Good afternoon and thank you for attending today's Hallador Energy Third Quarter 2022 Earnings Call. My name is Jason, and I will be the moderator for today's call. Lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'd now like to pass the conference over to our host, Rebecca Palumbo, Investor Relations.

Thank you, Jason, and thank you everybody for taking the time to join us today. Yesterday afternoon, we released our third quarter 2022 financial and operating results on Form 10-Q that is now posted on our website. With me today on this call is Brent Bilsland, our President and CEO; and Larry Martin, our CFO. After the prepared remarks, we will open the call up to your questions. Before we begin, please note that the discussion today 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 binding 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 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 the earnings call is also available on Hallador's website. We encourage you to ask questions during our Q&A. And if you are on the webcast and would like to ask a question, you will need to dial into the conference and that toll-free number is (844) 200-6205, access code 840309. And with that, I turn the call over to Larry.

Thank you, Becky, and good afternoon everyone. I will start with our review of operating results. And before I do, I would like to define adjusted EBITDA as operating cash flow plus current income tax expense, 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 obligations, reclamation, plus other amortization. For the third quarter, Hallador made a net income of $1.6 million or $0.05 a share. We have lost $11.9 million net income or $0.38 a share for the year. Our adjusted EBITDA for the quarter was $18.4 million, $32.5 million year-to-date. Our bank debt was decreased by $17 million for the third quarter. We had a positive borrowing of a net $2 million for the year. Our bank debt at the end of September was $113.7 million. Our net debt reduced by our cash was $106.7 million. And our debt-to-EBITDA for the prior four quarters is 3.5x, well within our covenant of 4.5. I will now turn the call over to Brent Bilsland for our review of the quarter and beyond.

Thank you, Larry, and thank you everyone for joining us today. Q3 was a transitional and very positive quarter for Hallador. During the quarter, we signed contracts for 2.2 million tons of new coal sales at an average price of roughly $125 a ton, of which a small percentage of deliveries began during Q3 and will continue through 2025, but the majority of these tons will be delivered starting in the fourth quarter of this year and throughout 2023. These contracts put us in a position to generate up to $160 million of EBITDA in 2023 and will be a significant driver of our efforts to move towards the position of being net debt-free next year. During the quarter, we shipped 1.7 million tons at an average sales price of $49.01, which represents a price improvement of $8.78 a ton over the prior quarter. We expect Q4 pricing to be similar and look for our average price to continue to improve through 2023 to a price of around $58 per ton. To meet these new orders we have been expanding our coal production by hiring additional employees and putting more units to work at our Oaktown mining complex. We are also opening a small surface pit near Freelandville, Indiana, and moving our ACE in the Hole production to a small surface mine pit near Petersburg, Indiana at our former Prosperity mine. This has required us to increase our CapEx spending, which is up roughly $20 million year-over-year. And we have been successful in increasing our headcount by 24% year-over-year, thus incurring greater employee acquisition and training costs. Freelandville and Prosperity production began during the third quarter. Volumes from these new pits are expected to be higher costs and are forecasted to represent approximately 8% of our 2023 production. In Q3, Hallador’s operating costs increased to $37.46 per ton. Our newer workforce and surface pits will ramp up to reach peak productivity, and with expectations of only slight easing of inflation in 2023, we expect our mining costs to remain elevated in 2022, followed by potentially a small cost reduction in 2023. We believe that the increased market prices for coal clearly justify taking on these increased costs and investments. To help fund our increased CapEx and improve our liquidity, we sold $29 million of convertible notes, $10 million of which were sold in Q2 and $19 million of which were sold in Q3. The $10 million of notes issued in Q2 have been converted to Hallador stock bringing our current share count to 33 million shares. If all notes are converted to stock, this would equate to increasing our share count from 30.8 million shares at the beginning of Q2 to 36.1 million shares at some point in the future prior to year-end 2026, representing an approximate 17% increase in share count. Bank debt was reduced during the quarter by $17 million, bringing the balance owed at the end of Q3 to $113.7 million. Subsequent to the end of Q3, on October 21, we closed the acquisition of the one gigawatt Merom Generating Station from Hoosier Energy. At closing, we received net payments of $34 million. These funds were part of capacity payments owed to Hallador through our power purchase agreement with Hoosier. With these funds, we paid down an additional $27 million of bank debt. That's when including the $17 million of bank debt paid in Q3. Total debt was reduced by $44 million or 34% of the third quarter's beginning outstanding balance, bringing our total bank debt on October 22 to $87 million and further increasing our liquidity. This combination of debt reduction and rising EBITDA is quickly deleveraging our balance sheet, which we anticipate being less than 2.5 times debt to EBITDA by the end of the fourth quarter, and expected to be approaching a ratio of less than one times by the end of the first quarter of next year. Our goal at Hallador is to deleverage our balance sheet and to create multiple uncorrelated revenue streams that take advantage of our unique position in this energy market. The acquisition of Merom is a significant step forward in this pursuit as it provides us the ability to monetize our coal production through both capacity and energy sales, while also providing us a platform for potential future investment, including new generation and energy storage. As capacity payments are currently covering most of the fixed costs of the plant, Merom provides optionality to Hallador in both the coal markets and the energy markets. Starting in 2024, our Sunrise Coal subsidiary has the flexibility to sell up to 3 million tons, which represents 43% of our coal production annually to Merom if the economics of energy sales dictate or divert some portion of that to third parties if the economics of outside coal sales creates a higher value. In 2024, Hallador anticipates 4 million tons of annual coal sales to outside parties while maintaining the flexibility to utilize remaining coal production to generate up to 6.5 million megawatt hours of annual energy sales at Merom. We believe that this flexibility gives Hallador a tremendous opportunity to take advantage of the most favorable economic conditions in each market. With that, I'm going to open up the line to questions from the audience.

