Good afternoon, and thank you for joining Hallador Energy's First Quarter 2022 Earnings Call. My name is Jason, and I will be your moderator for today's call. I will now hand it over to our host, Rebecca Palumbo, with Investor Relations.

Thank you, Jason. Everyone, we appreciate that you took the time to join us today. Yesterday afternoon, we released our first quarter 2022 financial and operating results on Form 10-Q, which is now posted on our website. On today's call, we have Brent Bilsland, our President and CEO, and Larry Martin, our CFO. After the prepared remarks, our management team will be available to answer your questions. Before we begin, please note that the discussion today may contain forward-looking statements that relate 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 significantly from those projected or expected, for example, our estimates of mining costs, future sales, legislation, and regulations. 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. As a reminder, this conference call is being recorded. In addition, a live and archived webcast of this earnings call conference will also be available on Hallador's website. We encourage you to ask questions during our Q&A. Now with the preliminaries out of the way, Larry, you can start.

Good afternoon, everyone, and thank you, Becky. So I'm going to review our operating results. Before I start, I'd like to define adjusted EBITDA as operating cash flows 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 amortizations. Our net loss for the quarter was $10.1 million or $0.33 a share. Our adjusted EBITDA was $2.6 million, and we borrowed an additional $8.3 million of bank debt. Our bank debt at 3/31 was $120.1 million. Our net debt was $115.8 million, and our debt-to-EBITDA leverage ratio was 3.03x. I would like to now turn the call over to Brent Bilsland, our CEO, for his comments on the quarter.

Thank you, Larry. The world is currently experiencing an energy crisis, leading to increased prices for energy-related products. In the first quarter, Hallador faced challenges as our sales price was hedged, preventing us from benefiting from significantly higher market prices during a time when our input costs rose year-over-year due to supply disruptions and inflation. Additionally, our productivity was impacted as we integrated and expanded our new workforce. We shipped 1.4 million tons at an average price of $41.40 during the quarter, with production costs at $39.54 per ton, marking an increase of $4.42 per ton compared to the fourth quarter of 2021. We generated $3 million in operating cash flow during Q1 and increased our bank debt by $8.3 million, bringing our total bank debt to $120.1 million as of the end of March. Our liquidity stood at $20.6 million, and our leverage ratio was 3.03, which is above our covenant limit of 3x. We successfully amended our agreement with banks to ease the debt-to-EBITDA covenant for the first and second quarters. In May, we issued $10 million in convertible notes through two tranches of $5 million each to bolster our liquidity, with purchases made by parties associated with four of our Board members and one unrelated investor. We revised our existing sales contract which allowed for an increase in our average sales price for the remainder of 2022 through 2025. Given the strong sales market, we anticipate negotiating further price increases for 2022 and 2023 later this year. On the production side, we enhanced mining productivity by 20% in April and May, leading to notable improvements in production costs. We expect that these cost improvements, combined with projected sales price increases, will enhance our margins from Q1 and potentially restore them to over $10 per ton as early as June. Looking ahead to the third quarter, we foresee closing on the acquisition of the Merom power plant, pending certain regulatory and financial approvals, which should significantly boost our profitability in 2022 and beyond. However, if we fail to secure additional price increases or maintain production cost improvements, and if the Merom transaction does not close, we may need to seek another covenant waiver for Q3. For 2023, our current average sale price is already $4 per ton higher than in 2022, reflecting a $2 increase during the quarter. We have also reopened pricing on about 25% of our coal production for 2023, which we expect to supply to the newly acquired Merom plant, as it represents our highest value use of these tons. If necessary, these tons could still be sold in the open market at current prices that would yield margins exceeding $50 per ton. In summary, while we are disappointed with our first-quarter results, we are more optimistic than ever about the company's growth potential. We have made significant advancements in our sales price and cost structure in Q2, and we are progressing towards completing the Merom acquisition in Q3 within a strong coal and power market environment in 2022 and 2023. Hallador has traditionally generated $50 million in adjusted EBITDA annually. Given the current coal prices and our anticipated closing on Merom, we expect our adjusted EBITDA for 2023 to exceed $150 million. With that, I'll open the call for questions.

Our first question comes from Neil Rowe, a private investor.

Hi, Brent. My question relates to on May 2, and this information was released on May 6. You had the write-up on the $5 million in notes to the related Board of Director parties. And then subsequent to that, over the last 3 weeks some time, an additional $5 million has been provided by somebody not related to the company. Are the terms identical? Or are they different from what the Board got?

