Hallador Energy Co Q2 FY2025 Earnings Call

Good afternoon, and thank you for attending Hallador Energy's Second Quarter 2025 Earnings Conference Call. As a reminder, this call will be recorded. I would now like to turn the conference over to Sean Mansouri, the company's Investor Relations Adviser with Elevate IR. Please go ahead, Sean.

Thank you, and good afternoon, everyone. We appreciate you joining us to discuss our second quarter 2025 results. With me today are President and CEO, Brent Bilsland; and CFO, Todd Telesz. This afternoon, we released our second quarter 2025 financial and operating results in a press release that is now on the Hallador Investor Relations website. Today, we will discuss those results as well as our perspective on current market conditions and our outlook. Following prepared remarks, we will open the call to answer your questions. Before we begin, 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 from time to time with the SEC and are also reflected in today'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 events or otherwise, unless required by law to do so. And with the preliminaries out of the way, I'll turn the call over to President and CEO, Brent Bilsland.

Thank you, Sean, and thank you, everyone, for joining us this afternoon. We delivered a strong second quarter with year-over-year improvements in revenue, net income and adjusted EBITDA, along with another period of positive cash flow from operations. Our performance reflects the operational resilience of our platform, particularly as we navigated seasonal spring softness in the energy market and a scheduled outage at one of our generating units at Merom. The strength of our remaining unit and higher-than-expected market pricing in the end of June helped offset those headwinds, while our coal operation benefited from improved cost efficiency and stronger recovery rates. As a result of these operational enhancements and our planned outage at Merom, we expected and saw coal inventory levels rise in the quarter. These increased inventory levels should position us for an active second half of the year as both units return to full dispatch and coal customer shipments remain strong. As part of our ongoing strategy to manage the potential impacts of inconsistent weather and fluctuating energy prices, we continue to supplement periods of weaker pricing with select firm energy sales. These sales provide downside protection during periods of mild weather and soft pricing, but still give us the flexibility to capitalize on upside pricing during stronger periods. In late June, we expanded our relationship with an existing counterparty by executing a $35 million prepaid firm energy sale with delivery scheduled throughout 2025 and 2026. In conjunction with this sale, we made minor amendments to our credit agreement, including moving a required principal payment from October of 2025 to January of 2026, and redefining certain covenants to enhance our operating flexibility for the remainder of 2025. We used a portion of the prepaid proceeds to fully cash collateralize our term loan balance of $19 million, with the remaining balance of the proceeds supporting ongoing operations and liquidity. We requested the structure as we believe that it will give us additional optionality as we evaluate refinancing structures related to our current credit facility. We are also seeing increased momentum in our commercial strategy to secure a long-term power purchase agreement. Since concluding exclusive discussions with a global data center developer in May, we've engaged with a broader slate of potential partners, including utilities whose proposals offer compelling scale, simpler execution and faster implementation. The current market backdrop driven by accelerating demand for accredited capacity and resilient baseload power presents a meaningfully more attractive landscape than when we initiated our RFP process last year. While we continue to speak with our original counterparty, we are encouraged by the level of engagement from new participants, each bringing unique opportunities to monetize our energy and capacity offerings. We're in the process of gathering and evaluating multiple offers from a variety of sources, including utilities and data center developers. The attributes of these offers and discussions have varied in terms of price, execution risk, start date, term length and structure. Regardless of which direction we ultimately seek to pursue, we remain optimistic that these conversations will culminate in a long-term agreement or agreements that enhance shareholder value. We've long maintained the belief that the industry shift away from dispatchable generation and favor of intermittent renewables will create long-term imbalances and greater market volatility. This environment increases the value of reliable baseload assets like our Merom Generating Station. To build on that position, we continue to evaluate opportunities to acquire additional dispatchable generation, which we believe can diversify our portfolio, expand the scale of strategic transactions and enhance our financial profile in a rapidly evolving power market. We are continuing to evaluate the potential of adding natural gas capabilities at Merom, creating a dual fuel configuration that could enhance reliability, flexibility and cost control. The ultimate decision of whether to co-fire, when to implement the change and the associated cost and funding in connection with such a change is inherently dependent