnings per share. For the yr ended December 31, 23, we had $44.8 million of web revenue or $1.35 per fundamental earnings per share and $1.25 for diluted earnings per share. We had adjusted EBITDA of $1.7 million for the quarter and $107.3 million for the yr. We elevated our financial institution by $29.8 million for the quarter and $6.3 million for the yr.

Our funded financial institution debt as of the tip of December 31 was $91.5 million. Our letters of credit score had been $18.6 million. Our web funded financial institution debt was $88.7 million. Our leverage ratio for debt to adjusted EBITDA was 1.3x on the finish of the yr.

I’ll now flip the decision over to Brent Bilsland, our CEO.

Brent Bilsland

Thanks, Larry. First, I would wish to thank the Hallador workforce for his or her exhausting work and dedication on ending a stable yr for our firm. Whereas the fourth quarter highlighted some operational challenges and the episodic nature of our energy revenues, I do not need these challenges to overshadow the optimistic yr that we had as an organization.

Along with close to document margins in our — on our coal division for the complete yr, the continued integration of Hallador Energy into our portfolio with the springboard to document web revenue, our highest revenues ever and a future gross sales e book that’s approaching $1.5 billion and continues to develop as demand for power and capability improve. We’re seeing success in promoting contracted contingent power at glorious costs. And in gentle of that, we’re additionally specializing in capital expenditures to organize the plant to help these contracts in future years.

We’re additionally very enthusiastic about our lately signed settlement and construction with Hoosier Vitality and their distribution member, win, REMC that ought to enable us to draw industrial customers of energy, similar to information facilities, AI suppliers and energy dense producers to the Merom property. We consider leveraging our plan to assist provide these giant customers of power ought to enable us to function the plant extra effectively in a unstable energy surroundings and generate elevated margins at or above what we are able to obtain in our — within the conventional wholesale market.

We’re already seeing elevated curiosity and pleasure across the prospect of such a providing. If we achieve attracting high-powered demand buyer via this construction, it strikes Hallador up the electrical energy worth chain offering extra margin and stability to our earnings for years to come back. Mixed with our elevated quantity of Ford energy gross sales, we consider some of these alternatives will proceed to enhance the long-term outlook for the corporate and supply a steady platform to leverage each our energy and coal property in a accountable, sustainable and worthwhile method.

We have now been very deliberate in structuring these bilateral gross sales contracts to restrict our publicity to unplanned and for that matter, deliberate outages and different sudden challenges in what we count on to be an more and more unstable energy market. Negotiating offers on this manner protects us from draw back danger however can be extraordinarily bespoke course of, which takes considerably extra time than merely agreeing to agency energy contracts and accepting that extra danger.

The offshoot of that is that whereas we methodically construct our gross sales e book, we’re topic to the whims of the spot energy market. And extra particularly, to the climate and different elements impacting short-term electrical demand. As we noticed all through the final a number of months, when you’ve got 60 and 70-degree days in winter, the everyday power costs, we’d count on to get — see, get thrown out the window, and you find yourself in a scenario the place the plant merely doesn’t dispatch.

The continued despair of pure gasoline costs exacerbated this problem and our fourth quarter outcomes had been impacted by all of those elements. Simply for example, whereas the typical spot value for power at Merom was round $69 in 2022, the delicate winter and low gasoline pricing drove the typical value right down to about $31 in 2023. The spot market pricing actually highlights the significance of the longer-term contracts that we proceed to place in place, particularly as we proceed to spend CapEx to prepared the plant to help these gross sales.

Since January of 2023, we’ve got contracted almost $500 million in future power and capability offers. Many of those offers prolong via 2028 with the upper contracted costs occurring in ’26, ’27 and ’28. Along with the fourth quarter challenges at Merom, we additionally proceed to battle towards geology, inflationary stress and operational challenges in our coal division alongside the continued retreat of the coal markets from the largely elevated pricing of the final couple of years.

