Hello, and welcome to the Hallador Energy Company's Fourth Quarter 2023 Earnings Call. My name is Harry, and I will be your coordinator today. Now I'd like to turn the call over to Becky Palumbo from Investor Relations to begin. Please go ahead.

Thank you, Harry. Good morning, everyone. Hallador Energy's call for the fourth quarter and full year 2023 today features Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Yesterday afternoon, Hallador released its fourth quarter and full year 2023 financial results in a press release. Today, we will discuss those results as well as our perspective on current market conditions and outlook for 2024. Following our prepared remarks, we will open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements subject to a variety of risks, uncertainties, and assumptions contained in our filings with the Securities and Exchange Commission and are also reflected in yesterday's press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, Hallador has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future results or otherwise, unless required by law. Lastly, Hallador will file a Form 10-K sometime this week. And with that said, I will turn the call over to Larry.

Thanks, Becky. Good afternoon, everyone. Before we get started, I would like to define adjusted EBITDA as operating cash flows less the effects of certain subsidiary and equity method investment activity plus bank interest less the effects of working capital changes plus cash paid on asset retirement obligation reclamations plus other amortizations. For the fourth quarter, Hallador incurred a net loss of $10.2 million, or $0.31 basic earnings per share and $0.27 per diluted earnings per share. For the year ended December 31, 2023, we had $44.8 million of net income or $1.35 per basic 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 year. We increased our bank by $29.8 million for the quarter and $6.3 million for the year. Our funded bank debt as of the end of December 31 was $91.5 million. Our letters of credit were $18.6 million. Our net funded bank debt was $88.7 million. Our leverage ratio for debt to adjusted EBITDA was 1.3x at the end of the year. I will now turn the call over to Brent Bilsland, our CEO.

Thank you, Larry. First, I'd like to thank the Hallador team for their hard work and dedication in finishing a solid year for our company. While the fourth quarter highlighted some operational challenges and the episodic nature of our power revenues, I don't want those challenges to overshadow the positive year that we had as a company. In addition to near-record margins in our coal division for the full year, the continued integration of Hallador Power into our portfolio serves as a springboard to record net income, our highest revenues ever, and a future sales book that is approaching $1.5 billion and continues to grow as demand for energy and capacity increase. We are seeing success in selling contracted contingent energy at excellent prices. In light of that, we are also focusing on capital expenditures to prepare the plant to support those contracts in future years. We are very excited about our recently signed agreement and structure with Hoosier Energy and their distribution member, WIN, REMC, that should allow us to attract industrial users of power, such as data centers, AI providers, and power-dense manufacturers to the Merom property. We believe leveraging our plan to help supply these large users of energy should allow us to operate the plant more efficiently in a volatile power environment and generate increased margins at or above what we can achieve in the traditional wholesale market. We are already seeing increased interest and excitement around the prospect of this type of offering. If we succeed in attracting high-powered demand customers through this structure, it moves Hallador up the electricity value chain, providing additional margin and stability to our earnings for years to come. Combined with our increased volume of forward power sales, we believe these types of opportunities will continue to improve the long-term outlook for the company and provide a stable platform to leverage both our power and coal assets in a responsible, sustainable, and profitable manner. We have been very deliberate in structuring these bilateral sales contracts to limit our exposure to unplanned, and planned outages, and other unexpected challenges in what we expect to be an increasingly volatile power market. Negotiating deals in this way protects us from downside risk but is also an extremely bespoke process, which takes significantly more time than simply agreeing to firm power contracts and accepting that additional risk. The offshoot of this is that while we methodically build our sales book, we are subject to the whims of the spot power market, and more specifically, to the weather and other factors impacting short-term electrical demand. As we saw throughout the last several months, when we experienced 60 and 70-degree days in winter, the typical energy prices we would expect to see gets thrown out the window, leading to situations where the plant simply does not dispatch. The continued depression of natural gas prices exacerbated this issue and our fourth quarter results were impacted by all of these factors. Just as an example, while the average spot price for energy at Merom was around $69 in 2022, the mild winter and low gas pricing drove the average price down to about $31 in 2023. The spot market pricing really highlights the importance of the longer-term contracts that we continue to put in place, especially as we continue to spend CapEx to ready the plant to support those sales. Since January of 2023, we have contracted nearly $500 million in future energy and capacity deals. Many of these deals extend through 2028 with higher contracted prices occurring in 2026, 2027, and 2028. In addition to the fourth quarter challenges at Merom, we also continue to contend with geology, inflationary pressure, and operational challenges in our coal division alongside the continued retreat of the coal markets from the largely elevated pricing of the last couple of years. In response to these changing events, we took steps to support liquidity and to increase the efficiency of our operations. In December, we implemented an at-the-market offering program under our existing shelf registration statement as a tool to fund any short-term financing needs. Under the ATM, we sold approximately 800,000 shares of Hallador stock in December of 2023 and raised approximately $7.3 million in equity. We sold an additional 700,000 shares of Hallador stock in January of 2024 and raised an additional $6.6 million. Furthermore, in February, several members of our Board further bolstered our liquidity through unsecured one-year notes totaling $5 million. We are also starting to see capacity revenue come in, which, in combination with the items I just discussed, will improve our liquidity position and provide us with additional optionality as strategic opportunities like hedging, acquisitions, or other ways to strengthen our balance sheet present themselves. Our near-term actions to enhance liquidity will be done in a prudent and strategic manner to respond to changing events or to take advantage of market opportunities in support of our long-term outlook. In February, we also restructured our coal operations in an initiative designed to add efficiency to our operations and create higher margins in our Coal segment. As part of this initiative, we idled production at our higher-cost Prosperity mine and substantially reduced production at the Freelandville mine, where we expect to finish reclamation late in the second quarter of 2024. These moves should reduce our capital reinvestment for coal production in 2024 by approximately $10 million, thus reducing CapEx for our coal division from $35 million to approximately $25 million. We are also focusing our seven units of underground equipment on four units of our lowest cost production at Oaktown. As part of this initiative, we reduced our workforce by approximately 110 employees, which we expect to start creating operational savings once the waiting period expires in the second quarter. While this was a difficult decision on a personal level, it was the right decision for the company, and we believe it will improve our operational efficiency relatively quickly. By focusing on our most efficient mining and highest margin coal, we expect to produce about 4.5 million tons annually of higher-margin coal, as compared to 6 million historical tons of production at the Oaktown mining complex. Additionally, in 2024, we have secured supplemental coal from third-party suppliers at favorable prices. This allows us to diversify self-production supply risk and provides us with additional flexibility in our sales portfolio. The capability to obtain low-cost tons either internally or from third parties, while capturing upward swings in commodity markets for coal and electricity should further maximize margins while optimizing fuel costs at Merom. As we enter the traditionally mild spring, seasonal electricity prices could remain weak. However, we remain excited about the transformation of Hallador from a commodity-focused producer of coal to a vertically integrated independent power producer. We believe that this transition provides significant opportunity to capture increased margins in the energy markets to take advantage of the soaring demand for electricity and to elevate our position in a more sustainable and future-proofed industry than the one we have traditionally operated in. As evidenced by the ongoing build of our long-term sales book, this deliberate movement into the electricity sector should materially strengthen our company and the products that we sell. As I mentioned at the start of my comments, despite a challenging quarter, I'm very pleased with our annual results and the continued evolution of Hallador as a company. That concludes our prepared remarks. I'll now open the line up for questions.

