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spk03: Good day and welcome to the Halidor Energy Company fourth quarter and full year 2020 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Becky Palumbo. Please go ahead.
spk00: Thank you, Tom. Good afternoon, everyone. Thanks for joining us today. Early this morning, Palo Duro Energy released its fourth quarter 2020 financial and operating results on Form 10-K and issued a press release containing certain financial metrics. Both documents are posted on our website. Today, we will discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we will open up the call to your questions. But before beginning, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties, and assumptions contained in our filings from time to time with the Securities and Exchange Commission. 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, we have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, forward, future information, or other or otherwise unless required by law to do so. With us today on the call is Brent Bilsen, our President and CEO, Larry Martin, our CFO. And with the required preliminaries out of the way, I'll now turn the call over to Larry Martin.
spk05: Larry Martin Good afternoon, everyone. Before I get started with our review of our operating results, I would like to go over a couple of definitions. We define free cash flow as net income plus deferred income taxes. depreciation, depletion, and amortization, ARO accretion, change in fair value of hedges and stock compensation, less maintenance capex, and the effects of our equity method investments. We define adjusted EBITDA as earnings before interest, taxes, depreciation, and amortization, plus stock compensation, ARO accretion, and changes in fair value of hedges, less the effects of our equity method investments, and iron glass sands. How do our energy incur a net loss of 4.7 million for the quarter or 15 cents a share, a loss of 6.2 million for the year, which equates to 20 cents a share. Our free cash flow for the quarter was 2.9 million for the year, 27.6 million. Our adjusted EBITDA was 9.4 million for the quarter and 53.5 million for the year. We had a decrease of our bank debt of $9.2 million for the quarter and $42.4 million for the year. We paid dividends of zero in the quarter and $1.2 million or $0.04 a share for the year 2020. Our bank debt at $1,231 million. 2020 was $137.7 million of borrowed funds and $5.7 million of letters of credit. Our net debt as of 12-31-20 was $129.7 million, and our debt to EBITDA leverage ratio was 2.68 times. I'll now turn the call over to our CEO, Brent Doslin, for his summary of the quarter and the year. Hello, thank you for joining. The global pandemic brought huge disruptions to the energy market as people stayed home and sheltered in place. Oil prices went negative for the first time. Natural gas prices dropped to multi-decade lows, and coal plants struggled to dispatch for at least two months in early 2020. Despite these challenges, Halador displayed great resiliency as evidenced by generating strong operating cash flow. of $52.6 million. Alder has continued its focus on debt reduction as we paid down $42.4 million of bank debt, representing 24% of our outstanding bank debt. We maintained $51.8 million in liquidity, even as our debt-to-EVA ratio rose slightly to 2.68 times. On April 16th, you may remember, 2020, Halidor received a $10 million loan under the Paycheck Protection Program. And we expect the loan to be forgiven by April 8th of this year. As our customers' inventory levels grew to record highs in 2020, we worked with them to modify shipping schedules, sell additional tons, and extend the terms of our contracts with multiple customers. Shipments for the quarter were 1.6 million tons. Coal inventories were reduced year over year by $2.8 million. Our operations teams also rose to the challenge, implementing new safety protocols and training to protect the health and safety of our employees. Out of an abundance of caution, at times up to 25% of our workforce was quarantined due to possible exposure issues. These operational hurdles, coupled with some temporary poor recovery, in the fourth quarter led to slight cost increases of $3,107 in 2020 versus $3,069 in 2019. At Oaktown, costs were $2,984 versus the year before at $2,835. As our recovery has now returned to normal and as increasingly more of the population receives vaccines, lessening our disruptions from COVID-related workforce issues, we anticipate our costs returning to the lower end of $29 to $30 in 2021. Looking forward, energy markets are recovering, as evidenced by the forward strip on natural gas prices. It's up 44% year over year. As of the end of January of 21, Illinois Basin utility inventory levels had returned to 48 days of full load burn versus being in the low 60s in May of 2020. Inventory levels are expected to drop further in February as a result of the cold snap that affected most of the nation. This return to normal was further displayed by Duke Energy and Southern Company Services, two of the largest utilities in the nation, coming out with requestful proposals to buy coal in the last few weeks. Though Texas received the majority of the nation's attention over its four-day rolling blackout, MISO, which operates the grid in the Midwest, experienced the same cold weather but fared much better as coal represented nearly 60% of its power supply during the cold snap. The Texas event has caused many decision-makers to question our nation's pace of transition to carbon-free electricity. One poll I saw last week of roughly 2,000 voters conducted by Morning Consult found that 7% and 10% registered voters support maintaining baseload on-demand power plants such as coal plants to support the reliable supply of electricity. In the last seven months, California and Texas, the two states with the highest concentrations of renewable generation at 30%, have both experienced multiple rolling blackouts. We acknowledge the greening of the grid, but believe that coal will play an important role in supporting the grid for many decades to come. With that, I will open up the microphone to Oh, I'm sorry, 7 out of 10. I misread my document here. 7 out of 10 support maintaining base load on the mass power plant. Sorry, misspoke. With that, I'll open up the microphone to questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Lucas Pipes with B Reilly Securities. Please go ahead.
