Hallador Energy Co Q4 FY2021 Earnings Call

Thank you, Elliot. Thank you everybody for taking the time to join us today. As a reminder, this event is being webcast live and the replay will be available on our website later today. Yesterday afternoon, we released our fourth quarter 2021 financial and operating results on Form 10-K, followed by a press release containing certain financial metrics, which are now posted on our website. Today, we will discuss the results and our perspective on market conditions and outlook. Following the prepared remarks, the call will open up to questions. This call may contain 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 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. For example, our estimates of mining costs, future costs, sales, legislation and regulations relating to the Clean Air Act and other environmental initiatives. 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 as such may be required by law. For a discussion of some of those risks and uncertainties that may affect our future results, you should see the risk factors described from time to time in the reports we file with the SEC. So today on today's call we have Brent Bilsland, our President and CEO; and Larry Martin, our CFO. And with the preliminaries out of the way, I turn the call over to Larry.

Thank you, Becky and good afternoon, everybody. First, I wanted to get a definition out of the way. We define adjusted EBITDA as operating cash flows plus gain on extinguishment of our PPP loan plus current income tax expense less the effects of certain subsidiaries and equity method investments plus bank interest less the effects of working capital changes plus other amortization. So for the year ended December 31, 2021, we had a net loss of 3.8 million or $0.12 a share. Our adjusted EBITDA was 50.3 million and our bank debt decreased by 26 million. At the end of '21, we had 111.7 million of bank debt. Our net debt with our cash on our balance sheet was 109.2 million. And our leverage ratio which is debt to EBITDA was 2.34 times. I'll now turn the call over to Brent Bilsland, our CEO.

Thank you. As we reflect on 2021 and look forward to 2022 and beyond, we feel the last year was the year the economy reopened. 2020 will be the ramp-up year and integration of our soon-to-be-acquired near power generation station. The 2023 and the following years appear to have the potential to be fantastic for Hallador shareholders. So first, let's review 2021. We shipped 6.2 million tons and produced 5.8 million tons of coal during the year. Pricing for new business in Q1 was terrible and we chose not to participate in making new sales at that time. But as the year wore on, the market strengthened dramatically. We chose to make forward sales for the years 2022 through 2026, totaling 5.8 million tons with 4.5 million of those tons being delivered over the next three years. In the fourth quarter, as markets improved, we began focusing on increasing our production ramping from 5.8 million tons of production to our target of 7 million, a 21% increase. To date, we have increased our headcount by 70%. Our productivity increases have been challenging. As we take turnover into consideration, we had a lot of new employees that require extensive training. At this point, we mined through a handful of difficult areas to enable setting up our underground for additional units of production. The whole mine is reaching the near reserve life resulting in higher than historical costs. It will mine out in a few months and we will put a new pit, which will result in lower mining costs. Despite higher costs, we were able to generate 48 million of operating cash flow, 6.3 million of adjusted EBITDA and reduced our bank debt by $26 million. As of December 31, 2021, our bank debt was 111.7 million bringing our liquidity to 35.9 million, and our leverage ratio to 2.34 times, which is within our covenant of 3x. Turning our attention to 2022, we anticipate producing a total of 7 million tons. Our production volumes have increased but are still not at the 7 million ton pace. So we expect more shipments in the back half of '22 than in the first half. Our average sales price is 37% higher than 2021 and we expect those to count to average roughly $31 per ton for the total full year 2022. So we expect slightly better margins on more tons in 2022. CapEx for our coal operations is expected to be 25 million in 2022. Our big news was recently made public on February 15 as Hallador announced its new wholly-owned subsidiary, Hallador Power Company, will acquire Hoosier Energy’s 1 gigawatt Merom Generating Station located in Sullivan County, Indiana, in return for assuming certain decommissioning costs and environmental responsibility. The transaction includes a 3.5-year power purchase agreement that is scheduled to close in mid-July upon obtaining required government financial approvals. We expect Hallador Power to contribute little power profit in 2022 as plant fuel is limited, meaning it doesn't have enough fuel to operate in many hours in 2022. However, this acquisition is significant starting next year as we begin to have additional fuel to put to the plant. At which time, we believe Hallador Power will begin to double Hallador Energy’s adjusted EBITDA. Additionally, at the end of the plant’s useful life, Hallador and Hoosier expect to finalize a PPA to allow for renewable energy development at the site. This transaction makes Hallador very unique as it is an example of how Hallador can help its customers transition to renewables, providing critical capacity to them in the near-term to maintain grid reliability, while creating a path to renewables through a PPA in the future. We are working to increase our liquidity to allow for increased working capital and enable forward power sales. As such, on March 25th, we executed an amendment to our credit facilities to maintain our leverage covenant at 3x. We anticipate adding more liquidity to our balance sheet prior to our anticipated acquisition of Merom in mid-July. All of these actions are setting up 2023 and beyond to be very special for Hallador. First, of the 5.3 million tons we have sold to parties in 2023, our average sales price is $3.29 per ton higher than in 2022. Additionally, we have 2 million tons of coal beyond the $5.3 million to sell to the Merom power plant. This removes the fuel limitation at Merom. Russia's invasion of Ukraine has fundamentally changed the world's focus on energy independence and procuring resources from suppliers other than Russia for the next few decades. With all forms of energy experiencing much higher prices, power prices are higher as well and we have a large open position of both power plant capacity and energy starting from June of 2023. As we have previously stated, we believe this puts Hallador in a position to move to double-digit adjusted EBITDA in 2023. Maintenance CapEx for Hallador Power in 2023 is expected to be 16 million. In order to run the plant past 2025, we will be required to spend some money on environmental controls. We are currently evaluating how best to meet those requirements. In summary, Hallador Energy is becoming a fundamentally larger company. Our wholly-owned subsidiary Sunrise Coal will increase its production by over 20% going forward. And our new wholly owned Hallador Power subsidiary will generate adjusted EBITDA equals to or greater than Sunrise Coal. All of this points to a very bright and lasting future for our shareholders. With that, I'll open the mic up for questions.