In response to those altering occasions, we took steps to help liquidity and to extend the effectivity of our operations. In December, we carried out an at-the-market providing program beneath our present shelf registration assertion as a instrument to fund any short-term financing wants. Below the ATM, we bought roughly 800,000 shares of Hallador inventory in December of ’23 and raised roughly $7.3 million of fairness. We bought an extra 700,000 shares or so of Hallador inventory in January of 2024 and raised an extra $6.6 million.

As well as, in February, a number of members of our Board additional bolstered our liquidity via unsecured 1-year notes totaling $5 million. We’re additionally beginning to see capability income are available, which, together with the gadgets I simply mentioned, will add to the liquidity place and provides us extra optionality and as strategic alternatives like hedging, acquisitions or different methods to enhance our stability sheet current themselves.

Our near-term actions to enhance liquidity will probably be executed in a prudent and strategic method to answer altering occasions or to reap the benefits of market alternatives and furtherance of our long-term outlook. In February, we additionally restructured our coal operations in an initiative designed so as to add effectivity to our operations and create greater margins in our Coal phase. As a part of this initiative, we idled manufacturing at our higher-cost Prosperity mine and considerably idle manufacturing on the Freelandville mine the place we count on to complete reclamation late within the second quarter of 2024.

These strikes ought to cut back our capital reinvestment for coal manufacturing in 2024 by roughly $10 million, thus decreasing CapEx for our coal division from $35 million to roughly $25 million. We’re additionally focusing our 7 items of underground gear on 4 items of our lowest value manufacturing at Oaktown. As a part of this initiative, we decreased our workforce by roughly 110 workers, which we count on to begin creating OpEx financial savings as soon as the warrant interval expires within the second quarter.

Whereas this was a tough resolution on a private degree, it was the appropriate factor to do for the corporate, and we consider that it’s going to enhance our operational effectivity comparatively rapidly. By specializing in our best mining and highest margin coal, we count on to provide about 4.5 million tons yearly of higher-margin coal as in comparison with 6 million historic tons of manufacturing on the Oaktown mining advanced.

Moreover, in 2024, we’ve got secured supplemental coal from third-party suppliers at favorable costs. This enables us to diversify self-production provide danger and offers us with extra flexibility in our gross sales portfolio. The optionality to acquire low-cost tons both internally or from third events, whereas capturing upward swings in commodity markets for coal and electrical energy ought to additional maximize margins whereas optimizing gasoline prices at Merom.

As we enter the historically delicate spring, seasonal electrical energy costs may stay weak. Nonetheless, we stay excited in regards to the transformation of Hallador from a commodity-focused producer of coal to a vertically built-in impartial energy producer. We consider that this transition offers vital alternative to seize the elevated margins of the power markets to reap the benefits of the hovering demand for electrical energy and to step up the worth chain in a extra sustainable and future-proofed trade that which we’ve got historically — been that, of which we’ve got historically operated in.

As evidenced by the continued construct of our long-term gross sales e book, this deliberate motion into the electrical energy sector ought to materially strengthen our firm and the merchandise that we promote. As I stated in the beginning of my feedback, regardless of a difficult quarter, I am more than happy with our annual outcomes and the continued evolution of Hallador as an organization.

That concludes our ready remarks. I am going to now open the road up for questions.

Query-and-Reply Session

Operator

[Operator Instructions] And our first query right this moment is from the road of Lucas Pipes of B. Riley.

Lucas Pipes

I first needed to the touch on the liquidity and the way you concentrate on it. So the ATM somewhat bit late final yr, earlier this yr, they had been the unsecured notes. Do you handle to a minimal money stability or minimal liquidity stability? I might respect your ideas on that.

Brent Bilsland

Nicely, I believe — look, we’re — on this — till we end filling out our gross sales e book, which we predict we’ve got huge alternatives in entrance of us so as to add to that place this yr. There’s loads of RFPs out, loads of curiosity however within the meantime, we’re very topic to identify costs of energy, which may be very a lot influenced by the climate or like there — so once we take into consideration liquidity, you’ll be able to by no means have an excessive amount of, proper?

