Hallador Energy Co Q1 FY2026 Earnings Call

Good afternoon. Thank you for attending Hallador Energy's First Quarter 2026 Earnings Conference Call. Operator provided instructions regarding the conference. As a reminder, this call will be recorded. I'd 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 first quarter 2026 results. With me today are President and CEO Brent Bilsland and CFO Todd Telesz. This afternoon, we released our first quarter 2026 financial and operating results and 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. Before diving into our first quarter results, I want to begin with what we believe is an important milestone in a multiyear transformation of Hallador, one that has been in the works for a long time now and reflects the steady, deliberate execution of a strategy our long-term shareholders have been patient with. Subsequent to quarter end, we executed a 12-year capacity agreement with a subsidiary of a utility that is expected to generate more than $1 billion of contracted revenue from 2028 through 2040 at pricing levels more than two times our historical contracted capacity pricing. This agreement is subject to approval by the Indiana Utility Regulatory Commission, which we anticipate will occur in the second half of 2026. The agreement represents one of the most significant commercial achievements in our company's history. It may be helpful to put today's announcement in the context of the path that brought us here. Six years ago, Hallador was originally an underground coal mining company. In 2021, we began acquiring a 1 gigawatt interconnection. In 2022, we acquired the 1 gigawatt power plant that utilizes the interconnection. In 2024, we began marketing long-term output of the plant. And in 2025, those discussions broadened from data center developers to utilities. In March of this year, we executed a 3-year capacity agreement at approximately twice our historical pricing. And today, we are announcing a 12-year $1 billion-plus capacity agreement that follows directly behind it. Each of those steps was deliberate, each built on the one before. And we believe the same pattern of disciplined sequential execution will continue to define how we create shareholder value from here. Combined with the 3-year capacity agreement we announced in March that contracted our accredited capacity for planning years 2026, 2027 and 2028, the agreement we are announcing today contracts the back portion of planning year 2028 and each year thereafter through mid-2040. Together, these two capacity-only sales total approximately $1.1 billion and place Hallador in a substantially sold-forward position on accredited capacity for approximately the next 14 consecutive years. We believe this represents a meaningful structural improvement in the durability of our earnings power and our balance sheet. And importantly, it provides the capital raising foundation from which to pursue the next set of opportunities in front of us. The agreement initially covers a smaller volume of accredited capacity in planning year 2028, increasing to approximately two-thirds of our accredited capacity beginning in planning year 2029 and continuing through 2040. This structure provides the kind of long-duration revenue visibility that is increasingly rare for dispatchable generation in MISO and validates the durable economic value of our dispatchable generation platform. It is worth noting that this agreement is only for our capacity. We are not committing energy under this contract, which enables us to secure durable contracted revenue while preserving full exposure to future upside in energy markets as demand for power continues to rise across MISO. Preserving that energy-side optionality is intentional. As we will discuss in a moment, we believe the energy market is on a different time line than the capacity market, and we are positioning the portfolio to participate in both as they develop. To us, that is the bigger story. While our first quarter results were generally in line with our expectations due to previously mentioned availability constraints at Merom, the underlying value of Hallador is increasingly tied to the growing scarcity of reliable, dispatchable generation. The agreement we announced today is one clear data point of that dynamic. And we believe it is one of several you should expect to see emerge from the role our assets can play in meeting this demand. When we look at the market, we view capacity as the critical first step. For large load customers, particularly data centers, access to accredited capacity is often the gating factor. Without it, projects cannot move forward. As a result, we are seeing capacity markets tighten and reprice ahead of the physical demand that these developments will ultimately bring. Energy demand follows on a different time line. These projects require several years to build. And as they come online and begin to draw power from the grid 24/7, 365, that is when we expect to see more meaningful response in energy pricing. Our portfolio is constructed to participate in both phases. The capacity contracts we have announced this year address the first. The merchant energy position we have intentionally retained is positioned to address the second when it arrives. This dynamic is central to how we are positioning the business. Our strategy is to monetize capacity where we can secure attractive, long-term value today, while maintaining flexibility to participate in future upside in energy markets. We are being deliberate in how we contract our portfolio, locking in value where scarcity is already evident and preserving exposure where we believe demand has yet to be fully reflected. Capacity remains a critical requirement for large load development, and we continue to see strong interest from counterparties seeking reliable supply over longer periods. The agreement we signed is an important anchor in our forward sales book, but it is by design, not the last commercial step we expect to take. We continue to evaluate additional ways to monetize our remaining capacity and optimize our forward energy position. We will maintain a disciplined approach, and we will be deliberate about the timing and structure of any future commercial agreements. That said, the level of inbound interest we are seeing today is meaningfully higher than it was even six months ago across multiple counterparty types and contract structures. The contracted high-conversion cash flows from these agreements also support a broader transformation we are pushing, building in Hallador over time into a multi-fuel independent power producer with a more diversified generating fleet. We have spoken previously about the proposed 515-megawatt combustion turbine project at our Merom Generating Station site under the MISO ERAS program. Additionally, we are continuing to evaluate dual fuel initiatives for our existing generation. We will work towards making progress on these work streams in the same disciplined sequential way as the contracting strategy has unfolded over the past year. Now turning to our first quarter 2026 results. As we discussed on our last call, we experienced availability constraints at Merom in the fourth quarter that continued into the first quarter and reduced generation from the plant. First quarter results reflected those constraints as lower generation at Merom pressured electric sales and intercompany coal sales, which ultimately impacted our profitability for the quarter. We also incurred outage-related replacement power costs during Q1, which created an additional headwind. While these results were generally in line with the expectations we provided in March, they are below the level of performance that we expect from our Merom power plant over time. Maintaining high levels of reliability remains a top priority for our team, particularly as MISO increasingly depends on dispatchable resources during periods of peak demand. As such, the generating unit in question is currently in a planned maintenance outage, and we are using this period to make reliability-related investments that we believe should improve performance as we move through the balance of the year. As we have discussed previously, Hallador operates as a vertically integrated platform, and Merom sits at the center of that system. When the plant is running efficiently, it drives performance across the business, supporting electric sales, creating consistent internal demand for coal, improving mine productivity and enhancing overall operating efficiency. When performance at Merom falls below planned levels, those impacts extend throughout the platform. Coal inventories increase, production at Sunrise becomes less efficient, and it becomes more difficult to optimize our cost structure. That is why our focus on improving reliability at Merom is so important. The outage currently underway is a key part of that effort. We are making targeted capital investments in the unit, and we believe that is the right decision given both the value of Merom today and the increasing importance of reliable, dispatchable generation going forward. Historically, similar investments have led to meaningful improvement in operating performance, and we expect the work being completed now to position the plant for higher availability as we move into the summer and upcoming peak demand periods. We are also in a much stronger financial position to support these investments. At quarter end, we had no outstanding bank debt and meaningfully improved liquidity compared to year-end. That improved capital position gives us greater financial flexibility to invest in the assets, support our ongoing operation and pursue the strategic opportunities we are seeing across the power market. Looking ahead, our second quarter results will reflect the planned outage currently underway, which we expect will temporarily reduce generation as we complete the necessary maintenance. As we move into the second half of the year, the underlying setup begins to shift with the plant returning from outage and availability improving. We expect to be better positioned heading into the peak summer demand period. As I mentioned earlier, more consistent performance at Merom supports not only electric sales, but also internal coal demand, mine productivity and overall operating efficiency across the platform. This is important because the opportunity in front of us ultimately depends on execution. While the agreement we discussed earlier reinforces the value of accredited capacity and dispatchable generation, realizing that value over time requires consistent performance at Merom. We're focused on improving reliability, driving efficiency across our coal operations and translating the market opportunity we see into durable cash flow. Although the first quarter was operationally challenging, it does not change our view of the long-term earnings potential of the platform. The fundamental signals across our markets remain constructive, and we believe Hallador is well positioned to compound shareholder value over a multiyear horizon as the strategy we have been describing continues to unfold milestone by milestone. With that, I'll turn the call over to Todd to take you through our financial results.

