Q4 2023 Hallador Energy Co Earnings Call
Participants
Rebecca Palumbo; Vice President - Corporate Affairs; Hallador Energy Co
Larry Martin; Chief Financial Officer; Hallador Energy Co
Brent Bilsland; President, Chief Executive Officer; Hallador Energy Co
Lucas Pipes; Analyst; B. Riley Securities
Roger Zigler
Presentation
Operator
Hello, and welcome to the Hallador Energy Company's announces fourth-quarter 2023 earnings call. My name is Harry, and I'll be your coordinator today. (Operator Instructions) Now I'd now like to turn the call over to Becky Palumbo, Investor Relations, to begin, please go ahead.
Rebecca Palumbo
Thank you, Harold, and good morning and our GP Call for the Fourth Quarter and Full Year 2023. With me today are Brent Bilsland, our President and CEO, and Larry Martin, our CFO. Yesterday afternoon, Hallador released its fourth quarter and full year 2023 financial. 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 from time to time 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, it was a great period from those we projected or expected CGR 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 Rick. Lastly, Hallador will file our Form 10 K sometime this week.
And with that, with that, I will turn the call over to Larry Becky.
Larry Martin
Good afternoon, everyone. Before we get started, I would like to make a definition of adjusted EBITDA as operating cash flows less the effects of certain subsidiaries and equity method investment activity plus bank interest, less the effects of working capital period changes plus cash paid on asset retirement obligation recommendations plus other amortizations. For the fourth quarter, Hallador incurred net in or a net loss of $10.2 million or $0.31 basic earnings per share and $0.27 for diluted earnings per share for the year ended December 20 or December 31st, 23, we had $44.8 million of net income for $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 31st, was $91.5 million. Our letters of credit were $18.6 million. Our net funded bank debt was 88.7 million. Our leverage ratio four Our debt to adjusted EBITDA was 1.3 times at the end of the year.
I will now turn the call over to Brent Bilsland, our CEO.
Brent Bilsland
Thank you, Larry. First, I'd like to thank the Hallador team for their hard work and dedication on 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 on our coal division for the full year. The continued integration of Hallador power into our portfolio was 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 and in light of that we are also focusing on capital expenditures to prepare the plant to support those contracts in future years. We are also very excited about a recently signed agreement and an structure with Hoosier energy and their distribution member within REMC that should allow us to attract industrial users of power such as data centers, AI. providers and power dense manufacturers to the Merrem property. We believe leveraging our plant 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 our 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 customer 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 before 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 for that matter, plant outages and other unexpected challenges and what we expect to be an increasingly volatile power market negotiating deals. And this way protects us from downside risks. But it's also extremely bespoke process we'll take 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 you have 60 and 70 degree days in winter. The typical energy prices we would expect to get get see get thrown out the window and you end up in a situation where the plant simply does not dispatch. Continued depression of natural gas prices exacerbated this issue, and our fourth core quarter results were impacted by all of these factors. And as an example, while the average spot price for energy at Mirum was around $69 in 2022, the mild winter and low gas pricing drove the average price down to about $31 in 2023. 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 the higher contracted prices occurring in 26, 27 and 28.
In addition to the fourth quarter challenges at Mero, we also continue to fight against 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 23 and raised approximately 7.3 million of equity. We sold an additional 700,000 shares or so of Hallador stock January in January of 2024 and raised an additional 6.6 million. In addition, 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 add to the liquidity position and give us additional optionality as strategic opportunities like hedging acquisition or other ways to improve our balance sheet present themselves. Our near-term actions to improve liquidity will be done in a prudent and strategic manner to respond to changing events or to take advantage of market opportunities in further of our long-term outlook in February, we also restructured or 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 idled production at the free landfill mine where we expect to finish reclamation late in the second quarter of 2020 for 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 productions at Oaktown as part of this initiative, we reduced our workforce by approximately 110 employees, which we expect to start creating OpEx savings once the warranty period expires in the second quarter. While this was a difficult decision on a personal level. It was the right thing to do for the Company, and we believe that 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 hotel 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 optionality 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. Amiram 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 the increased margins of the energy markets to take advantage of the soaring demand for electricity and to step up the value chain in a more sustainable and future proved industry that which we have traditionally our bent that of which 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 said 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.