Well, just to clarify, the first tranche was exclusively Board members. The second tranche was 3 Board members plus an unrelated party. All of those terms are materially identical.

Okay. And you talked about the sales going forward and getting more per ton of late, and the prospects look good. I was somewhat surprised on the 10-Q to see the news about how much of the sales in the first quarter have been hedged. Therefore, the higher prices weren't taken advantage of, but that's probably maybe my bad on not knowing the details of that. But how much of the forward sales are already hedged versus being able to garner what the market is?

Yes. So there's a couple of different things at play here. On the coal side, we've got, as I said, 25% of our sales position, which is about 1.7 million tons, is available for sale next year. If we were to sell that on the open market, those prices would be at margins today of $50 a ton or more, which we've not historically seen margins of that level. However, we think we're most likely to acquire the Merom power plant in the third quarter. And so the best use of those tons is to not sell them on the open market but to deliver them to the Merom power plant and convert those into electrons. The power markets and capacity markets, which are the 2 main revenue streams for a power plant, are extremely strong as well. As we saw at the end of the day, that makes us more money. So that's why we haven't been out aggressively marking those tons because we're holding them back for ourselves. And we have no reason to believe today that we won't close on the power plant in the third quarter. So we will be trying to modify some of our existing sales contracts with customers that we think will lead to price increases in the back half of 2022. And the equity raise was to make sure that we have ample liquidity on our balance sheet to make sure we get to the promised land. We think that the power plant, in prior calls, we had said it would not be profitable in 2022. We are reversing that statement to say it would be profitable in 2022. And this could be as early as July. So we're down to 35, 40 days, something like that would be the earliest we could close on the plant. Again, we are waiting for financial and regulatory approvals, which we've made a lot of progress on. I don't want to get into the details on that. But sitting here today, we're pretty happy. So we think that both the existing business will be much more profitable in the second half of this year, and it will be extremely profitable next year, and that the power plant is likely to add to profitability starting in the third quarter.

Good. I have another question. Regarding the Merom plant, it’s my understanding that Hallador will be responsible for any environmental liabilities and issues. What does that entail? This is somewhat uncharted territory, isn’t it? What are the risks associated with it and how have they been assessed? What do you anticipate the outcome will be?

To clarify, we are not assuming liabilities as stated in the press releases, but rather certain environmental responsibilities. We believe we have successfully defined which assets we are acquiring and which we are not. Our purchases include a power plant, a rail facility, and a CCR-certified landfill. We regard all of these as valuable assets, both individually and collectively. We have worked hard to ensure that we do not take on significant environmental risks and that we can generate value from all three assets.

I have one final question, if that's alright. I apologize for prolonging this discussion. Looking ahead, if you acquire the Merom plant and given the current situation in the country, the demand for energy may persist longer than previously anticipated. Considering that, what are your plans for converting solar power and who will be involved in that process? What costs should we expect? My understanding is that this is not a straightforward transition and won't be resolved quickly. How do you foresee this evolving in the future? It appears that this may take more time, but what is your perspective on how it will all come together?

Our goal today is to acquire a coal-fired power plant and operate it as long as market conditions indicate that it is necessary. Recently, a commissioner from FERC mentioned that the transition to renewable energy has progressed too quickly and is pushing the limits of what is feasible. It has become clear that the country is rapidly shutting down generation sources that can be turned on, such as coal, gas, and nuclear plants. In contrast, solar and wind sources are dependent on natural conditions; they can't be turned on at will. Solar energy isn't available at night, and while batteries are a solution for managing supply and demand, the technology is still developing and not yet fully capable. Meanwhile, grid operators are struggling to maintain a stable power supply. For example, MISO, which covers 15 states and includes our Merom power plant, has warned that they may have to reduce load this summer and declared an emergency earlier this year. Other grid operators like PJM, MISO, ERCOT, and CAISO are also indicating that we're running low on reserve capacity. Although there is progress in transitioning to renewables, current backup systems are still needed. Over time, we expect improvements in transmission lines and battery technology, but it’s uncertain if that will take 10 or 20 years. Our president claims we will reach 80% renewable energy in six years, but I find that unrealistic. On the other hand, grid operators predict it may be achievable in 28 years, which seems more plausible. The economic viability of the Merom power plant is uncertain, but I believe it will be sustainable longer than many expect. Recent capacity markets indicate a crisis in MISO, where the March auction hit the maximum legal limit, impacting supply. This situation benefits generators that can be turned on, but this won’t always be the case. We have a structure in place with our partner, Hallador, to transition to renewable power once it’s no longer economically feasible to operate the plant. They have rights to purchase a portion of that energy. When a power plant is decommissioned, renewable developers often seek to acquire nearby properties to take advantage of existing infrastructure, such as substations and transmission lines. Transitioning to renewables typically requires three to four times the amount of renewable generation to produce the same amount of energy, while the current infrastructure is limited. As we approach the limits of existing facilities, new constructions will be necessary, which come at a higher cost. One of Merom’s advantages is our right to use the existing substation and access to transmission lines, resulting in significant cost savings and added certainty. We believe this gives us a valuable asset in our interconnection rights for the future, regardless of when that transition occurs. I hope that addresses your question.