spk05: Lucas Pipes Hey, good afternoon everyone and Brenton team. Good job on navigating this very difficult past year. I wanted to follow up on the comments you just made there regarding kind of the storm and then also the renewed purchasing activity. And kind of what's your outlook for coal burn this year specifically, kind of on a year-on-year basis? How sustainable do you think it is? Kind of as we look at 2022, is there going to be a continued erosion given plant retirements? Kind of at the stage where we are today, kind of what's your outlook for Coldburn this year, next year? Thank you. And maybe just to hone in a little bit further, any particular comments about Illinois Basin would be appreciated. Thank you. Sure. Thank you. You know, I would say And what we saw last year was, you know, if you look at that mid-March through mid-May timeframe, coal plants just really didn't dispatch. I mean, you had natural gas prices down around $1.50, even anemic as people stayed home. And so what we saw is coal inventory levels of our customers you know, grew dramatically higher, especially, you know, towards the end of May, May, June. And then basically inventory levels have been declining from that peak every day since. And we're, you know, we were happy with what we kind of, you know, saw data wise at the end of January. We haven't seen the end of February coal inventory levels yet. They've yet to be reported, but we know just with the record amount of, cold weather everywhere that those inventory levels got down further. And when it's that cold, neither trucks nor rail perform that well from a shipment perspective. So we think that the market has improved. I'm not going to sit here and say it's great yet. But it certainly must improve from where we sat six months ago. We've seen other coal companies come out and say that they have looked at exports of coal. I don't think anybody expected to ship exports this year. LNG pricing got so terribly high in December. I think the KJM marker got up to $32 an MMBTU, which is a record. Coal is exporting for various reasons, so that's helped to get some of that inventory level out of the area. We've seen some supply come offline, both from us and from competitors as well. Some of that can actually be a fair amount in Indiana that looks to be permanent. And so I think the utilities have been, you know, long and wrong for quite some time. And so now they're kind of playing a wait and see approach. But we think they have to buy coal at the end of this year. They're probably going to try to get to summer and just see, you know, how strong the summer burns are before they really come in and buy big volume. So big spot purchases here and there. We think our sales are considerably stronger in 2022 than they will be in 2021. Just from what our customers are telling us, what their open position is, and from buying closures that typically supply a market that are no longer operating. So from that perspective, we see our cold sales being stronger in 2022 than 2021. That's very helpful. Thank you. And then another topic I wanted to touch on is M&A. Brent, you know, historically you've had some opinions on M&A and the industrial logic behind it. Do you see increased appetite today? From my vantage point, it's been pretty quiet, but would be curious to see if maybe something changed on the ground. Thank you. Yeah, I think that you will see continued M&A efforts. You know, as the market gets smaller, we think you'll see more consolidation. And that kind of, you know, kind of the reason behind that is you're seeing contracts getting moved from high-cost production to low-cost production. You're seeing the higher-cost mines come offline and the lower-cost mines produce more. And I think that's just a natural progression, especially as we see power plant closures over the next decade or two. So, yeah, I think we see it. capital for fossil fuels is certainly more challenging than in years past, but it is available, and we'll see what the market brings. Okay. That's helpful. And, Brent, I'll ask a final one before I'll turn it over. the outlook on natural gas. You know, I'd say you've always been able to look a little bit beyond the corner in terms of, you know, what's coming your way in terms of the price on the computing fuel there. What's your analysis today say about natural gas prices and obviously the huge impact for the competitiveness of coal in the Illinois Basin in particular? Yeah, I think capital for oil and gas became more expensive mid-2019. And then 2020 certainly brought challenges for everyone in the energy space. And so that kind of forced a little more capital discipline into the oil and gas producers. And I think that, you know, a lot of those guys have, you know, on one hand, we