Question and Answer Session
Operator
(Operator Instructions) Lucas Pipes, B. Riley Lucas.
Lucas Pipes
Thank you.
Very much operator.
Good afternoon, everyone, and good afternoon with Brent. I have first wanted to I'll touch on the liquidity and how you think about it. So is the ATM a little bit late last year. Earlier this year there were the unsecured notes. Did you manage to a minimum cash balance or minimum liquidity balance? I would appreciate your thoughts on that.
Brent Bilsland
Thank you.
Well, I think, look, we are in this until we finish filling out our sales book, which we think we have enormous opportunities in front of us to add to that position this year. There's a lot of RFPs out a lot of interest. But in the meantime, we're very subject to spot prices of power, which is very much influenced by the weather or lack thereof. So when we think about liquidity, you can you can never have too much right now. But that being said, I mean, we are our Board of Directors owns roughly 31% of the shares. And so our interests are very much aligned with the shareholders because we are substantial shareholders, including myself. And so it's a balance we have to look at what do we think power prices will be for the year? And how much liquidity do we need to fulfill our obligations of improving the plants and keeping the coal mines up in tip-top shape, we probably had about as much because could go wrong and or fourth quarters went wrong, right? We had half the plant offline part of that was planned, and part of that was off UnPlan. We had moved a lot of equipment around that. The coal mines are trying to get all seven units in better production. And finally, in February decided, you know, we were going to our focus on our four best units of production and we were going to buy some coal from third parties and so there's just a lot that goes into that question. I don't think we have an exact target number. I think it's more we're looking at our sales book and what the opportunities are and where we can get comfortable with margins locked in contractually and managing liquidity until we reach that point in the road.
Lucas Pipes
Got it.
Really appreciate really appreciate that and, Turning a bit to on kind of the Q1 outlook. You already mentioned the weather hasn't been supportive. What what what insights would you be able to provide here at this point as it relates to the Q. one arm, but how much of those issues kind of continued into the quarter? It sounds like, David, at least on the coal side, on and for the full year, what sort of volumes should we should we anticipate it at this point?
And then on the on the power side, is that part of the discussion around kind of filling out the sales book? Or was that really release more more more in because Thank you very much.
Brent Bilsland
All right.
So I'm not sure I got your questions, Lucas, on the sales book, where we see opportunities, look, the market is short capacity, right? We've seen these power-generation supply has been relatively flat for about 20 years. And then we've been in this transition period of maybe a decade of closing baseload and replacing it with non dispatchable resources that have shrunk the accredited capacity. And I mean, by So says they've got some reports out that say in the next couple of years as people retire assets as announced, you know, the reserve margins go negative so that, you know, that won't happen. So but it just kind of shows how tight the situation has become from a generation point of view, particularly in MISO. And now you add in this explosion of AI right. I mean the growth in that industry is just kind of unprecedented, right? And there's all sorts of reports in final. I don't really know which numbers you believe, but essentially these are these companies that are trying to it's a race to develop AI if they can't find places to plug it in. So they're short capacity. We have to be long capacity. And this is this is kind of happening everywhere, right? We've talked to a lot of different utilities about where they have interest in selling their other plants to us and and there's always some interest out there. But what's also been surprising is how many have said, yes, we know we show retirement date and we're going to push that out because we're seeing all of this new demand suddenly show up from manufacturing from Europe from AI. from EV.s. So it's a long-term trend from us. We are extremely bullish short term. We're depending on whether in the spot market until we fill this book out. But there are major RFPs out right now for for power and capacity. And we feel we have a high probability of success in obtaining some of that. We are extremely excited about this new structure. We were able to get the Hoosier and win REMC to work with us on. I've tried to attract high high demand users of power to our site because we feel that look either that's going to offer us better terms than we can get in the wholesale market. We're not going to do it, but we feel just from the early indications and please keep in mind, we signed this agreement like a week ago. So we're early in this process, but we will be running an RFP to see who's interested in locating our site and can we get terms that are better than what we see in the long-term wholesale market, certainly you're going to see us add to both positions. And I hope this year in a very meaningful way on the coal side of the business you know, Mariner is a significant customer of our Sunrise Coal division. And if you look, you'll see in the 10 K when we release that we went ahead and contracted that business to ourselves, just trying to add more clarity and set that price out for the next handful of years. And we do that. It really kind of shows that materially for the next four years where we're extremely well hedged or sold contracted on the on the coal side of the business. So so I think that answer to your questions, I can't remember what the third was very helpful.
