This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Hello and welcome to Halador's Energy Company fourth quarter 2021 earnings call. My name is Chris and I'll be coordinating your call today. If you would like to register a question during a presentation, you may do so by pressing star followed by one on your telephone keypad. And I'd like to hand over to our host, Becky Palumbo, Investor Relations. Please go ahead when you're ready.
spk00: Thank you, Elliot. Thank you, everybody, for taking the time to join us today. As a reminder, this event is being webcast live, and the replay will be available on our website later today. Yesterday afternoon, we released our fourth quarter 2021 financial and operating results on Form 10-K, followed by a press release containing certain financial metrics, which are now posted on our website. Today, we will discuss those results and our perspective on market conditions and outlook. Following the prepared remarks, the call will open up to questions. This call may contain forward-looking statements, that is, statements related to future, not past events. In this context, forward-looking statements often address our expected future business and financial performance. 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. For example, our estimates of mining costs, future cost sales, legislation and regulations relating to the Clean Air Act and other environmental initiatives. In providing these remarks, we have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information future events, or otherwise, except as may be required by law. For a description of some of those risks and uncertainties that may affect our future results, you should see the risk factors described from time to time in the reports we follow with the SEC. So today, on today's call, we have Brent Bilplin, our president and CEO, and Larry Martin, our CFO. And with the preliminaries out of the way, I turn the call over to Larry.
spk03: Thank you, Becky, and good afternoon, everybody. First, I want to get a definition out of the way. We define adjusted EBITDA as operating cash flows plus gain on extinguishment of our PPP loan plus current income tax expense less the effects of certain subsidiaries and equity method investments plus bank interest less the effects of working capital period changes plus other amortizations. So for the year ended December 31, 2021, we had a net loss of $3.8 million, or $0.12 a share. Our adjusted EBITDA was $50.3 million, and our bank debt decrease was $26 million. At the end of 2021, we had $111.7 million of bank debt, our net debt with our cash on our balance sheet was $109.2 million, and our leverage ratio, which is debt to EBITDA, was 2.34 times. I will now turn the call over to Brent Filslam, our CEO. Thank you.
spk04: As we reflect on 2021 and look forward to 2022 and beyond, we feel that last year was the year the economy reopened, 2022 will be the ramp-up year in integration of our soon-to-be-acquired Mayor and Power Generation Station. The 2023 and the years following appear to have the potential to be fantastic for the Hallador shareholders. But first, let's review 2021. We shipped 6.2 million tons and produced 5.8 million tons of coal during the year. Pricing for new business in Q1 was terrible. and we chose not to participate in making new sales at that time. But as the year wore on, the market strengthened dramatically, and we chose to make forward sales for the years 2022 through 2026, totaling 5.8 million tons, with 4.6 million of those tons being delivered over the next three years. In the fourth quarter, as markets improved, We began focusing on increasing our production, ramping from 5.8 million tons of production to our target of 7 million tons, a 21% increase. To date, we have increased our headcount by 17%. However, productivity increases have been challenging, as when you take turnover into consideration, we have a lot of new employees that require extensive training. Additionally, we mined through a handful of difficult areas to enable setting up our underground for additional units of production. Our eighth of the whole mine is reaching the near of its reserve life, resulting in higher than historical costs. Eighth will mine out in a few months, and we will open a new pit, which will result in lower mining costs. Despite the higher costs, we were able to generate $48 million of operating cash flow. 50.3 million of adjusted EBITDA and reduced our bank debt by $26 million. As of December 31st, 2021, our bank debt was $111.7 million, bringing our liquidity to $35.9 million and our leverage ratio to 2.34 times within our covenant of 3X. Turning our attention to 2022, We anticipate producing and selling 7 million tons. Our production volumes have increased, but are still not at the 7 million ton pace. So we expect more shipments in the back half of 22 than in the first half. Our average sales price is 30 cents a ton higher than 2021, and we expect both towns to average roughly $31 a ton for the total full year 2022. So we expect slightly better margins on more tons in 2022. CapEx for our coal operations is expected to be $25 million in 2022. Our big news was recently made public on February 15th since Halador announced its new wholly owned subsidiary, Halador Power Company, will acquire Hoosier Energy's 1 gigawatt Mirim generation station. It's located in Sullivan County, Indiana, in return for Assuming certain decommissioned costs and environmental responsibilities. The transaction, which includes a three and a half year power purchase agreement, is scheduled to close mid-July upon obtaining required government and financial approval. We expect Halador Power to contribute little to Halador's profit in 2022 as the plant is fuel limited, meaning it doesn't have enough fuel to procure to run very many hours in 2022. However, this acquisition is significant starting next year as we begin to have additional fuel to put to the plant, at which time we believe