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

Thank you, operator. This is actually Nick asking a question on behalf of Lucas. Once you hit the net debt target in 2023, how would you describe your capital allocation objectives? Do you think M&A could play a role or capital returns more likely in that case? Thank you so much.

Well, like I said, I think we've got the contracts in place to be net debt-free or we at least forecast – we think we can hit that target in 2023. But certainly we are deleveraging extremely quickly, which is great, which is where we want to be and that's kind of who we are. So I don't know that we're in any hurry to make any decisions as to what to do with excess capital. We probably wouldn't do anything until 2024. I think you'll see us look to what are the opportunities to use our capital to make forward energy sales and be able to lock in margins and position the company from that perspective. I think that's some of the things that we're looking at today, but all things are on the table. We're not currently in any M&A discussions, but if the right opportunity came along, I guess, we would consider it. But for now, our primary goal, as stated, is to deleverage the balance sheet and focus on creating ways to get what I call uncorrelated revenue streams. So what I say that is for a long time, our revenue stream has been selling coal; with Merom we have the ability to sell capacity, sell energy, potentially use the landfill there to create gas from other utilities and create revenue there. We've got some permit work to do that, but we see other opportunities around that facility at some point in time as that becomes a – but we repower that site with solar battery. I think those things – right now the market is saying it needs the capacity, so we plan to invest in that plant and have it serve the market for quite some time. So – but those are our thoughts today, Nick.

Got it. Got it. Now, that's very helpful. Thanks, Brent. And maybe just on Merom, what kind of breakeven price should we think about on a dollar per megawatt hour basis as far as those tons that you plan to dedicate to Merom today? Thank you so much.

That's just not I remember that we've released to the public yet. So I would say this, because we have at-cost coal production that we can put to that plant. We feel that plant has the lowest dispersed cost of any coal-fired power plant in the area. So we think it's definitely positioned in very good shape to be in a position to run if that's the best use of our fuel.