However that being stated, I imply, we’re — our Board of Administrators on roughly 31% of the shares. And so our pursuits are very a lot in keeping with the shareholders as a result of we’re substantial shareholders, together with myself. And so it is a stability. We have now to have a look at what do we predict energy costs will probably be for the yr? And the way a lot liquidity do we have to fulfill our obligations of enhancing the plant retaining the coal mines up in tiptop form.

We most likely had about as a lot because it may go fallacious within the fourth quarter went fallacious, proper? We had half the plant off-line. A part of that was deliberate. A part of that was off unplanned. We had moved loads of gear round on the coal mines, making an attempt to get all 7 items in higher manufacturing. And eventually, in February, determined we had been going to give attention to our 4 finest items of manufacturing, and we had been going to purchase some coal from third events.

And so there’s only a lot that goes into that query. I do not suppose we’ve got a precise goal quantity. I believe it is extra — we’re taking a look at our gross sales e book and what the alternatives are and the place we are able to get comfy with margins locked in contractually in managing the liquidity till we attain that time within the street.

Lucas Pipes

Received it. Actually respect — actually respect that. And turning a bit to sort of the Q1 outlook. You already talked about the climate hasn’t been supportive. What insights would you be capable of present right here at this level because it pertains to Q1? How a lot of these points sort of continued into the quarter.

It seems like they did not less than on the coal facet. And for the complete yr, what kind of quantity ought to we anticipate at this level? After which on the facility facet, is that a part of the dialogue round sort of filling out the gross sales e book? Or was that basically extra with reference to coal?

Brent Bilsland

All proper. So I am undecided I received all of your questions, Lucas. On the gross sales e book, the place we see alternatives is, look, the market is brief capability, proper? We have seen these energy technology provide has been comparatively flat for about 20 years. After which we have been on this transition interval of perhaps a decade of closing baseload and changing it with non dispatchable sources.

And that has shrunk the accredited capability. And I imply, MISO says, they have some reviews out that, say, within the subsequent couple of years if individuals retire property. As introduced, the reserve margins go unfavourable. So that will not occur. So but it surely simply sort of reveals how tight the scenario has turn out to be from a technology viewpoint, notably in MISO.

And now you add on this explosion of AI, proper? Imply the expansion in that trade is simply sort of unprecedented, proper? And there is all kinds of reviews. So I do not actually know which numbers to consider. However basically, these corporations which are making an attempt to race to develop AI, they cannot discover locations to plug in. And so their brief capability, we occur to be lengthy capability.

And that is sort of occurring in all places, proper? We have talked to loads of completely different utilities about the place they’ve curiosity in promoting there are different vegetation to us. And there is at all times some curiosity on the market. However what’s additionally been stunning is what number of have stated, sure, we all know we present a retirement date and we’ll push that out as a result of we’re seeing all of this new demand out of the blue present up from manufacturing from Europe, from AI, from EVs. So it is — the long-term pattern from us, we’re extraordinarily bullish.

The brief time period, we’re relying on climate within the spot market till we really feel this e book out. However there are main RFPs out proper now for energy and capability, and we really feel we’ve got a excessive chance of success in acquiring a few of that. We’re extraordinarily enthusiastic about this new construction, we had been capable of get Hoosier and win REMC to work with us on to attempt to entice excessive high-demand customers of energy to our web site as a result of we really feel that, look, both that is going to supply us higher phrases than we are able to get within the wholesale market, and we’re not going to do it.

However we really feel simply from the early indications and please take into accout, we simply signed this settlement like every week in the past. So we’re early on this course of however we will probably be working an RFP to see who’s fascinated with finding our web site and may we get phrases which are higher than what we see within the long-term wholesale market. Definitely, you are going to see us add to each positions. And I hope this yr in a really significant manner.

On the coal facet of the enterprise, Merom is a big buyer of our Dawn Coal division. And when you look — you may see within the 10-Okay once we launch that, we went forward and contracted that enterprise to ourselves simply to attempt to add extra readability and set that value out for the following handful of years. And once we do this, it actually sort of reveals that materially for the following 4 years, we’re extraordinarily effectively hedged or bought, contracted on the coal facet of the enterprise.