Thank you, Brent, and good afternoon, everyone. Jumping into our first quarter results. Electric sales for the first quarter were $65.1 million compared to $85.9 million in the prior year period, while third-party coal sales increased to $35.1 million compared to $30.2 million in the prior year period. Electric sales in the first quarter reflected the availability constraints at Merom that Brent discussed earlier, which reduced generation during the period and resulted in lower electric sales compared to the prior year. These impacts were partially offset by stronger credit capacity revenue during the quarter. The increase in third-party coal sales during the first quarter was driven primarily by improved pricing on shipments to customers, reflecting continued execution across our external customer book and Sunrise Coal's ability to supply both internal fuel requirements at Merom and external market demand. On a consolidated basis, total operating revenue was $101.8 million for the first quarter compared to $117.7 million in the prior year period. Net loss for the first quarter was $9.3 million compared to net income of $10 million in the prior year period. Operating cash flow for the first quarter was $20.5 million compared to $38.4 million in the prior year period, with the decrease primarily reflecting lower generation at Merom, higher purchased power costs during the quarter and an increase in coal inventory of approximately $4.6 million. Adjusted EBITDA, a non-GAAP measure, which is reconciled in our earnings press release issued earlier today, was $5.5 million for the first quarter compared to $19.3 million in the prior year period. We invested $7.7 million in capital expenditures during the first quarter of 2026 compared to $11.7 million in the year-ago period. As Brent mentioned earlier, we are currently in a planned major maintenance outage at Merom and expect capital spending to remain focused on planned maintenance, reliability and operational improvements across the platform. For the full year, we continue to expect capital expenditures to increase modestly compared to 2025 levels, excluding potential ERAS-related development investments. As of March 31, 2026, our forward energy capacity sales position was $571.2 million compared to $543.5 million at December 31, 2025, and $630.4 million at March 31, 2025. When combined with our third-party forward coal sales of $288.4 million as well as intercompany sales to Merom, our total forward sales book as of March 31, 2026, was approximately $1.2 billion. Importantly, these figures do not include the 12-year capacity agreement signed last week. Hallador had no outstanding bank debt at March 31, 2026, compared to $29.7 million at December 31, 2025, and $21 million at March 31, 2025. Total liquidity at March 31, 2026, was $97.5 million compared to $38.8 million at December 31, 2025, and $69 million at March 31, 2025. The increase reflects both the capital raised during the quarter, capacity payments received and the addition of borrowing capacity under our new credit facility. As Brent mentioned earlier, we took several steps during the quarter to strengthen our capital structure. In early March, we entered into a new credit agreement with Texas Capital Bank, Old National Bank and other long-term relationship lenders, replacing our prior facility. The new agreement includes a $75 million revolving credit facility and a $45 million delayed draw term loan, with maturity in March 2029 and includes an accordion feature that provides additional flexibility. We believe this new facility, combined with our improved liquidity position and the absence of outstanding bank debt at quarter end, provides a more flexible capital structure than we had entering the year. It allows us to fund the planned outage and reliability investments at Merom, manage working capital across both segments and support the commercial strategy Brent outlined, while maintaining a disciplined approach to leverage and preserving the financial flexibility to support the disciplined multiyear transformation Brent described. With that, operator, we can now open the line for questions.