And our first question today is from Lucas Pipes of B. Riley.

I first wanted to touch on liquidity and how you think about it. So the ATM a little bit late last year, earlier this year, they were the unsecured notes. Do you manage to a minimum cash balance or minimum liquidity balance? I would appreciate your thoughts on that.

Well, I believe we are in a position where we have significant opportunities to enhance our sales this year. There are many proposals out there and considerable interest, but we remain affected by fluctuating power prices, which are largely driven by weather conditions. Regarding liquidity, there's never really an excess, but our Board of Directors holds about 31% of the shares, aligning our interests with those of our shareholders, including myself. Thus, we must consider potential power prices for the year and determine how much liquidity we need to maintain our plant and keep the coal mines operational. The fourth quarter presented numerous challenges; we experienced significant downtime, both planned and unplanned, and we were reallocating equipment at the coal mines to improve production across all seven units. In February, we decided to concentrate on our four most productive units and procure some coal from external suppliers. The response to this question is complex; we don't have a precise target number. Our focus is more on our sales opportunities and finding a comfortable margin while managing liquidity until we reach a critical decision point.

Got it. Really appreciate that. And turning a bit to kind of the Q1 outlook. You already mentioned the weather hasn't been supportive. What insights would you be able to provide here at this point as it relates to Q1? How much of those issues continued into the quarter? It sounds like they did at least on the coal side. And for the full year, what sort of volume should we anticipate at this point? And then on the power side, is that part of the discussion around kind of filling out the sales book? Or was that really more in regards to coal?

All right. So I'm not sure I caught all your questions, Lucas. On the sales book, where we see opportunities is, look, the market is short capacity, right? We've seen power generation supply has been relatively flat for about 20 years. Then we've been in this transition period of maybe a decade of closing baseload and replacing it with non-dispatchable resources. That has shrunk the accredited capacity. MISO has reports indicating that if people retire assets as announced, the reserve margins will go negative. But it just shows how tight the situation has become from a generation point of view, particularly in MISO. Adding to this is the explosion of AI, which is unprecedented. Companies racing to develop AI can't find places to plug in. So their short capacity, we happen to be long capacity. This is happening everywhere. We've talked to a lot of different utilities about interest in selling to us. What has been surprising is despite retirement dates on the horizon, they have indicated they will push that out due to the sudden new demand from manufacturing, Europe, AI, and EVs. So the long-term trend for us is extremely bullish. The short term relies on weather and spot market prices until we fill this book out. Major RFPs for power and capacity are in the pipeline, and we believe we have a high probability of success in obtaining some of that. We are extremely excited about the new structure we were able to negotiate with Hoosier and WIN REMC to attract high-demand users of power to our site. I believe this will offer us better terms than the wholesale market, and early indications are promising. We hope to add to our positions this year in a meaningful way. On the coal side, Merom is a major customer of our Sunrise Coal division. In the 10-K that we will be releasing, we contracted that business to ourselves to add clarity and set pricing for the next few years, demonstrating that we are well hedged or contracted in the coal side of the business.