Our first question comes from Lucas Pipes from B. Riley Securities.

My first question is about the proposed transaction, and I want to clarify what happens after the initial 3.5-year term. Is that when the power plant is retired, or would you be able to extend the operating life of the coal plant beyond those 3.5 years?

So we are contracted with Hoosier to sell all of the capacity and energy through May of 2023, and then it steps down and continues to 2023 through December of 2025 to roughly 30% of the capacity and 21% or 20% of the energy. We do not have any environmental upgrades to the plant to run through 2025. Beyond that, we'll have to spend some money on ELGs and we're still evaluating the best way to comply with that and what the cost structures are. We will make a decision on that sometime next year. At current market prices, we think it absolutely makes sense to make those investments, but we will evaluate all of that over the coming 12 months.

And if you make those investments, what would be the operating life of the plant?

That's largely based on economics. Right now, there is simply not enough rated capacity to really keep the lights on. The grid operator has declared a state of emergency due to significantly low reserve margins. They believe that their grid could reach 80% renewables by 2050. I think the market will determine how long it needs the capacity from our plant, but we have seen strong demand for our excess capacity since announcing this transaction in mid-February. And we have one supplier calling in four hours after the announcement saying, 'I'll take all the capacity you have.' The issue is all the utilities, especially public utilities, want to transition, but they all have the same game plan, and you can't shut down generation that's rated at 92% of main play and replace that with a rated capacity of 25%. To do that, you have to overbuild the lower rated capacity and build an enormous amount of transmission lines, which take about a decade from planning to permit meetings and then they have to be built. It remains to be seen how long this transition will last. So how long will this plant last? Clearly, it's going to be determined by the market. It looks, from a supply standpoint, like it has a long life ahead. But the market conditions change every day. I am confident that the economics will take us to 2025. We're studying our environmental costs to extend the plant's life beyond that, and we are optimistic.

And then in terms of your balance sheet. So on my numbers, it appears that you would generate sufficient free cash flow between now and maturity to essentially just pay this off out of cash. So could you share with me how you think about refinancing opportunities and what sort of options you're considering here at this time?

What we're looking at is that the closing is dependent on permit transfers and financial approvals. We need to obtain permission from our bank group to allow Hallador Power to include the Merom plant in our collateral position. Simultaneously, our credit facility will expire towards the end of this year. We want to enhance our liquidity so that as we take on additional working capital, we ensure we have enough liquidity to capitalize on market opportunities. With rising power prices, the global landscape changed significantly when Russia invaded Ukraine. Russia is the world's leading gas exporter and a major exporter of oil and coal. Now, 80% of the world has decided to avoid Russian coal. Consequently, Europe is looking to the United States, which is significantly driving up prices here as well. Hallador now has the flexibility to determine where to sell its tons for the best return to shareholders.

So the way to think about maturity is that this is being renegotiated here as part of this transaction?

Correct. It is being renegotiated. With our term extension, we're looking for increased liquidity to allow it as part of our collateral package, and those conversations are ongoing now. But we feel good about it.

And then my last question, I mean, we all know and feel the inflationary pressures. What's your guidance for cash costs? I may have missed it. But how do you think about the cost pressures affecting your operations?

We are all seeing inflationary pressures and supply constraints. You have to compete right now to get inputs such as glue and parts. I think all our suppliers are stretched towards the upper end of their limits as well. How long will this last? Everything indicates that this will decrease throughout the year. Interest rates are rising; fuel prices, electricity prices, and food prices are all higher, which will slow the economy eventually. This year, we are looking at an increase in our cost structure. We believe we will average $31 a ton for the balance of the year. We have added personnel and our productivity is improving, although not as quickly as we would like. We are seeing progress daily, and we are getting closer to our goal of increasing production from 5.5 to 7 million tons. It's a gradual process, but we are working hard towards it. Last quarter's results were strong and we appreciate everyone's patience. We believe we are headed in the right direction, and the potential for the company over the next few years looks promising. The return on investment for shareholders has the potential to be outstanding.

We have no further questions. I will now hand it over to Brent Bilsland for the closing remarks.

I appreciate your time today and interest in the company. Again, I just want to reiterate how excited we are about what we see coming around the corner and the opportunities in front of us. And we thank you for your continued interest. Thank you.

This concludes today's call. We'd like to thank you for your participation. You may now disconnect your lines.