still see productivity gains from some of those producers. On the other hand, you know, we're starting to see some of the Marcellus and Utica become, you know, pipeline constrained. And so it's going to be interesting to see if future pipelines can be built. You know, I think there's, you know, like the... Mountain Valley Pipeline, I think it's got a shot at getting built. But we've had surprises. I thought Atlantic Coast Pipeline would get built, and it doesn't look like that's going to be the case now. So, you know, if you really kind of pay attention to the gas, yeah, there's a lot of low-cost gas, but there's, you know, very few basins anymore, in my opinion, that have access takeaway capacity. We've done a really good job of building pipelines to get gas out of the U.S. into Mexico and building LNG export facilities to get gas out of the country and into Europe and into Asia. Those facilities are running wide open in the last few months. So that's been somewhat of a relief out to get that gas out there. And that's kind of what we're seeing is gas prices are up 44% year over year. That means coal plants are going to burn more, right? I mean, they're going to dispatch at a higher percentage the higher the price of gas is. And from a reliability perspective, it's going to be interesting to see, like I said, back in August, California had multiple rolling blackouts. And here, their renewable profile is a little bit over 30%. We saw California last year had several natural gas plants that were slated for retirement. But as they've had reliability issues, now they've pushed those retirement dates out. And we think a similar narrative can be made for coal in that, yes, certainly, there's a lot of pressure and a lot of desire environmentalists and those more on the left side of the politics. But at the end of the day, no one's willing to sit in the dark. We've seen this in California. We're seeing this now in Texas. And we're seeing any leader who lets us sit in the dark quickly loses their leadership position. And so I think that's what we're seeing is legislators from across the country are pulling these ISO operators, MISO in the Midwest, PJN, SPP, and others, and saying, hey, explain to us how this can never happen in our region. And so it really kind of comes back to diversity of supply. I mean, if you look at Texas, Texas had a lot of gas generation. but they couldn't get gas from the plants. And, you know, in that case right there, you know, we saw in Indiana where, you know, a coal-fired power plant was running full bore all through the night, and the gas plant that was owned by the same utility wasn't running because the local price of gas was $500 an MMBTU. And so they were dispatching, you know, they were offering that gas plant in. It was available, but it was being offered in at $3,600 a megawatt hour. You know, a megawatt hour typically sells for $25. And so, you know, out of the public, someone just said, well, wait a minute. How is this possible? How can we, you know, basically have our power interrupted four days at a time in Texas, and then you stick it to the $6,000 power bill, right? And so because of that narrative, I think a lot of people are looking at that and saying, well, wait a minute, it turns out there is a big difference between baseload power and interruptible power. Removable power doesn't have an on switch. You know, it comes on when the sun shines and the wind blows. Or you have to back it up with batteries, but even the batteries, you know, in most of these markets are only backing it up for four hours. So what happens when you have an event that lasts four days? So from that perspective, you know, it seems to be a challenge for any market to go over 30% renewables. I'm not saying it doesn't happen. I'm just saying that really seems to be the wall of resistance that we hear that. from ISO in Indiana is that, hey, we're at 10% renewables. We think we can get to 30, and then, boy, it really is difficult. It's going to take a lot of transmission lines to get built. And transmission lines typically take decades, not years. The Biden administration is working on this. They are looking at this, saying, well, how can we speed this process up? But there's just a lot of steps. And quite frankly, nobody wants the power lines built in their backyard. So there's a lot of ways for the public to fight that. So all of this is another way of saying that we acknowledge this greening of the grid. We just think this transition is probably going to take considerably longer than what politicians and the press would have you believe. I really appreciate all the color. Very helpful and insightful. And I wish you continued best of luck and your team, and I'll turn it over. Thank you. Thanks, Lucas. Thank you.