on the type of long-term PPA transaction, if any, that we ultimately reach. The multitude of potential PPA options and structures has resulted in us pushing forward with base level planning or, in other words, planning those things that are consistent regardless of the ultimate deal structure. But delaying implementation on more bespoke elements until we have additional clarity on customer desires and regulatory requirements. We continue to invest in the long-term value of Merom through disciplined maintenance and capital planning. One of our units was offline for scheduled maintenance for most of the second quarter and into early Q3, a process we intentionally time during the spring shoulder months when power demand and pricing are typically lower. We also limit firm power sales during these periods to avoid potential exposure to the spot market in the event of an unplanned outage with our other unit. That said, pricing in late June exceeded expectations, and we were able to capitalize on those conditions with our remaining online units. As we've stated in the past, we believe Merom has the capacity to produce up to 6 million megawatt hours annually. Beginning in 2026, our average contracted sales prices across both Hallador and Sunrise Coal step up meaningfully compared to current levels. With respect to energy sales, our largest PPA contract will see an increase of more than $20 per megawatt hour in 2026 as compared to 2025 on expected volumes of approximately 1.6 million megawatt hours. On the coal side of the business, our average contracted sales price across all contracts in 2026 is approximately $4 per ton higher than the average contracted sales price in 2025. As discussed in our recent earnings call, we are actively evaluating strategic transactions that could expand our scale, diversity of our generation footprint and support the growing demand of large load users. By targeting the repurposing of retiring or underutilized assets to serve industrial and AI-related demand, we believe Hallador can deliver capacity that is additive to the grid rather than cannibalizing existing reliability, positioning us to create long-term value for customers, shareholders and the grid at large. Encouragingly, we are also seeing growing policy support at both the state and federal levels that we believe could further bolster this strategy moving forward. Turning to our coal operations. We continue to realize the benefits of the restructuring efforts we implemented last year within our Sunrise Coal division. That initiative was focused on aligning production, headcount and operations to better support both our internal generation needs and existing third-party contracts. As a result, we've seen improved cost performance and more efficient recoveries. We did see increasing inventory levels due to the slowed internal shipments while we completed our planned maintenance at Merom, but expect these levels to normalize as we move through the shoulder season into the warm summer months. We believe Sunrise is well positioned to quickly scale if market conditions shift, particularly if pricing strengthens to levels that justify restarting production at higher cost units. This structure provides us with the flexibility to meet increased demand while maintaining a disciplined operational profile. With growing support for coal and coal-fired generation at both the federal and state level, we believe Hallador through our mining subsidiary, Sunrise Coal, is positioned to quickly capitalize on opportunities for expanding production. Market conditions have strengthened relative to last year, and we continue to assess whether it makes economic sense to bring additional production online in the second half of 2025 or into 2026. For now, we expect to produce approximately 3.7 million tons in 2025, with roughly 2.1 million tons already produced during the first half of the year from our Oaktown Mining Complex. To supplement internal production, we continue to source coal from third-party suppliers, typically at favorable pricing to diversify supply risk and provide added flexibility in the event of spot market strength. This optionality enables us to optimize fuel cost at Merom while positioning us to capture margin upside in a rising coal market. Looking ahead, we remain focused on unlocking the full value of our dispatchable generating assets while continuing to evaluate strategic acquisitions and enhancements. The momentum we're seeing across federal and state policy, combined with growing interest from potential partners for long-term PPAs reinforces our confidence in the path ahead. We believe Hallador is uniquely positioned to capitalize on the trends that are reshaping the energy sector. To support this next phase of growth, in June, we announced the appointment of Todd Telesz as our new Chief Financial Officer. Todd brings deep experience across the power and utility sectors, most recently serving as CFO of Tri-State Generation and Transmission, a cooperative serving 40 systems across 4 states. Prior to that, he was CEO of Basin Electric, one of the nation's largest G&T cooperatives and previously held senior leadership roles at CoBank, where he supported energy and utility clients for approximately 17 years. Todd's background in finance, generation and cooperative power favorably positions him to efficiently support Hallador's continued growth plans. I will now publicly welcome Todd to Hallador and hand the call over to him to take you through our financial results.