Got it. Got it. Okay, that's helpful. That's all for me for now. I'll jump back into the queue, but thanks for the color.

Our next question comes from Kevin Tracey with Oberon AM. Your line is now open.

Great. Thanks for taking my question. So, Brent, in the 10-Q there was a note that you acquired $17 million of coal inventory with the Merom acquisition. So I understand your original plans were to shut up the plant next May. So am I right in thinking coal supplies beyond May will be tough and given spot prices are in the triple digits that Merom probably won't operate much in the second half of next year?

Yes, I think that – so I think your question was do we have a lot of fuel post May of 2023? The answer to that is no. And so we do not expect that plant to operate much from say June to December of 2023 with current fuel procurement that could change, but that's the position we're in today.

Okay. And then a related question to that is I think that next capacity auctions are coming up in April for the year starting in June of 2023. So just given what you just said, kind of the lack of coal supply at least for the second half of 2023. Does that kind of prohibit Merom from entering into that capacity auction for, well, what, I think it's 68% of the capacity that you're not selling to Hoosier under the PPA? Or is there a way, well, you can partially participate for the months in 2024 when Oaktown can ensure coal supply?

Yes, twofold. One, we do believe we have enough coal procured to meet our requirements. We also are working on, as I said earlier in the call, increasing our coal production. So that's another way we can put more fuel to the plant. We can acquire fuel from other third parties, and those are all things that are on the table. But we think we can fully participate in the capacity auctions in markets in future years, 2023 and 2024 and beyond.

Okay, great. And just to confirm this kind of $39 million of advanced capacity payments from Hoosier, there is no cost or cash cost associated with that. Is there – and then you have the PPA for 100% of capacity through next May, but then 32% of capacity through 2025. And I guess should we expect under that PPA for Hoosier to pay more additional capacity payments in future years?

Yes, they do pay future capacity payments in future years; some of those payments are in 2023. They are reduced because they're buying less capacity. And, so – but I think we come back and say we still got capacity to sell. We have a lot of interest from other parties, and capacity pricing to date is very good. So there is more retirement of generation in the area that have an on switch, and they're being replaced in large part by generation that does not have an on switch. And so capacity continues to tighten and it is our viewpoint and belief that capacity becomes more valuable over time, not less valuable over time. And we think those are comments that are also being echoed by grid operators. If you read what they're saying, I think they realize they've got a capacity shortfall in future years and they are trying to modify their auction process to incentivize the market to stop, slow down retirements and speed up additions of capacity. So we think from our perspective that gives – that puts us in a position where in most years, a significant portion of capacity or a significant portion of our fixed cost of the plant can be covered by capacity payments. And if that holds true, then from our perspective, we kind of get a free option to put fuel to the plant or fuel to the public. Now, you're right, I mean, we can't put zero fuel to the plant, but we can vary that amount and if the third-party market is willing to pay a significant premium above what we think the power markets will bring. And as evidence of that, that's what we did basically in Q2 – we agreed to those contracts in Q2. We signed those contracts in Q3 to sell it to the market versus take it to the plant. We felt that that was the best risk-adjusted return at that time that was available to us, so – and realized at that time we weren't 100% sure we were going to close on the plant. We were 98% sure. So we were glad to finally complete that transaction. We're thrilled to have Merom in our portfolio. We think it dramatically changes our company and we think it puts us in a very unique position to be a part of this transition. Today, the plant is very much needed in the grid from the capacity viewpoint. In the future, it gives us a great platform for investment in – the Hallador shareholder investment in new generation of stores, which if I was sitting here today, I would tell you would be solar and battery, time will tell.

Yes. Okay. And just to clarify on that $39 million capacity payment in future capacity payments, there is no kind of cash cost associated with that revenue – you're standing by with the capacity willing to provide it. Is that right?