spk03: As a reminder, if you have a question, press star then one to be joined in the queue. The next question comes from Douglas Dethy with DC Capital Partners. Please go ahead.
spk04: Hi, good afternoon. Thank you for the good results in 2020. Lots of challenges for sure, but good results as far as I was concerned. Could you talk a little bit about your, given the uncertain environment, but maybe with a little bit of an upward trend, the ability to, I guess, flex production up? And kind of what is the marginal cost on doing that per ton?
spk05: Well, we do have the ability to flex up to eight or over eight million tons. And actually, as in most manufacturing and miners, the incremental cost would be negative because our cost would be lower if we maxed out our production.
spk04: I mean, your average cost would go down, you're saying, but at the margin, how much will your marginal cost be? I mean, there's always some marginal cost.
spk05: I think that's probably a number that we don't really want to disclose from a competitive point of view. I think that if you look back over the history of our company, when we've run over 7 million tons, you typically see 8 pounds average cost structure in the mid to lower 20s.
spk04: Okay, that's helpful.
spk05: And so, yeah.
spk04: And do you think on the pricing on the coal going forward as, you know, with the natural gas strip up, as you mentioned, is the pricing on the coal going to, is it coal on coal competition so much or coal versus natural gas, do you think, in terms of the the price setting on any incremental demand?
spk05: Natural gas kind of sets the size of the market as well as the electricity demand. And then once the size of the market is kind of set, then it becomes more co-op coal competition. Okay. And that's, you know, we have one customer in particular that tells us, Hey, you know, our model shows that our dispatch could be anywhere from 7 million tons to 13 million tons in a given year. And so typically what they'll do is try to, you know, buy towards their minimum burn and then fill in the balance with spot sales or even potentially, you know, longer-term sales once that once that burn forecast really starts to materialize. And we kind of think this year is one of those years where the utilities are bought at the minimum levels, and they've been caught wrong and wrong before, especially last year. Nobody really saw the pandemic coming. And so we think that they do have open positions in the back of the year, and we're expecting to participate in that We know there's significant open positions with our customers starting in 22. Gas market will continue to kind of set the size of what that market opportunity is.
spk04: No, that is certainly helpful. You mentioned the customer survey, and if I understood it correctly, that people are obviously very upset about the lack of stability and supply of electricity in different parts of the country, and Do you have an idea from your customers? The people who make the decisions tend to be the rate commissioners and often influenced by the political figures. Do you think it's going to reach that level? You sort of implied that it had already reached that level. Could you talk a little bit about that among the decision makers as opposed to the broad population on the Texas fiasco, if you will?