Thank you, Brent, and good afternoon, everyone. I'm pleased to address you for the first time as Hallador's Chief Financial Officer. I joined the company in late June, and it's been a privilege to step into this role at such a pivotal time in Hallador's transformation. With a background rooted in the power and utility sectors, including generation, cooperative finance and strategic operations, I'm excited to contribute to Hallador's continued momentum as we advance both our organic growth initiatives and acquisition strategy. Now let's jump into our second quarter results. On a segment basis, electric sales for the second quarter were $60 million compared to $85.9 million in Q1 and $60 million in the prior year period. While third-party coal sales increased to $38.1 million for the second quarter compared to $30.2 million in Q1 and $32.8 million in the prior year period. Electric sales in Q2 were subdued due to typical spring seasonality, which brings milder weather and lower power demand as well as a planned maintenance outage at one of our two generating units at Merom that remained offline for the majority of the quarter. The increase in coal sales in the second quarter was primarily driven by higher third-party coal shipments. Despite these increased shipments, coal production efficiency gains resulted in elevated inventory levels at quarter-end. On a consolidated basis, total operating revenue was $102.9 million for the second quarter compared to $117.8 million in Q1 and $93.8 million in the prior year period. Net income for the second quarter was $8.2 million compared to $10 million in Q1 and a $10.2 million loss in the prior year period. Operating cash flow for the second quarter was $11.4 million compared to $38.4 million in Q1 and $23.5 million in the prior year period, with the decrease primarily driven by the aforementioned lower pricing and planned outage at Merom compared to Q1 and a larger $45 million PPA secured in Q2 of last year. Adjusted EBITDA, a non-GAAP measure, which is reconciled in our earnings press release issued earlier today, was $3.4 million for the second quarter compared to $19.3 million in Q1 and a $5.8 million loss in the prior year period. We invested $13 million in capital expenditures during the second quarter of 2025 compared to $13.2 million in the year-ago period, bringing our 2025 year-to-date CapEx to a total of $24.7 million. As of June 30, 2025, our forward energy and capacity sales position was $619.7 million compared to $630.4 million at the end of Q1 and $685.7 million at December 31, 2024. When combined with our third-party forward fuel sales of $371.5 million as well as intercompany sales to Merom, our total forward sales book as of June 30, 2025, was approximately $1.4 billion. Our total bank debt was $45 million at June 30, 2025, compared to $23 million at March 31, 2025, and $44 million at December 31, 2024. The expected increase from March 31, 2025, was driven by higher revolver balance. Additionally, we did not utilize our ATM program in the second quarter and have not utilized it since Q2 2024. Total liquidity at June 30, 2025, was $42 million compared to $69 million at March 31, 2025, and $37.8 million at December 31, 2024. This concludes our prepared remarks. We will now open it up for questions from those participating in the call. Operator, back to you.

First question comes from the line of Nick Giles with B. Riley Securities.

Brent, you started to walk us through kind of how you're viewing longer-term agreements with other counterparties. And so my first question was, are you really more open to multiple agreements to avoid customer concentration? And as a follow-up to that, your prior counterparty was a data center developer. Could new counterparties serve different end markets? Or do you think it would still be kind of in the data center realm?

Thanks, Nick. Well, ultimately, the hyperscalers are driving all the new demand, and it's significant, and it continues to tighten the market, particularly for capacity. Look, we've stopped our exclusive discussions in May. We're still speaking with that counterparty, but we've opened it up to other counterparties as well. And we've been particularly encouraged by what we're seeing out of the utilities. They've been much more aggressive, particularly than what they were a year ago. And so we're right now in the process of gathering multiple bids and having discussions with various parties and trying to evaluate those offers. So as far as counterparty risk, these are all investment-grade counterparties ultimately that I think would be our customer. And is it going to be that we tie up with one of them or tie up with two of them? I think it's probably going to be more like that rather than us doing five or six deals.

