Hallador Energy Co

NASDAQ:HNRG

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. Thank you for attending Hallador Energy's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call may 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.

[Sean Mansouri]

Thank you, and good afternoon, everyone. We appreciate you joining us to discuss our third quarter 2024 results. With me today are President and CEO, Brent Bilsland; and CFO, Marjorie Hargrave. This afternoon, we released our third quarter 2024 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. We plan on filing our Form 10-Q shortly. And with the preliminaries out of the way, I'll turn the call over to President and CEO, Brent Bilsland.

[Brent Bilsland, executive]

Thanks, Sean, and thank you, everyone, for joining us this afternoon. I'm happy to announce that during the third quarter, we reached an all-important milestone in our transformation as an independent power producer by signing a nonbinding term sheet with a leading global data center developer. Our team is working diligently to finalize definitive agreements with this partner and the relevant utilities that will support the delivery of our energy and capacity to a large load end user.

As we've previously discussed, these types of deals are complex, multiparty arrangements involving multiple stakeholders. If we're successful in reaching these agreements, we'll secure long-term contracts for a substantial portion of our plant's energy and capacity at improved margins, extending for over a decade.

As a reminder, our proposed in-front-of-the-meter transaction involves selling our power and capacity through utility or cooperative, which would be in contrast to the behind-the-meter structures that have created recent regulatory challenges that you may have seen associated with other deals of this type. We are optimistic that we will be successful in finalizing a long-term data center transaction given Indiana's business-friendly climate and favorable tax policy.

We believe we hold a considerable portion of the remaining unsold accredited capacity in MISO Zone 6, covering Indiana and parts of Western Kentucky, where demand continues to grow. While we have not yet reached binding agreements, we are encouraged by the progress with this partner and the strong interest we continue to see from other potential counterparties in our energy and capacity offerings. We believe we have selected a highly strategic and experienced global partner and are pleased with the progress that we've made to date.

Further, the supply response from the accredited capacity market continues to be restricted. MISO has reduced the capacity accreditation awarded to intermittent resources like wind and solar. This constraint makes it challenging for the market to meet accredited capacity needs through resources other than coal, gas and nuclear.

Additionally, the response from accredited capacity suppliers has been muted, in part due to the regulatory and environmental challenges facing all types of dispatchable generation, including gas. This limited supply response is further constrained by an influx of solar and wind projects that provide minimal accredited capacity, overwhelming the queue and delaying access for essential dispatchable generation projects. Each of these factors contributes to our belief that accredited capacity we have is likely to remain valuable into the foreseeable future.

Now MISO has recently sought to change the way in which accredited capacity is calculated and awarded, and we continue to evaluate how that may impact our future capacity awards. However, this does not change our sentiment with respect to the value of what we have or what we expect to be awarded in the coming years.

Turning to the results for the quarter. Our wholly owned subsidiary, Hallador Power generated 1.1 million megawatt hours in Q3, up from 800,000 megawatt hours in the second quarter. While the energy environment remains challenging, during the quarter, we saw incremental improvements based on stronger pricing and higher dispatch rates. Even though our pricing remains weak, we're encouraged that gas inventory levels are returning towards their historic norms.

Additionally, our power plant ran more frequently this quarter, thus our cost improved significantly. This and other factors led to a material increase in gross margin for our Power segment to $16.36 per megawatt hour sold compared to $8.11 in Q2. Subsequent to quarter end, we executed a $60 million prepaid power purchase agreement, or PPA, with an existing customer in the global asset management industry, which is on the heels of a $45 million PPA we signed in the second quarter.

These types of deals support our near-term operations while positioning the company to continue advancing negotiations of the long-term agreement we described earlier. In our Sunrise Coal division, we continue to make progress with the restructuring of our mining operations, an initiative we launched in Q1. During the third quarter, we completed a project for 4 of our most productive units, bringing all operating units to a split error system, which helps to improve efficiency and reduce operational costs at the mine. While it is still early, we believe the optimizations projects we have implemented in connection with the restructuring will help increase the tons of coal mined per man-hour while decreasing the cost per ton of the coal that we will mine.

Overall, we're enthusiastic about the direction of the energy markets and our strategic positioning. We believe the surge in demand from data centers and other industrial users presents a meaningful opportunity to transform our financial profile over the long term. With the strengthened balance sheet and an improving environment for both coal and power sales, we are well equipped to capitalize on the multiyear growth opportunity ahead of us.

I will now hand the call over to Margie Hargrave before opening Q&A and returning for closing remarks.

[Marjorie Hargrave, executive]

Thank you very much, Brent, and good afternoon, everyone. Reviewing our third quarter financials in more detail. On a segment basis, electric sales for the quarter were $71.7 million compared to $59.4 million in Q2 and $67.4 million in the prior year period, while coal sales were $48.3 million for the quarter compared to $45.7 million in Q2 and $134.4 million in the prior year period.

This expected year-over-year decline was driven by our decision to reduce our coal production as part of the restructuring of our Sunrise Coal division as announced earlier this year. On a consolidated basis, we generated $105 million for the quarter compared to $93.5 million in Q2 and $165.8 million in the prior year period.

Net income for the quarter was $1.6 million compared to a net loss of $10.2 million in Q2 and net income of $16.1 million in the prior year period. Operating cash used for the quarter was $12.9 million compared to operating cash flow of $23.5 million in Q2 and $35.3 million in the prior year period, with the decline driven by less deferred revenue from Q2 and a more favorable environment for coal in the year ago period.