Operator provided instructions for the question-and-answer session. Your first question comes from the line of Julien Dumoulin-Smith with Jefferies.

This is an analyst on for Julien. Congrats on the big contract. It's been a long time coming, so nicely done there. Just wanted to ask you, now looking forward towards the gas extension, can you talk about what would get you more confident here in pursuing that moving forward with the gas extension and what your strategy there is both with regards to securing the turbine and towards the EPC? I think you've talked about partnerships on the turbine side, but we're also hearing constraints on the EPC side. So curious if you can add more color on how you move forward with the gas reset?

Yes. Thank you. Selling a big block of capacity puts us in better financial footing and increases our confidence. As far as equipment, yes, equipment is hard to get and EPCs are constrained, but we're in conversations with those parties and we're moving those discussions forward. When we secure equipment and an EPC, we will announce such a transaction if we decide to go forward with that. What we're seeing in the market is the value of PPAs going up, but equipment prices are also increasing. We're trying to align those economics and see if we can execute a development build.

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

Congrats on the capacity deal. That's really great to see. Brent, in your prepared remarks, you noted that capacity is the bottleneck between data center deals being finalized. And I know you've signed this deal with the utility, but should we assume that this deal is ultimately linked to a hyperscaler end user? And how should we think about how end users have shifted on the energy front?

We're a little limited on what we can say just based on some of the confidentiality requirements in the agreement. That said, this is a material agreement, and so it will be filed as an exhibit with our 10-Q. There will be a little more information there. Overall, data centers are the big demand that we're seeing everywhere, but it's not the only demand. We're seeing potential steel plant expansions in Indiana and announcements of new aluminum smelters in other states like Oklahoma. Manufacturing is showing up as well, particularly as you look at energy disruption around the world. The United States is energy independent with some of the cheapest and most secure energy in the world, and so new industrial projects are being built on that foundation. AI is revolutionary technology and people are beginning to see the productivity gains from some of the new products. That's contributing to the demand. Indiana in particular is welcoming data centers to the state, while many other states have some form of pause or moratorium on new data centers. Indiana checks the boxes of population proximity, business climate and favorable tax policy to attract data centers. That's why we're seeing intensified interest in the state. We executed on it in March and again here in May, and we hope to execute on further deals later this year.

Appreciate that perspective, Brent. Maybe just back on the energy side. In the past, you've talked about where you saw pricing at any given time, and you've made references to the forward curve. I was hoping to get an updated view on that. It's been a while. There were some other deals across the space, some on the nuclear side, that we could use as precedent, but I don't think we've seen any of that nature here more recently. So just was hoping for an updated view on where you see energy pricing today?

There are a lot of different curves out there produced by many companies. We generally think capacity is a lead indicator for energy. First, if you're going to build a data center or a factory, you need to secure accredited capacity. Once you've secured that, you can start building, and then when those facilities are turned on, they draw energy and you see the energy pricing response. There's typically a couple-year lag between what we're seeing in the capacity markets and the response in energy markets. I think the curves are just starting to reflect that. We've seen a little upward movement in prices, which is encouraging. We'll see if that holds, but by and large everything we're seeing is constructive.