So I believe that answered 2 of your questions. I can not keep in mind what the third was.

Lucas Pipes

This was very useful. The third one, was on the outlook for Q1 and the complete yr. I do have one other query on the MOU. So perhaps because you talked about it, I am going to increase this one first. Is that this an MOU for behind-the-meter energy basically? After which how rapidly do you suppose you could possibly see one thing materialize and I would assume you’d have some building that would want to happen the construct out of a knowledge heart, what have you ever. So sort of finest case, when may you provide energy to a buyer?

Brent Bilsland

Sure. So we’ll exit for RFP this spring, hopefully, subsequent month. We’re making an attempt to get that with a purpose to see what the calls for of the markets are. We have now, I believe, a good quantity of flexibility on what we are able to supply prospects. And fairly frankly, I do not know what the construct occasions will probably be.

We have had some prospects with out an RFP knock on our door, say they’d like to start building in 3 months. I believe that is most likely too aggressive. May we see one thing as early as subsequent yr? Probably. However we’re probably not far and off alongside in these conversations to provide any steerage round what the timing is. I believe what we’re enthusiastic about is simply what we have seen different corporations do each in Indiana and all through the Midwest, we have seen some actually giant developments and people costs do not get revealed, however they do get whispered and if that holds true, we’re enthusiastic about what that would doubtlessly be.

Once more, till we see an RFP outcomes, it is actually exhausting to say. We’re simply excited in regards to the alternative. After which so far as our first quarter, we noticed one week of actually chilly excessive climate. So the facility vegetation carried out effectively via that interval, and that was a worthwhile time. And the remainder of winter up to now has been extraordinarily delicate. I imply, it is — we have had some 60 and 70-degree days in each February and March in Indiana. So we do not know what meaning.

We’re heading into the shoulder season right here subsequent month. That historically is low energy demand, however winter is historically excessive energy demand, and that hasn’t proved to be the case. So we’ll see if this seems to be a scorching summer time, we’re inspired by we have extraordinarily low-cost gasoline right this moment. After which while you begin to get out to October, November, we’ve got affordable gasoline costs once more up within the 3s and $350 vary each month thereafter.

So the facility curve is seeing that, and it has remained sturdy up to now however short-term costs have been low-cost. And so we’ll simply handle via that. And that is why we’ll — we’ll maintain a really shut eye on liquidity to ensure that we’re profitable. And there might be some alternatives once more right here with the MOU that we simply signed.

Lucas Pipes

Sure. Directionally, would you count on Q1 to be worse than This fall?

Brent Bilsland

Nicely, I am not ready to provide steerage on Q1 at a 10-Okay earnings name. So we’ll wait and see what these outcomes are. Quarter will not be over.

Lucas Pipes

Useful. I am going to do one final one. Why was it crucial for Hoosier to be a part of the MOU?

Brent Bilsland

So we, as Hallador, are solely allowed to promote wholesale energy. And while you begin attracting prospects for information facilities and what not, that’s industrial energy. And in order that technically must be bought via a construction that includes Hoosier and their distributed cooperative win REMC. And so we principally negotiated with them for a time frame to say, hey, there’s a possibility right here for everyone.

Let’s work collectively and see if we are able to have success. And people guys have simply been terrific companions each step of the best way and proceed to take action. And as such, I believe we’ve got an actual alternative to not solely create worth for Hallador however create worth for or when REMC and their prospects.

Lucas Pipes

Received it. Actually respect all the colour. Brent, to you and the workforce all the perfect of luck.

Operator

[Operator Instructions] It appears we’ve got no additional questions within the queue for right this moment. So I wish to hand again to Brent Bilsland for any concluding remarks. My apologies, we’ve got simply had a query registered. And we’ve got a query on the road right here from Robert Lietzow

Unidentified Analyst

It is Roger Zigler particular person investor. So in recapping — the — and one query and a remark. Is there anyone else within the coal trade who’s making or has made this transition to built-in — vertically built-in impartial gold producer. Or energy producer as you’re. That is my first query, I assume.