Lucas Pipes
But the third one was on the outlook for Q1 and the full year. I do have another question on the MOUs maybe And since you mentioned it, I'll raise this first and is this an MOU for behind-the-meter power essentially? And then how quickly do you think you could see something materialize? And I'd assume you'd have some construction that would need to take place to build out of a data center. What have you so kind of best case when when could you supply power to a customer?
Brent Bilsland
Thank you.
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 demands of the market are we have, I think, a fair amount of flexibility on what we can offer customers. And quite frankly, I don't know what the build times will be. We've had some customers without an RFP, knock on our doors, say that like the bank begins construction in three months, I think that's probably too aggressive. Could we see something as early as next year possibly, but we're not really far enough along in those conversations to give any guidance around, you know what the timing is. I think what we're excited about is just what we've seen other companies do both in Indiana and throughout the Midwest. We've seen some really large developments and those prices don't get published, but they do get whispered. And if that holds true. We're excited about what that could potentially be. Again till we see in our fee results. It's really hard to say we're just excited about the opportunity.
And then as far as our first clearing up, you know, we saw one week of really cold extreme weather. So the power plants performed well through that period and that was a profitable time. And the rest of winter so far has been extremely mild. I mean, you know, it's it's we've had some 60, 70 degree days in both February and March in Indiana. So we don't know what that means. We're heading into the shoulder season here of next month that traditionally is low power demand, but winter is traditionally high power demand and that hasn't proved to be the case. So we'll see if this turns out to be a hot summer, we're encouraged by what we've got extremely cheap gas today.
And then when you start to get out to October November, we have we have reasonable gas prices again up in the threes and three 50 range every month thereafter. So the power curve is seeing that and it has remained robust so far, but short term prices have been cheap. And so we'll just manage through that. And that's why you know, we're going to we will we will keep a very close eye on liquidity to make sure that we are successful and we could be some opportunities again here with the MOU that we just signed
Lucas Pipes
here on directionally would you expect Q1 to be worse in Q4?
Brent Bilsland
Well, I'm not prepared to give guidance on Q1 and in a 10 K earnings call. So we'll wait and see what those results are quarters, not over helpful. Thank you.
Lucas Pipes
I'll I'll do one last one, why why was it necessary for Hoosier to be part of the MOU?
Brent Bilsland
So we as or are only allowed to sell wholesale power. And when you start attracting customers for data centers and whatnot, that is industrial power. And so that technically has to be sold through a structure that involves a closure and a distributed distributive cooperative win REMC. And so we they're basically negotiated with them for a period of time to say, hey, there's an opportunity here for everybody, let's work together and see if we can have success. And those guys have just been terrific partners every step of the way and to continue continue to do so. And as such, I think we have a real opportunity to not only create value for Hallador but create a value for closure when it went our EMC and their customers.
Lucas Pipes
Got it.
Really appreciate all the color Brent to you or the team are the best of luck.
Brent Bilsland
Thank you, Lucas.
Operator
(Operator Instructions) Okay. Since we have no further questions in the queue for today, so I would like to hand back to Brett Wilson for any concluding remarks -- my apologies. We do have we have just had a question, Mr. And we have a question on the line here from [Roger Zigler]. Roger Zigler, your line is open please go ahead.