And maybe just one more, if I could. Given that some of the upside on the energy side could come with a lag, would you be willing to wait it out given you have the stability of the capacity revenue secured now? Or would you rather lock something in sooner?

We are well hedged for 2026 and this year's book is in great shape. These capacity deals set a strong foundation for the company through 2040, providing 14 years of forward visibility for a large portion of the book. If you review our March release, we talked about selling capacity at the March prices across the portfolio, which could equate to roughly $130 million of revenue before we turn the plant on against fixed costs of roughly $60 million. This deal was priced higher than that, so we have locked in a profitable position for many years before turning the plant. We feel no pressure. As for selling energy, we will take opportunities as they arise. Different customers have different needs and timing. If we see opportunities to lock in energy at prices we deem appropriate for the future, we will do so. But the biggest response we've seen to date has been in the capacity markets where pricing has more than doubled relative to two years ago, and that's where we've been most aggressive.

Your next question comes from the line of Jeff Grampp with Northland Capital Markets.

Congrats on the announcement. I wanted to talk on—you were a little more vocal it seems in this release regarding the dual fuel ambitions at Merom. Is there any more detail you can share regarding potential timing, next steps? And as I recall, it was a little bit more of a potential bargaining chip for prospective customers. With that seemingly not really a constraint or consideration, can you talk about what the benefits for Hallador would be should you pursue a project like that?

If we bring a gas line in for a gas plant, it has dual use. It could be used for the gas plant and could be used if we decide to dual fuel the coal-fired units. It wouldn't be a replacement of coal; we would have the ability to burn both coal and gas. There are multiple reasons to pursue that. Sometimes gas can be cheaper than coal. It helps investors, bankers and insurance companies view the company as having risk mitigation. If there is a change in administration or regulatory environment, Hallador could present as a multi-fuel company rather than solely a coal company. As we progress, we're locking in the economics of the existing generation and stepping toward building a gas unit to both expand our capacity and add a separate fuel source. If we then dual fuel the existing plant, Hallador could transition from a coal company to a multi-fuel company. That could potentially lead to a multiple uplift if we can execute it. That said, I don't want to state we are committed to doing that today. Because of the contracts we've signed, we've derisked the balance sheet and increased our ability to access capital, and these are the types of projects we are reviewing. We'll see if the investments make economic sense and represent the best use of capital at the time.

Understood. I appreciate that thorough answer. For my follow-up, I know in the past you talked about M&A ambitions and some opportunities there. It's obviously a big derisking event for the Hallador story at large. Does this help further or serve M&A ambitions? Are these independent? And can you just give us a broad update on the opportunity set in that world?

I think there's a lot of opportunity. Many potential sellers are funds that own assets. What is unique about Hallador is we have a public vehicle, a sales team that can help lock in long-term contracts to add value to existing assets, and a team working on developing the interconnect and expanding it to meet market demand. We can also acquire coal assets. Those attributes set us apart and make Hallador a potentially interesting vehicle for M&A possibilities down the road. We'll only pursue deals that we think are smart and bring the most value to shareholders at the time they're in front of us. Hopefully, we can have success on that front.

Your next question comes from the line of Matthew Key with Texas Capital.

Congrats on the new agreement. I was wondering if you could help quantify the pricing a little more on the new capacity agreement? I think you mentioned that it was done above the previous 3-year deal that was announced. Could you provide a rough ballpark on that improvement in pricing?

Matt, I apologize but we're somewhat limited on what we can say due to confidentiality in the agreements. However, if you look at the tenor and the volume we've discussed and the total dollar amount we provided, people can get in the neighborhood. There were reports on what our last deal was at, and some of that will show up in our forward sales book in the 10-Q. So if you compare the previous 10-Q to this 10-Q, I think you can get a feel for pricing. On this particular $1 billion deal, once it's approved by the IURC, that deal is firmly bound. That's the last approval we're waiting for. Once that happens in the quarter that follows, we'll start to report the volumes and pricing on the deal we just announced.

Got it. No, that's helpful color. And for my follow-up, I wanted to talk a little bit about the natural gas expansion. I believe in the previous earnings call you mentioned that you would expect MISO to complete the ERAS application in third quarter 2026. Have there been any changes to that timeline? Have they picked up the application as we stand today?

They have not picked up the application yet, but we still anticipate them doing that in June, and that will require us to make the decision sometime in September.

Got it. So about 90 days after they pick it up to work through the details?

Yes. That is how the ERAS program is supposed to work. Once they pick it up, the 90-day clock starts. We do not control when they pick it up.

I will now turn the call back over to Brent Bilsland for closing remarks.

Yes. I want to thank everybody for their patience in us getting this capacity deal done. We're very excited about the future of the company, and we think we've got just great things in store. So thank you for your time today.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.