That's a great answer.

Well, it looks like we have another investor in the queue.

Our next question comes from Eric Wagner.

Yes. You guys are doing a great job. Keep up the good work. Two quick questions. With the acquisition of the utility plant, how dilutive will that be to the existing stockholders? And the other question was, when you've been doing your hedging, is that amount or level of hedging determined by the bank loan? Or how do you come up with the amount of hedging that you need to do to keep the business going?

Well, under our current PPA with Hoosier, they are acquiring all of the energy and capacity from the date that we closed, which, again, is not an exact known date until the end of May of '23. So we're not really hedged. We have set the price in terms of those electrons with our counterparty, which is Hoosier, seller of the asset. And then we have PPAs with them that extend from June 1, '23 through the end of '25 for certain amounts of energy and capacity. They rely on the plant, they just don't rely as heavily on the plant. So it's roughly like 1/3 of the capacity of 20-some-odd percent of the energy. So hedging beyond that, that is something we're evaluating now as to how much hedging we want to do or not do. As long as we have bank debt, we like having a certain amount of forward sales. That being said, one thing that is happening here is we are converting fuel, coal that we produce today into electrons. And I would say that the electron market, because we can sell a day ahead at MISO, is a much more liquid market than the coal market. So from that perspective, I think the liquidity of our sales opportunities has improved dramatically with the acquisition of the power plant.

Our next question comes from Robert Baker.

Can you hear me okay?

Yes. Thank you.

My first question relates to the operating costs for the most recent quarter as well as the last several quarters. From earlier quarterly calls, I understand that part of the increase is due to hiring new staff and boosting productivity. How much of the rise in costs over the past four quarters, from approximately $30 to about $39.54 this quarter, can be linked to productivity? You've also noted some supply chain issues, which I'm assuming refers to supplies and equipment. Could you explain the individual factors that have contributed to the rise in costs?

We're currently dealing with a variety of challenges. From an input perspective, we're experiencing inflationary pressures. Suppliers are informing us that the cost of certain items has risen significantly. We anticipate that these increases are likely to persist for the next couple of years due to widespread inflation affecting everything from fuel to food. Additionally, we have encountered situations where suppliers can only fulfill a fraction of our orders, which forces us to seek alternative sources that charge much higher prices. While we expect some inflationary pressures to lessen as supply chains stabilize, various factors, including geopolitical disruptions and supply chain limitations, contribute to ongoing cost challenges. Approximately half of our cost increases can be attributed to rising input prices, with the other half related to labor. In response to growing demand for coal, we significantly expanded our workforce starting in September 2021. This demand surge coincided with market reopenings following COVID-19 restrictions, and was further intensified by the invasion of Ukraine in February, which exacerbated an already tight energy market. Currently, we've seen a notable increase in natural gas prices, indicating higher operational costs for coal plants. Regarding labor, we've brought on 120 new employees, which constitutes about 20% of our total workforce, but we're facing higher turnover rates among these recent hires. Our longstanding employees have shown more stability. Training a large number of new recruits who frequently change jobs presents challenges in integrating them into our operations and achieving desired productivity levels. In April, we experienced a significant improvement in productivity, and our financial results were better than anticipated. However, we have not yet finalized these numbers as we want to assess performance in May before making any announcements. Looking ahead for the remainder of the year, our focus will be on managing costs, increasing our average sale price for coal, and finalizing the acquisition of the Merom plant. While we've had a challenging start to the year, we are optimistic about our potential for improved results in the near future. Our confidence suggests that by 2023, our profitability may triple compared to historical levels. Our strategy includes ensuring sufficient liquidity to navigate these challenges effectively, even as we face cost increases that could be permanently elevated. However, the projected sales prices present significant opportunities for profitability. The expectation is that as we adjust our pricing, the financial outcomes will reflect substantial improvements. These changes could also lead to higher stock valuations in the future if our earnings before interest, taxes, depreciation, and amortization (EBITDA) reach significant levels. Overall, we're positioned for potentially transformative developments in our operations.