Roger Zigler
Hi, it's Roger Zigler, your individual investor. Thanks again for your time, guys. The So In recapping the endpoint question and a comment it is there anybody else in the coal industry who is making or has made this transition into integrated vertically integrated independent coal producer and our power producer, as you are.
It's my first question, I guess I mean you tell someone that's a good question.
Brent Bilsland
And when I take it, yes, to my knowledge of how little we're the only company that has acquired and has interest to acquire more coal-fired power plants and a public structure. And so we're happy and excited about what we were able to do at Meira. We think there are other possible opportunities out there to replicate. And so we will. But as far as other people in the industry doing this, I know of some others that are buying plants in a private structure, but I'm unaware of anyone doing it in a public structure, as let's say, it doesn't exist just to say I'm not aware of it.
Roger Zigler
Okay. And I think you've pretty much answered this but just for how we should think about the safety, the 2024 outlook, there's some tremendous opportunities. It sounds like you're really building for like on a three, three, four year build out. But the is it as simple as if you get in Indiana and maybe the surrounding power areas, get it finally get a hot summer following the second warm winter in a row. Is that going to just be like it's kind of Springboard nat gas coal in your power, your power markets, the considerably correct. I mean, is it that simple.
Brent Bilsland
Yes, the power market move so quick. I mean, we can see spot prices one day be $20 a megawatt hour and three days later, they're 250 made. But those are weather driven events. We're trying to get to a contracted sales book and we're having a lot of success to do that and doing that and doing so and there we have a huge amount of business out for bid as we speak, but we'll see how successful we are in securing those contracts. But I think we have multiple customers multiple avenues, particularly with MOU.
Now to add to that and what excites us is we see Hallador in a traditional margins that it made in coal. And then we see what if you look at our sales table in the 10 K when it gets published in the next day or so, you look at the pricing for power, particularly when you get out in the 26, 27, 28 range. Our margins are dramatically higher, and we think we can continue to have success contracting for power and capacity at higher margins. We haven't gotten our sales book filled out as fast as I would have liked. But I think our team's done a terrific job and the way we're going about it and you have to you have to you have to find willing dance partners and there's they're showing up. It just takes more time because it's a very bespoke process in filling that out. And so, you know, our earnings are going to be a little episodic depending on weather here for the next handful of quarters of we were we were the market changed so dramatically from our earnings call in November, what we saw the power curve there for December, January, February versus what it actually ended up being it was completely a different number just based on the fact that we had with some people are calling the warmest winter in history, right? We don't know what that means for the spring and the summer if it's hot, one thing about it, the win windmills, myself has a very high percentage of windmills. It had very little solar panels that have been built very little by half a percentage there generation, but the wind tends not to blow on hot days. So we're actually seeing, you know, theoretically, we think we'll see a peak in summertime versus where we used to see it in the wintertime. So, you know, that's that's what we're looking at. We're in contract discussions with customers to see, you know how soon we can start pulling some of these higher prices forward. And so that's what our team will be working on this summer, and we'll just have to see how it plays out. Hopefully, we see some some warm weather, that would certainly be helpful. But long term, we're just extremely excited because we think the earnings potential of the company has dramatically improved, and we feel that our future sales book is starting to demonstrate that to the public. So what I don't know from a shareholder perspective, will investors be focused on this quarter and next? Or will they be focused on what we're building all of that later this year and early into next year and beyond. So stay tuned.
Roger Zigler
Yes, to say you're basically spring-loaded is seeming to be an understatement with the things you have in place here. So good luck on that and appreciate it.
Brent Bilsland
And thank you for your question.
Operator
Thank you. We have no further questions in the queue. So I'd now like to hand back to rentals in person closing remarks.
Brent Bilsland
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.
Operator
This concludes today's call. Thank you all for joining. You may now disconnect your lines.