This was very helpful. The third one was on the outlook for Q1 and the full year. I do have another question regarding the MOU. So maybe since you mentioned it, I'll raise this one first. Is this an MOU for behind-the-meter power essentially? And then how quickly do you think you could see something materialize? I assume you'd have some construction that would need to take place, like building out a data center. So kind of best case, when could you supply power to a customer?

Yes. So we will go out for RFP this spring, hopefully next month. We're trying to get that in order to see what the market demands are. I believe we have a fair amount of flexibility in what we can offer customers. We have some customers without an RFP knocking on our door, expressing interest in beginning construction in three months, which seems too aggressive. Could we see something as early as next year? Possibly. However, we are not far enough along in those conversations to provide guidance on timing. What excites us is observing large developments across Indiana and the Midwest. Pricing on those does not get published openly but is whispered among industry players, and if true, we are eager about the potential. Again, until we see RFP results, it's hard to say. As far as the first quarter, we had one week of extreme cold weather during which our power plants performed well, making that a profitable period. However, the remainder of the winter so far has been very mild, with temperatures reaching 60 and 70 degrees in both February and March. We are unsure what that means moving forward. Now we're approaching the shoulder season, which traditionally has low power demand, but winter's high demand has not manifested as expected. If we experience another hot summer, we remain optimistic as natural gas prices are currently very low. Come October and November, we may see prices in the $3 to $3.50 range every month after. The power curve has remained robust, but short-term prices are cheap. Therefore, we will manage our liquidity carefully to ensure we succeed, while opportunities from the MOU we just signed may also emerge.

Yes. Directionally, would you expect Q1 to be worse than Q4?

Well, I'm not prepared to give guidance on Q1 at a 10-K earnings call. So we'll wait and see what those results are. The quarter is not over.

Helpful. I'll do one last one. Why was it necessary for Hoosier to be part of the MOU?

So, as Hallador, we are only allowed to sell wholesale power. Attracting customers for data centers and similar needs constitutes industrial power. Therefore, this has to be sold through a structure that includes Hoosier and their distribution cooperative WIN REMC. We negotiated with them for some time to clarify the opportunities for everyone involved. They have proven to be excellent partners every step of the way, and I believe we have an opportunity to create value for both Hallador and WIN REMC and their customers.

Got it. Really appreciate all the color. Brent, to you and the team, all the best of luck.

It appears there are no further questions in the queue for today. I would like to turn it over to Brent Bilsland for any final remarks. However, we have just received another question from Robert Lietzow.

So in recapping, is there anybody else in the coal industry who is making or has made this transition to a vertically integrated independent power producer as you are? That's my first question.

That's a good question. To my knowledge, Hallador is the only company that has acquired more coal-fired power plants and maintains interest in acquiring additional plants in a public structure. We are happy and excited about what we achieved at Merom. We think there are other potential opportunities to replicate this model. While others may be buying plants in private structures, I am unaware of anyone doing this in a public structure.

Okay. And I think you've pretty much answered this, but how should we think about the 2024 outlook? There are some tremendous opportunities. It sounds like you're really building for a 3-, 4-year build-out. But is it as simple as getting into Indiana and maybe the surrounding power areas experiencing a hot summer following this second warm winter in a row? Would that just significantly boost nat gas, coal, and your power markets?

Yes. The power market can shift quickly. We can observe spot prices fluctuate drastically; one day they're $20 per megawatt hour and three days later, they'll be $250. These are weather-driven events. We aim to secure a contracted sales book and our team is working hard on that. We currently have substantial business out for bid. The potential for further collaboration is emphasized by the MOU we signed, allowing us to explore multiple avenues to solidify our sales book. Our margins for coal remain strong, and it's evident in the pricing detailed in the 10-K report when it's released. The margin outlook for power, particularly in 2026, 2027, and 2028 looks favorable. Although our sales book hasn't filled out as quickly as we hoped, our team's work has been commendable. This bespoke process takes time. Our earnings may be episodic in the near term due to weather effects, but the market can change rapidly.

Yes. To say your basically spring-loaded is seeming to be an understatement with the things you have in place here. So good luck on that. I appreciate it.

Thank you. We have no further questions in the queue. I'd like to hand back to Brent Bilsland for some closing remarks.

I want to thank everyone for taking the time today to tune into our call and your interest in Hallador Energy. We greatly appreciate it. Thank you.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.