I would like to ask a couple of follow-up questions, if I understood you correctly. Has the turnover rate for the new hires improved? You mentioned around 120 new employees, and there was significant turnover among them. As you have replaced those who left, has the rate of attrition from new hires moving on for various reasons improved over the past six months?

I think it's marginally better. I think that higher interest rates and higher inflationary prices will eventually slow this economy down. And that's why our turnover and our growth in people will improve. When exactly will that happen? It's hard to put an exact number on it. I think it happens gradually between now and the end of the year.

Okay. And then in terms of supply chains and obtaining equipment or consumables or however they're referred, is there anything that concerns you about being able to obtain everything you need where it's not just you have to pay a price that's 2 or 3 times more than you normally would, but it's just not available at any price?

We think about that every day, as it's part of our responsibilities. We're currently in a challenging period where we must work hard to secure our inputs. As a result, we're maintaining higher inventory levels to ensure we don't run out of supplies. So far, the industry has managed to prevent shortages, but our concerns have not completely gone away.

Yes. Fair enough. And you haven't experienced anything like that directly at being unable to obtain equipment needed or anything?

So far, we've been able to acquire everything we need, though it hasn't come easily, and we've definitely had to pay higher prices. We believe that rising interest rates and inflation will eventually slow down the economy, which is the reason for the rate hikes aimed at controlling these factors. The situation regarding Russia is unprecedented; it involves the world's largest exporter of natural gas, the second largest exporter of oil, and the third largest exporter of coal. Consequently, when Europe decides to stop using these energy sources and looks for alternatives, they are turning to markets in the Middle East, Africa, and the United States. Over the last five years, there has been a lack of investment in fossil fuels in the U.S., which means now the industry has to ramp up production to meet demand. Europe is willing to pay a premium to ensure they are warm this winter, even if government funds are involved. This has led to significant opportunities for the fossil fuel sector. The positive aspect is that our profit margins are increasing, but the challenge lies in the increased effort required to secure the necessary inputs to maintain that profitability. We are committed to tackling this issue daily, as it has been ongoing, leading to rising input prices. We didn't anticipate such a sharp increase in the first quarter, but we are now highly focused on it and have a solid plan to improve our margins, which we are beginning to see effective results from due to our performance in April and expected price increases starting in June and thereafter.

Okay. I have one last question to clarify something. Earlier, you mentioned using the tonnage for the Merom plant instead of selling it in the market, and you referred to a $50 per ton margin. Does this mean you are selling the coal for $50 a ton, or is the margin $50, so you would sell it for a certain amount and after costs, it would result in $50 a ton?

I'm talking about the margin, not the sales price. And I want to clarify something. Those are the prices that we would receive if we didn't take it to the plant, and we sold it on the open market. We want to take it to the plant because we think it's a higher value at the plant. Now those concepts change every day. And we may sit here 3 months from now and say, 'No, it makes more sense to sell those tons.' But that's one of the things that the plant gives us is that kind of optionality. It looks to me is that the plant will 99 times out of 100 be the best use of those tons just from a freight perspective. But that may not always be the case. But again, we have that optionality, and we think we're taking them into the plant because it's a greater value than selling them on the open market. We just wanted to clarify that we have that option.

Right. Okay. So given this instance of $50 a ton margin currently, what would the equivalent margin be for the tons going to the plant instead of being sold in the open market?

That's not something we've disclosed. It can be a bit complex because it depends on whether we're referring to power prices we've agreed to sell through our bilateral contracts or spot prices in the market. Since the plant acquisition is not closed, we haven't discussed this. Our view is that taking them to the plant is more profitable than a $50 per ton margin. That's our plan. At a high level, we anticipate EBITDA to grow by over $150 million next year in adjusted EBITDA. So, considering that, it presents a unique opportunity to profit quickly, as we expect to close on the plant in about seven months, likely in the third quarter.

Our next question is from John Moran with Robotti & Co.

Brent, I just had a question about your liquidity and whether or not the $10 million you raised is sufficient. It seems like all that would do is replace what you sort of would have generated typically in the last couple of quarters. And it also seems only logical that the banks are going to want more liquidity if you bring Merom into the mix. That's the first question. The second question is about the negotiation with your banks. If you believe you can achieve a $50 margin on the 1.7 million tons that are unsold next year, then as a bank, wouldn't that make negotiations challenging? It seems they could have little risk left on the loan if you were to sell those tons right now. I assume they are not concerned with the company beyond the loan itself. So those are my two questions.