spk05: Texas is an unregulated market. Indiana is a regulated market, by and large. The decision to build a plant, such as a gas plant, right? And we've seen proposals from customers that, all right, let's set this coal plant and build a gas plant. A couple things are happening there. First, you're seeing the – you're seeing legislators all of a sudden say, well, wait a minute, you know, if – Of course, the utility wants to build a gas plant because they get a guaranteed rate of return on the cost of capital of that plant. But from an environmental perspective, the Biden administration is clearly focused on trying to get carbon emissions down. If we allow a gas plant to get built, what if there's a rule down the road that all of a sudden now we have greater stranded asset risk? We're trying to build you use gas-fired power plants. And so we think that this might favor coal in that, you know, our argument is these plants are already built. They're already paid for. The ratepayers in Indiana are already hooked for them. You should use the coal plants you have to transition to greener sources over time and use that to stabilize and back up the grid and support the grid. rather than shutting down coal building in the gas plant and then having a gas plant have its stranded asset risk, you know, 10, 15, 20 years down the road and not reaching its full 30, 35 years of amortization. So you're starting to see discussions among politicians, specifically in Indiana, around, hey, does it make sense to shorten up the amortization schedules on new fossil fuel builds such as gas? And I think that type of conversation favors coal. The part where you're really not seeing many headlines because they look a little quieter is the ISOs. The ISOs now are – MISA's come out and said, hey, they're going to reallocate the capacity factors of wind and basically cut them in half in the MISA district because, you know, originally they came out and said if you've got a gigawatt of wind – we're going to get a 25% capacity rating in the capacity market. So, you know, that means a gigawatt of wind is going to be credited for 250 megawatts of capacity. I could have come back and said, hey, you know, we're just not seeing that amount of reliability out of the wind generation assets. So we're going to reaccredit those assets here probably this year. And, you know, I think everyone's expecting – that to drop to something like 12, 13% versus 25% of capacity. So meaning a gigawatt of wind would certainly only have 130 million, or excuse me, 130 megawatts of capacity accreditation. We've seen, you know, discussion at MISO level and other ISAs of winter constructs that all of this is just another way of saying they're going to make sure that they build enough resources into the grid so that there's not a failure. And those ISOs that are lucky enough to have fuel diversity and are lucky enough to maybe be a little slow to the greening process are going to have much more reliability, and they're going to get to watch and see the mistakes of other ISOs that were more aggressive. And California and Texas have been, to date, the most aggressive. It looks like to me the New York ISO has put out some mandates that are extremely aggressive. So those will be ISOs that more conservative ISOs will probably sit back and watch and say, how did they do it? What did they get right? What did they get wrong? And what do we need to do to make sure that the lights stay on? But we just saw it. We just saw it a few weeks ago in Indiana where – I say Indiana. I mean all of MISO, which is – MISO didn't have the most customers, but it had the largest footprint of any ISO in the country. It was all the way from Louisiana to the top of Alberta, Canada. And, you know, at times that grid was flirting with being 60% coal-fired iron. And so, you know, I think all those ICE operators have to say, well, what happens down the road if we shut those assets down? How do we handle these, you know, taxing events? Which is resiliency, right? I mean, that's kind of the discussion. Kind of very interesting that the Biden, you know, FERC decided the week that Texas was sitting in the dark to cancel taxes. Trump's resiliency study. And he's probably found that timing like, you know, why would you delay that decision a week, right? People are sitting in the dark and coming out saying, we know we're responsible for reliability, but we're not going to do a resiliency study. So, you know, a lot of people don't know the difference between reliability and resiliency. Reliability is I go to the light switch and flip it on 100 times and it comes on 99 times. Resiliency means the house got hit by lightning and then it was flooded and the light switch still comes on. We can take a look and keep on ticking. Texas proved in February it did not have enough resiliency. And they'll, I'm sure, do the correct things to make sure they get that building in the future. And I think it's gotten much of the country between that and what happened in California talking about how do we build more resiliency into this grid, which means probably baseload assets stay on longer, whether that be coal, whether that be gas, whether that be nuclear.
spk04: No, that's really, really helpful. I appreciate it. Really insightful. Just to summarize, does that mean if looking at it in terms of, I guess, kind of death sentences, that some of these coal plants could get a longer term until they're supposed to, you know,
spk05: death or extinction by regulation or get commuted altogether by a natural death if you will is not too much to read into it well i think you can look to california where they had four gas fire power plants that were all slated to close this year and all of those to my knowledge all those plants are still are still in place and still operational because at the end of the day leadership knows, whether that's political, whether that's an ISO operator, whether that's the president of the United States, if you let people sit in the dark, you're going to be out of jobs. So we all have goals and we all have targets, and those are certainly noble aspirations, and we're not trying to deny that exists, and we certainly acknowledge that it's headed in that direction. Our point is this transition is much more complex and will take more time than what a lot of people give it credit for.