Understood. And my second one would be just back to the decision to co-fire. I think you mentioned it's inherently dependent on the PPA. Should we expect that the end user funding such an upgrade is really a core part of the discussions? Or is there anything else that you would highlight from an economics perspective that's different from the first agreement? I think a key part of that was that pricing would be above the forward curve, things like that.

Thank you, Nick. Regarding co-firing, we have customers interested in it as part of the transaction, while others do not see it as a requirement. We need to continue evaluating these offers as they come in, as they come with various risks, and we assess their overall value. Naturally, our initial focus is often on who will pay the most. However, we also consider factors such as who can start accepting and paying for capacity and energy next year, and whether facilities need to be built or if they'll go to a utility with an existing position and customer base. Additionally, we evaluate the duration of these discussions or contracts and the expected volumes. Utilities typically prefer larger volumes and are less focused on ramp-up times compared to data center developers. We strive to determine which deal offers the greatest value for Hallador shareholders and the highest certainty of execution, taking a risk-rated approach to decide our direction. It's worth noting that our Board of Directors holds a 25% stake in the company, so our interests align closely with those of Hallador shareholders.

That's very helpful. One more, if I could. Todd, I want to congratulate you on your appointment and joining Hallador at such an exciting time. Just would be great to hear your thoughts around liquidity management between now and any deal. Obviously, Hallador has been successful in executing some forward sales to pull forward some cash. Is there more of that that could be done between now and any deal? What other levers could you pull?

Thanks, Nick. It's very good to be here and to join the Hallador team. I think as we look forward, there are opportunities to perhaps continue to execute on prepays as we've done in the past. But also, I think as you look at the forward look and the open position that we have and some of the cash flow visibility that we have, I think there will be an ability to refinance the existing capital structure within the existing bank group and maybe with some additional lenders as well. So we're in the midst of those conversations, and I think we will look to achieve that over the course of 2026.

Our next question comes from Jeff Grampp with Northland Capital Markets.

Brent, the press release from today highlighted that the dynamics are continuing to work in your favor regarding the larger scale PPA. You initially mentioned that pricing was at a premium to the curve at that time. Since then, the markets have only strengthened. Is it accurate to say that the terms are likely more favorable now compared to that time? What is your level of confidence in this outcome at this moment?

Yes, Jeff, the curve has dropped slightly since that time. However, we have seen much stronger capacity markets. We're having very competitive discussions, but we haven't seen the final numbers yet. Some counterparties are focusing on structure, while others are considering both structure and price terms. We're gathering all this information to determine what offers the most value. We've observed other data center deals priced in the market, but it's difficult to fully grasp those based on headline numbers alone because many factors are at play. What encourages us the most is that when we issued RFPs a year ago, the utilities today appear to be more aggressive and willing to engage in much longer deals. They seem to recognize that the market is running low on accredited capacity. We’re working on how to structure this to maximize value for our shareholders.

Understood. That's really helpful. For my follow-up, on the acquisition side of things, you guys seem to be more communicative about that potential than maybe quarters past. So I was just hoping to hear a bit more about what inning you'd say you're in, in terms of looking at deals? Like is this something that you and the team are kind of building towards? Or are you guys actively in the market today for acquisitions?

Well, look, we're having conversations, right? And I guess the reason we've been more communicative about it is if there's somebody out there who is interested, we wanted them to pick up the phone and call us, right? We certainly have our eyes on several things, and we've inquired about a lot of different assets, and we'll see where those conversations go. They always tend to go slowly and then suddenly very quickly. So we're expecting some assets to come for sale. We're trying to get the company in a position where we can take advantage of that because we feel that particularly buying coal-fired assets is kind of our niche, and we're one of the few players doing it, and we see value there for the shareholders. So we'll see if we can be successful in acquiring one or more of those assets.