Yes. So what that really obligates us to do with the grid at a high level is by selling that capacity we are obligated to bid that plant into the day-ahead-market each and every day. Now we have some flexibility as to what price that plant gets bid in at. There are rules around that, and there is a market monitor that evaluates that to make sure that we are complying with those rules. But by selling our capacity, you basically are saying, hey, look, I've got an asset that's ready to go. I've got the employees staff to make it operate. And I've got fuel procured and in position with my inventory and existing contracts to be able to meet the capacity factor that we think that plant will run at. And we are in position to say yes to all those things in 2023 and beyond. So what we are trying to do…

So, Brent, let me – even though we don't – so even though we don't have correlated expenses related to that capacity income, we do have fixed costs at the plant in order to bid that capacity into the – into whoever is buying it or the market.

Got it. Got it. Okay. If I could just sneak one last one in just on the CapEx going forward, I understand it's elevated this year as you're opening up these new sites, but in the past call CapEx is kind of spent more in the $30 million to $35 million range. I guess I'm just curious next year, what are you thinking? And then if you have any comment on what Merom's kind of normalized CapEx will be, that'd be great. Thanks.

So, yes, we expect our coal CapEx going forward to be at a $35 million to $40 million range, could be a little higher next year, even with the surface equipment ramping up the two surface mines we have. And then our CapEx, at Merom, we have two categories of CapEx there. We have just regular reliability maintenance CapEx that will be in the $15 million to $20 million range. And then we have to start analyzing our ELG to get into the Effluent Limitations Guidelines with that plant by 2025 and when we will start that process. And it's about $40 million to $45 million over the next three years and we haven't figured out our timing yet. Right now, I think we expect maybe $17 million, $18 million next year, but we haven't got into the planning and the POs for that since we just bought the plant.

Our next question comes from Ted Waters, a Private Investor. Your line is now open.

Hi, Brent. Thanks for taking my call. The question I had was could you tell me a little bit about your ability to sell megawatt hours into the future? For instance, could you start locking in megawatt hour pricing going forward in the near term? And if so, what would that be equivalent to in terms of coal tons? For instance, you sold $125 tons in Q3 if you were to sell into the megawatt hours in 2024 today, what pricing is that putting today?

Yes. So, the answer to that question is yes. We do have the ability to sell either in the day-ahead-market or we can sell basically a bilateral agreement with an energy trading company or a utility that would like to buy megawatt hours. What is the price of that? That's up for negotiation and so that – and that changes every day, right, and every hour within the day. We do have curves that kind of show, hey, where things to power market is going forward. It – I don't know if I'm ready to release any of that from proprietary perspective, as far as that's a plant basically one ton of Oaktown coal at the Merom plant generates about 2.2 megawatt hours, right? So if you take, there is various curves out there and various assumptions, but if you take a megawatt hour, the variable costs on that, you're going to have about $5 a megawatt hour variable cost. So let's just talk for easy math, the megawatt hours, at $50. It's the equivalent of one ton of coal that's going to produce 2.2 megawatt hours. So that's $110 per ton equivalent, track $5 in variable, excuse me, I've doubled it there, so $10 now. So now you're roughly at $100 coal and then what's your fixed cost to the plant? It's a capacity payment covering your fixed cost to the plant or is it short or is it long, is capacity payment exceeding fixed cost to the plant? So that's kind of how we look at it. Hope that makes sense.

Yes, that's – I assume now that's how the math you do when you decide to sell to the third party or do the megawatt hours, that's interesting.

Our next question comes from Arthur Calavritinos with ANC Capital. Your line is now open.

All right, thank you. Let me ask you something on the – on the debt reduction to zero that – that's going to happen. You've got that locked in for this year, right?

Not quite sure what you mean by locked in.

It's going to be paid off, I mean, 95% confidence interval, what I mean? I mean given what you're looking at right now. We're not going to get any surprises and say, okay, we couldn't take it down like at all. I mean, right now you're pretty confident the debt should get to be de minimis, right, by year-end.