Brent Bilsland

It is a good query — to my data, Hallador is the one firm that has acquired and has curiosity to accumulate extra coal-fired energy vegetation and a public construction. And so we’re completely satisfied and enthusiastic about what we had been capable of do at Merom. We expect there are different attainable alternatives on the market to copy. And so we’ll — however so far as different individuals within the trade doing this, I do know of some others which are shopping for vegetation in a non-public construction, however I am not conscious of anybody doing it in a public construction. It is to not say it does not exist simply to say, I am unaware of it.

Unidentified Analyst

Okay. And I believe you’ve got just about answered this, however only for how we must always take into consideration the, say, the 2024 outlook, there’s some large alternatives. It sounds such as you’re actually constructing for like on a 3-, 4-year build-out however the — is it so simple as when you get in Indiana and perhaps the encompassing energy areas get it lastly get a scorching summer time following the second heat winter in a row? Is that going to only be like it’ll springboard nat gasoline, coal and your energy markets significantly, appropriate? I imply is it that straightforward?

Brent Bilsland

Sure. I imply energy market goes to maneuver so fast. I imply we are able to see spot costs at some point be $20 a megawatt hour and three days later, they’re $250. I imply these are weather-driven occasions. We’re making an attempt to get to a contracted gross sales e book, and we’re having loads of success to do this and doing so. And we’ve got an enormous quantity of enterprise out for bid as we converse. However we’ll see how profitable we’re in securing these contracts.

However I believe we’ve got a number of prospects, a number of avenues, notably with the MOU now so as to add to that. And what excites us is we see Hallador and its conventional margins that it made in coal. After which we see what — when you take a look at our gross sales desk, within the 10-Okay when it will get revealed within the subsequent day or so. Have a look at the pricing for energy, notably while you get out within the ‘ 26,’ 27, ‘ 28, vary, our margins are dramatically greater, and we predict we are able to proceed to have success contracting for energy and capability at greater margins.

We have not gotten our gross sales e book crammed out as quick as I might have favored, however I believe our workforce has executed a terrific job. And the best way we’re going about it, and it’s important to discover prepared dance companions they usually’re exhibiting up. It simply takes extra time as a result of it is a very bespoke course of and filling that out. And so our earnings are going to be somewhat episodic relying on climate right here for the following handful of quarters, we had been — the market modified so dramatically from our earnings name in November, what we noticed the facility curve there for December, January, February versus what it really ended up being was fully a distinct quantity simply primarily based on the truth that we had what some persons are calling the warmest winter and historical past, proper?

We do not know what meaning for the spring and the summer time the tunnel. If it is scorching, one factor about it, the windmills MISO has a really excessive share of wind mills. It has little or no photo voltaic panels which were constructed little or no. Like half of their technology. However the wind tends to not blow on scorching days. So we’re really seeing — theoretically, we predict we’ll see a peak within the summertime versus the place we used to see it within the wintertime.

So that is what we’re taking a look at. We’re in contract discussions with prospects to see how quickly we are able to begin pulling a few of these greater costs ahead. And so that is what our workforce will probably be engaged on this summer time. And we’ll simply need to see the way it performs out. Hopefully, we see some heat climate, that will surely be useful. However long run, we’re simply extraordinarily excited as a result of we predict the earnings potential of the corporate has dramatically improved.

And we really feel that our future gross sales e book is beginning to reveal that to the general public. However I do not know from a shareholder perspective, will traders be targeted on this quarter and subsequent? Or will they be targeted on what we’re constructing that is later this yr and early into subsequent yr and past. So keep tuned.

Unidentified Analyst

Sure. To say your principally spring loaded is seeming to be an understatement with the issues you’ve got in place right here. So good luck on that. And respect it.

Operator

Thanks. And we’ve got no additional questions within the queue. So I would now like at hand again to Brent Bilsland for some closing remarks.

Brent Bilsland

I need to thank everybody for taking the time right this moment to tune into our name and your curiosity in Hallador Vitality. We tremendously respect it. Thanks.

Operator

This concludes right this moment’s name. Thanks all for becoming a member of. You might now disconnect your traces.