Adjusted EBITDA, a non-GAAP measure, which is reconciled in our earnings press release issued earlier today, was $9.6 million for Q3 compared to a negative $5.8 million in Q2 and $35.9 million in the prior year period. We invested $11.6 million in capital expenditures during the third quarter, bringing total year-to-date CapEx to $39.6 million.

As of September 30, 2024, our forward energy and capacity sales position was $616.9 million compared to $664.1 million at the end of Q2 and $516 million as of September 30, 2023. When combined with our forward fuel sales, which were up more than 50% to $320.3 million compared to the end of Q2, our total forward sales book as of September 30, 2024, was $1.42 billion compared to $1.37 billion at the end of Q2 and $942.1 million as of September 30, 2023. These results do not include the $60 million PPA we signed in October.

In response to the more challenging environment for spot pricing this year, we focused on strengthening our balance sheet. During the third quarter, we modified our credit facility to provide short-term covenant relief, which allowed us to pursue additional liquidity. Subsequent to the quarter end, we utilized $20 million of the proceeds from our $60 million prepaid PPA to further pay down bank term debt and $34 million to pay down our revolver, which reduced our total bank debt to a $23.5 million balance at the end of October compared to $91.5 million balance outstanding at the end of last year.

Importantly, we did not use our ATM program in the third quarter or in the several weeks since the end of the quarter. Total liquidity at September 30, 2024, was $34.9 million. Following the $60 million PPA we signed last month at the end of October, our total liquidity was $53.8 million. Through these strategic actions to strengthen our balance sheet, we are creating a solid foundation to position Hallador for substantial growth and margin expansion in the years ahead.

That concludes our prepared remarks. We will now open the call for questions. Thank you.

[Operator]

Our first question comes from the line of Lucas Pipes from B. Riley.

[Lucas Pipes, analyst]

Brent, congratulations on the progress of signing a nonbinding term sheet, and that's great to see. I just wanted to follow up on a few points there. The first is, is it possible to maybe quantify the magnitude of this agreement? You mentioned it's the majority. We -- should we be thinking about 50%, 60%, 70% of the plant's output? And any way to quantify that would be very much appreciated.

And then on the pricing side, you mentioned it's above the curve. I would assume this is kind of separate from kind of the capacity payments that would kind of be part of the package. But if there's a way to quantify how far above the curve and what is included there, I would very much appreciate your thoughts on this.

[Brent Bilsland, executive]

Yes. So as far as volume of the output of the plant, it would be the majority of the output of the plant, significant. And as far as pricing goes, we get a lot of questions around pricing. And it gets very complex, right? Because people say, well, is it going to be priced like this deal or some other deal that was announced. And the first question I always have is, okay, when they came to that number, is that the price -- is that the wholesale price for energy? Does that include capacity?

Does that include fees paid to a utility in the case -- or cooperative in the case that it's in front of the meter, like we're proposing? So it's a little hard to kind of compare apples-to-apples. I think we've said repeatedly that it's going to be priced above the curve or what we feel is above the curve. We've seen where the other deals are priced, and we feel that we're within market.

[Lucas Pipes, analyst]

Brent, could you remind us where -- I'm sorry, there's a lot of echo on my side. But Brent, could you -- could you remind us where the curve is as a benchmark? That would be helpful.

[Brent Bilsland, executive]

Yes. When we first said that, we felt the curve was in the mid-50s. It's fallen a little since then. But I think we still feel it's above where -- this will be priced above where we originally said the curve was.

[Lucas Pipes, analyst]

That's helpful. And then on the PPA that you signed, can you remind us what is the magnitude of that agreement? What years does it cover? And when I look at your hedge position on the power side in the release, would this include the PPA? Or would that be separate and on top of that?

[Brent Bilsland, executive]

Yes. No, so we did a $60 million prepayment subsequent to the third quarter, technically in the fourth quarter. And so you'll see it in our Q and subsequent events. And that is for power sold in years 2025 and 2026. So there were some power sold in '25 and some powers or electricity sold in '26.

[Lucas Pipes, analyst]

That's helpful. And then turning to the coal side. Sorry if I missed it, but can you remind me what the coal production cost per ton were during the quarter and how this kind of stacks up to the efficiency and restructuring plan that you've outlined earlier this year? And what else kind of do you look forward to on the coal side from a cost or productivity standpoint?

[Brent Bilsland, executive]

Yes. So we're still seeing those costs be elevated. We did do a lot of work, particularly in July around where we had the mine shut down for a week, and we were going to a split error system. So I really just don't feel like our costs were that reflective in the quarter because of that noise going on with splitting the error.

What we're excited about is -- or encouraged by, I should say, is we're seeing our average foot per shift is increasing. So our tons per man hour is improving. And so we think it's getting our cost structure back into the 40s where it historically was. And -- but again, Hallador, we've cut our volumes significantly, right? I mean we were doing 6.5 million tons annually a year ago. Now we're doing 3.5 -- and so I think what we tell people is, is the Hallador Power side of the business is really where it's going to be at. And Sunrise really is almost more in a support role at this time to support the power plant.

Now we certainly do sell coal to third parties. And we feel that we get a premium for that typically because of our coal qualities work so well in certain plants and help make other coals out there in the market work better. So that's kind of where we see the business.

[Operator]

And I'm currently showing no further questions at this time. This does conclude today's conference call. Thank you for participating, and you may now disconnect.