Yes, I think from our perspective we've contracted for the coal, right. So we know that our average sales price is going to come up significantly. So we're going to see significantly higher margins, something in the low 20s. We have to produce the coal, which we've always historically been able to do. We're trying to – we are increasing our production. With those increases in production, we have a slight increase in cost, but some of that is coming from higher cost surface pits, but we're forecasting a higher cost curve moving forward. And we are reliant upon our customers, providing transportation to pick up the coal, which that piece is out of our control. It's in our customers' control. But from a forecast perspective, we see no reason why we shouldn't be materially net debt-free by the end of the year.

Okay. And Brent, a different question. When you guys are looking at projects, right, internal rates of return with the businesses, any – I don't know discipline or does – are you seeing better opportunities? You mentioned storage. Again, it must be difficult to do a spreadsheet to model that out because what I'm concerned about is I don't want to see you guys do a lot of storage or something and it doesn't work out. That's all. So I'm just trying to figure out what your discipline is, how you look at stuff and how to decide to exit if that were to happen.

Yes, I think our focus right now is that we are essentially long energy, long capacity and we're in a pretty good sales position. If you look at us for the next couple years, our hedge position there is pretty well ahead. We don't have a lot of excess electricity to sell until 2024. So we're trying to figure out what's the best way to do that. And there's various ways to do that, some of which require some amount of capital. And so what we're saying is, is look 2023 is about getting our balance sheet in a very deleveraged position and trying to position the company to have profitable power capacity and fuel sales in 2024. So that's kind of what we're focused on. When we talked about energy storage, The Inflation Reduction Act was released and approved this year. However, they're still writing some of the technical rules around that. And so I don't think it's fair for us to say today we will or we won't do battery storage because quite frankly we're waiting for the rules to be finalized to understand is that a good rate of return for us or not. Today, I couldn't tell you yes or no, right. So… We'll wait for those rules. We'll evaluate that. I think what we're trying to point out to everybody is to some people this acquisition appears as if a coal company bought a coal-fired power plant. And what we're trying to say is that's true today, but in the future, this really is a transition platform, right. I mean, what solar developers and battery developers are dying for is a place to plug into the grid. The grid study has been backed up four years. PJM grid study is so far backed up, they've stopped accepting applications. We don't have to do a grid study. We already own the interconnect. We already have rights to that interconnect today. So if our management team and board decides that the best use is to close our power plant at some point in the future and repower that with solar and battery, we have very minimal work that we would have to do with the grid to get approval to do that versus the developer down the street, who's trying to jump on the grid somewhere. I mean, they've got to apply – in PJM, they won't even accept the application. In the grid, they'll accept the application, but they might be four years if your application happens to be on the edge of the grid near another grid, both grids have to approve that application. So that's – I mean one of the things that's causing a problem with this transition from fossil to renewables is there's not enough places to plug in, right? And we're turning off generation that has an on switch. We're turning off generation that can run 75% of the hours in a given year. And we're replacing it with generation that cannot be turned on from a grid operator's standpoint and it's only going to run 20 hours, 20% of the hours in a given year. And so that's the challenges that the grid is seeing today. You know, I spent some time last week with a couple different grid operators who basically outlined, hey, look, the number of levers we have to totally keep the system in balance is being reduced, which then leaves them as demand response is the new lever they're looking to reach for. Well, demand response is we're shutting power off to someone, right? That's what demand response is, who is getting their power shut off. And hopefully they've agreed to that ahead of time. That's not always the case. So for all those reasons… Yes. So for all those reasons, the value of a plant such as Merom that has been well invested in. It has all this environmental compliance investment in place except for guidelines. We will have to invest in guidelines to run beyond 2025. And we look to make those investments in that 2023, 2024, 2025 period to be in position to do that. That is our thinking today. We’ve not pulled the trigger on that yet, but that’s what we’re evaluating in real time. But we think this asset becomes more valuable because of the attributes it can provide to the grid. And because there are fewer and fewer generators that have these attributes that are available to the grid. The motivation of a public utility is very different than a wholesale power generator, which is what Hallador Power – our subsidiary, Hallador Power that owns Merom. That’s essentially what it is. So, for those reasons, that’s what we look like and this is what our thinking is.