Our next question is from Jake Sekelsky with Alliance Global Partners.

Curious, going back to the coal-firing opportunity at Merom, should we expect to see economics wrapped around that at some point in the coming quarters? Or is that more of an internal exercise at this stage?

We know we can achieve this, as the pipeline is just five miles away. We've been working on securing easements, so we are confident it's feasible. We have conducted preliminary assessments regarding costs, the project's appearance, timing, and execution. The key factor now is determining who will be the long-term buyer for the output from the Merom power plant. We are in discussions with several parties about long-term transactions, potentially lasting around a decade. This will influence whether we proceed with the project now or defer it. We prefer not to disclose costs until we can move forward since any delays could lead to cost fluctuations. We want to avoid misleading anyone by projecting current costs that may change in the future. As things become more defined, we will inform the market and our investors that the plant can be co-fired with gas and will reassess if that aligns with customer demand.

It comes from Nick Giles with B. Riley Securities.

I guess my follow-up is really what's your level of appetite to reenter into exclusivity with any of these counterparties? Or said differently, as we think about an upcoming deal, should we expect to see a definitive agreement as the next announcement?

Well, as far as exclusivity, I don't think we really have an appetite at this time to do that. We think it's a seller's market, and we want as many opportunities as possible. And that's kind of where we're at today is trying to gather as much information as possible, talk to as many interested parties as possible, ultimately trying to transact in a structure that brings the most value to the shareholders. So I think it's unlikely we would go forward in exclusivity anytime soon. Regarding future announcements, a PPA of this magnitude would be a special event. We would disclose that with a special 8-K and probably even have an investor call to follow that. We wouldn't wait, I don't think, for a quarterly filing unless it was just a day or two or three in front of a quarterly filing, then we might try to coordinate that timing. But otherwise, I think it will be a special event because it will be a significant influence on the company.

Got it. And in some ways, deals taking a little longer could have favored Hallador as economics continue to improve. But is this really something that we should think about as being wrapped up before year-end? Or is there any kind of timeline you have in mind for progressing to that final agreement?

Yes. It's always tough to put timing on these things because we're dealing with counterparties whom we do not control. So I guess I'll decline to answer that. We feel this market has opportunities, and we continue to see interest from a broader group, and that's good for the company. I don't feel like we've wasted our time, so to speak. Certainly, we all would like to get to a deal and get it announced as quickly as possible. But ultimately, we continue to attract more interest, and we believe that will lead to positive outcomes. We'll try to be patient on our end, and we hope that our investors are patient with us because we're hopeful that good things are coming.

No, I appreciate that. And apologies if I missed this in your prepared remarks. I read in the release that the amended credit agreement deferred certain covenant requirements until the third quarter. I was wondering if you could add any color regarding that.

Sure. Thanks, Nick. We basically postponed a couple of payments into early next year, January and March. Then we defeased that term loan for $19 million. Those payments will come out of that piece of the puzzle. It's really about that and some timing of some leverage covenants as well.

Got it. I promise this will be my last question. Can you remind us of any major CapEx spend between now and any deal? Should we expect you to run at similar quarterly run rates through the balance of 2025 and into 2026? I know there were some changes on the regulatory front maybe in 2Q, if I'm not mistaken. So I was wondering if that might have benefited Hallador.

Yes, Nick. Your intuition is correct. I think as we look at the remainder of this year, we're seeing likely CapEx that's going to be a little bit lighter than we initially expected. So I think you can expect the full year to look very much like the first half as we've seen a little bit of delay in some of the ELG-related capital expenditures.

And this concludes our Q&A session. I will pass it back to Brent Bilsland for closing remarks.

I just want to thank everybody for taking the time to dial in today and for your ongoing interest in Hallador Energy, and we'll continue to work to bring value to the shareholder. Thank you very much.

Thank you. And this concludes our conference. Thank you for participating. You may now disconnect.