spk04: Thank you very much for those comments.
spk05: Thank you.
spk03: The next question comes from Brian Bassett, who is a private investor. Please go ahead. Hello. Thank you.
spk05: I was wondering if I could, a couple of company-specific questions. First, if you could talk about, I think at the end of the third quarter, the contracted sales that you were expecting in Q1 was a little over 2 million and it came in at 1.6. So if you could talk about that a little bit and then also talk about CapEx in 20 and what you're projecting in 21 in terms of the split between maintenance and growth CapEx and maybe a little more detail on what that growth CapEx is going into in 21. Because it looked like it was expected to be from the K, $13 or $14 million. So I'll take the first one on toll sales. And I think you said first quarter, but I think you meant to say fourth quarter. But yeah, we were expecting $2 million for the quarter. But basically, because of the lack of demand, customers came to us and we were able to negotiate extensions. to where we would push tons to outer years in an agreement for selling more tons and adding, in some cases, up to three years to the length of our contracts. So I think we reported in the management commentary just two years of sales. So you don't really see that growth in sales in the NA section. But our total contract position increased significantly. I know one of the contracts went as far out as 2027. I think that answers your sales question. I'll let Larry here answer yours. your capex question yeah so capex uh the investment capex for 2021 um of the 13 million a little less than half of that is for a man uh drop elevator in oak town two that we are building to say basically production time travel to the face which we think that's $5 to $6 million, and that's less than a two-year payback. The other growth capex, we are not ready to disclose at this time. So just a little more color on the elevator. Once we start buying five miles out, it makes sense to put an elevator and just drop our people in. much closer to the operating phase. And as is usually, you know, pretty, as you said, two-year payback is usually our map because, you know, we save significant labor. Instead of people driving around trying to get to the phase, you know, we drop them in, you know, very close to where they're working. They're, you know, much more productive right away. Okay, and I guess just to follow up then on whatever the project is that you're not at liberty to disclose right now, is that something that's already committed to or is that something that you're going to wait and see how 2021 develops in terms of expecting more orders or growth in 2022? Yeah, so right now it's a placeholder. We are in the negotiation. And so if we're able to develop that, if we're able to contract, then we'll have a capital expenditure there. We think that that is likely enough that we chose to put it in our budget. Okay.
spk02: Thank you. Thank you. Thank you.
spk03: As a reminder, again, if you have a question, press star, then 1 to be joined into the queue. Next question comes from Sam Serio, who is a private investor. Please go ahead.
spk05: Sam Serio Hey, guys. Thanks for the question. You look at the contracted prices, I think that was touched on in the last question. It's down a little bit from last year. I don't know if there's a specific reason for that, given the natural gas tailwinds, or if that's two different things that aren't really related. Well, the contracts for 21, most of them were all entered into way before the natural gas prices went up. So that's the reason why they're a little lower is because when those were entered into, natural gas was lower than it is today. Right. Awesome. And the last question, I think – sorry, go ahead. No, go ahead. And then the second question was, I think back – late 2020, early 2021, there's some local news articles about a storage facility down in Indiana, I think by a Duke Energy plant. I was wondering if there was any more color on that or any more news or development? Well, we've got a rail facility down near Princeton, Indiana, which is right next door to Duke Energy's station power plant. And that really is where we truck coal to the NS Railroad to hit various other markets. And we have a lot of land there, so it is designed and permitted to be able to store coal for customers in the event that they need that. Currently, we do not have any storage for customers at that facility. We have a little bit of coal stored Okay, that sounds good.
spk02: Awesome. Thank you.
spk05: Thank you.
spk03: This concludes our question and answer session. I would now like to turn the conference back over to Brent Bilsand for any closing remarks.
spk05: Well, I just want to thank everybody for their interest in Haldor. And thank you for your time. We will continue to try to generate positive cash flow and pay down debt. That's the direction we've been headed, and that's the direction we'll continue. And I look forward to talking to you at our next quarterly call. Thank you.
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