From a liquidity perspective, we may look to increase our liquidity. We believe the closing of the plant significantly enhances our company, and we could be as close as 35 days to achieving that, pending regulatory and financial approvals. We are currently in discussions with our banks regarding this, and those discussions have been positive. We have a strategy in place for that. Regarding whether the bank will push us to sell coal in the open market, I believe the bank, like all of us, supports the most valuable use of those tons. Therefore, I don't think they are advising us to act against our most profitable options. Banks typically do not dictate how to manage your business.

Maybe just one more. You kind of referenced this optionality that you would have if you succeed with Merom. Do you really have optionality? Or do you have to run Merom at 100% once you own it? And if so, I think can you buy coal from third parties? Or could you buy profitably from third parties to run Merom?

The majority of the tons processed at that plant this year will not come from Hallador once we take ownership. Next year, we expect a mix of tons from Hallador and another supplier. We are obligated to produce a certain amount of electricity under our power purchase agreements, which means we need sufficient fuel to meet our capacity requirements in MISO. However, if selling the tons becomes more profitable at that point, we have the option to do so. Likewise, if it's more beneficial to operate the plant, we can choose that route as well. Essentially, the plant provides us with flexibility. Some people have contacted us, questioning our ability to finalize the acquisition without all the necessary approvals. In response, we have indicated that if for any reason the acquisition does not proceed, we could still sell these tons and maintain a higher level of profitability than we have seen in the past. What we are conveying is that we have several paths to profitability this year and next. This is something that we believe banks will recognize as a positive sign of profitability ahead. There is a possibility that we could be debt-free by late next year or early in 2024. From that viewpoint, the banks are optimistic about the improvements in profitability we are on the brink of achieving.

For the tons you're renegotiating for 2023, are you trading volumes in future years to achieve that? Are you conceding anything in the process? What leverage do you have over your customers regarding these renegotiated tons?

Mostly we've been engaging in blend and extend arrangements, where we plan to sell more tons in the future years. Remember, at least half of our production will be directed to Merom, while the other half will be available on the open market. As we move into 2023, 2024, and 2025, we will significantly open up, though not dramatically, some of that tonnage. Customers are now expressing concern about the forward gas prices for the next three years, which are over $5 and approaching $6. Utilities that are having difficulty securing tonnage are noticing that the gas curve continues to improve. We are witnessing a shift among utilities, with some transitioning from wanting short contracts to now preferring longer commitments. We are experiencing a revaluation of business at prices that I have never encountered in my 18 years in this industry. Our sales team includes members with over 35 years of experience, and these are the highest prices we’ve seen. In negotiations, when a customer approaches us for more tons in 2023 or 2024, it offers us the chance to propose blending and extending these prices. We may sell more tons in the future years while seeking some of that price increase for 2023 or adjusting sales in different windows to facilitate that. These are the types of agreements we are pursuing. I don’t believe we are sacrificing anything; instead, we are engaging in new business at significantly higher rates, which others are also doing. The current energy crisis is a reality, with Russia being cut off or restricted from Europe. Those markets, which have historically relied on Russia, are now looking for new suppliers, and the United States is on their radar.

Our next question comes from Ted Waters, another private investor.

Brent, I had a question about your 2023 adjusted EBITDA. If you can hit $150 million, what would your free cash flow look like? Basically, looking at what would your ability to pay down debt in '23 if you could hit those numbers?

Larry will probably have a more accurate opinion of that. So I'll let him answer this one.

I don't have our free cash flow calculated at this moment. However, based on our current projections and the EBITDA numbers Brent mentioned, we expect to eliminate our bank debt and be net debt-free in the fourth quarter of next year.

And would you be certain to be able to hedge some of those electrons once you close the plant for '23?

Yes, we would be in a position to do that. We can't do that today until we acquire the plant.

So we have interested parties.

For sure.

There are no more questions waiting at this time, so I'll pass the call back over to the management team for any closing remarks.

Well, I want to thank everyone for their interest in Hallador and again, just reiterate how excited we are about the future. I'm not going to say it's not going to be a bumpy path to get there, but it's just we see so many opportunities. And I think we're positioning ourselves to take advantage of that opportunity in very short order. So I thank everyone for their interest, and we look forward to talking to you on our next call. Thank you.

That concludes the Hallador Energy First Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your lines.