Got it. Thank you. And one last thing. We're like, I was going to say, we're in Boston. So we're going to have like some, we've already had shutdowns in the summertime. The industries nobody cares about. But if we get some shutdowns, national news type of stuff, like in New England, right, where it’s really tight. I’m just thinking how you – like where you guys are let me more specifically ask, would legislation or regulation change to be more favorable to you as people realize, finally the regulators realize how and the citizens are valuable these things are.

Well, yes. I think anyone who sits in the dark for any period of time realizes how valuable electricity is. They say power generation is 7% of the U.S. GDP, but it’s the first 7% because without it, nothing else works, right? Yeah, so we’ve seen this happen. Look, every grid that approaches 30% renewables, crashes, we've seen multiple crashes in various places, we've seen it in Texas, energy capital of the United States. We’ve seen a five-day outage that cost over $200 billion and 100 people lost their lives. And we saw Texas make massive changes to the rules around power generation and they're caught, right, the Electric Reliability Council of Texas. So I hope this doesn’t happen in other grids throughout the country, but I wouldn’t bet against it. You’ve got literally the grid operator saying our plan is to be backed up by another grid. But if they’re having a bad day, the same day we’re having a bad day, this nation’s going to have a bad day. I mean, that’s a public quote from the Chief Operating Officer of the grid. So they realize that the grid is changing very rapidly, and this is bringing a new risk profile to the grid. It’s being done in the pursuit of trying to reduce climate change, but there’s new risks that are associated with that. So from an economic perspective, we think all this is happening too fast. We think the Merom plant needs to stick around for a while. We’ve set all along, we have the rights to shut it down when we want to convert it to something else, we’re going to let the economic market decide. And right now the signals are telling us this plant should remain online and we should continue to invest in it. And that’s where we’re headed today.

Yes. Thank you so much for taking my follow-up. Brent, you spoke about the converts in your prepared remarks, and just maybe as you think about potential future sources of capital, would you be open to more converts or might you look to other sources at that point? Thank you so much.

Well, I think at this juncture, we are significantly deleveraging our balance sheet. And when we did the convert, it was at a time where our EBITDA performance was poor. Our, and we had yet, at the same point in time, we were knocking on the door of all this opportunity, but to take advantage of the opportunity. And when I say opportunity, that is sell coal high prices, increase production, acquire the Merom Power Plant; those were kind of the three things that were laying in front of us. So to take advantage of that, we knew we had to spend more money on CapEx, and we couldn’t go really any rely on any more of the debt market. So that’s why we went to the convert. Looking forward, we’re seeing the opposite. Our balance sheet is completely deleveraging, and so we feel that the debt capital market should be sufficient to meet our needs. So I don’t – at this juncture, look to do anymore convertible notes, and we just look to deleverage our balance sheet and work on continue to create cash flow streams for the Hallador shareholder.

Got it. very helpful. And then maybe just one more for me. you referenced real performance, and I believe last quarter you’d referenced around 85% of scheduled deliveries were being shipped. Has this figure improved, and just how are discussions progressing with these real providers as you’re kind of looking to return to higher levels?

Yes, it’s kind of customer by customer. Some customers are doing really well picking up what they’re required to pick up and others are not. And we’re in communications with both of those. And I would say performance on that front has been more of the same. Look, I appreciate everyone taking the time today, and we’re very excited about the future of Hallador and the position that we’re in. And we see as much opportunity in front of us as I think we’ve ever seen in the history of our company. So we’re excited about that and we think we’ve got the management team and getting the capital structure in place, to take advantage of those opportunities. So look for more interesting things out of us and look forward to talking to all next quarter. Thank you.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.