Halador Power will begin to double Halador Energy's adjusted EBITDA. Additionally, at the end of the plant's useful life, Halador and Hoosier expect to finalize a PPA to allow for renewable energy development at the site. This transaction makes Howler very unique. It is an example of how Howler can help its customers transition to renewables, providing critical capacity to them in the near term to maintain grid reliability while creating a path to renewables through a PPA in the future. We are working to increase our liquidity to allow for increased working capital and enable forward power sales. As such, On March 25th, we executed an amendment to our credit facility to maintain our leverage covenant at 3x. We anticipate adding more liquidity to our balance sheet prior to our anticipated acquisition of Miriam in mid-July. All of these actions are setting up 2023 and beyond to be very special for Halliburton. Of the 5.3 million tons we have sold outside parties in 2023, our average sales price is $3.29 per ton higher than in 2022. Additionally, we have 2 million tons of coal beyond the 5.3 million to sell to the Merrim Power Plant. This removes the fuel limitation of Merrim. Additionally, Russia's invasion of Ukraine has fundamentally changed the world's focus on energy independence and procuring BTUs for the next few decades from supply other than Russia. With all forms of energy experiencing much higher prices, power prices are higher as well, and we have a large open position of both power plant capacity and energy starting from June of 2023. As we have previously stated, We believe this puts Halador in a position to more than double its adjusted EBITDA in 2023 and beyond. Maintenance capex for Halador Power in 2023 is expected to be $16 million. In order to run the plant past 2025, we will be required to spend some money on environmental controls. We are currently evaluating how best to meet those requirements. In summary, Halador Energy is becoming a fundamentally larger company. Our wholly-owned subsidiary, Sunrise Coal, will increase its production by over 20% going forward. And our new wholly-owned, Hellover Power subsidiary will generate adjusted EBITDA equal to or greater than Sunrise Coal. All of this points to a very bright and lasting future for our shareholders. With that, I'll open the mic up for questions.
spk01: Thank you for our Q&A. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from Lucas Pipes from B. Reilly Securities. Your line is open.
spk02: Thank you very much, and good afternoon, everyone. My first question is on the proposed transaction, and I just want to make sure I understand what happens after this initial three and a half year term. Is that when the power plant is retired or is that when you would switch to, would you be able to extend the operating life of the coal plant beyond those three and a half years?
spk04: Yeah, so we're contracted with Hoosier to sell all of the capacity and energy through May of 2023 And then it steps down starting in June of 23 through December of 25 to roughly 30% of the capacity and 20-some percent, below 20% of the energy. We do not have to do any environmental upgrades to the plan to run through 2025. To extend beyond that, we'll have to spend some money on ELGs. We're still evaluating. What's the best way to comply with that and what those cost structures are? We'll pull the trigger on that decision sometime next year. At current market prices, we think it absolutely makes sense to make those investments, but we will evaluate all that over the coming 12 months.
spk02: Okay. And if you make those investments, what would be the operating life of the plant?
spk04: Well, that's largely based on economics. Right now, the markets are – there's just not – there simply is not enough capacity, rated capacity, to really keep the lights on. I mean, I think the grid operator, if you read what MISA was saying, their reserve margins have come down significantly. They declared a state of emergency in MISO January 1st, 2nd, and 3rd. They have publicly stated they think that their grid could reach 80% renewables by 2050. I don't think anybody really knows how long this transition takes. I think MISO is saying it's going to take longer than what the headlines are saying. The market will determine... how long it needs the capacity from our plant, but we have seen strong demand for our excess capacity since announcing this transaction in mid-February. We had one supplier call within four hours of the announcement and say, I'll take all the capacity you have. So the issue is all utilities, all public utilities especially, want to transition. but they all have the same game plan, and you can't shut down generation that's rated, has a rated capacity of, say, 92% of name played, and replace that with generation that has a rated capacity of, say, 25%. To do that, you have to overbuild the lower rated capacity, and you have to build an enormous amount of transmission lines. How long does that take? My system says transmission projects typically take about a decade from planning to the permit being issued, and then they have to be built. So I think FERC is doing some things to try to speed that up, but we've yet to see how long that transition will last. So how long will this plant last is totally going to be determined by the market. We don't know the answer to that. Um, it looks from my vantage point, like it's got a long life ahead of it, but you know, markets change every day. So, um, you know, how often did the economics make sense to 2025? Um, and we are studying what our environmental costs would be to extend the life of the plant beyond that. But yeah, we're, we're optimistic.
spk02: Okay. That's helpful. Thank you. In terms of your balance sheet, on my numbers, it appears that you wouldn't generate sufficient free cash flow between now and maturity to essentially just pay this off out of cash. Could you share with me how you think about refinancing opportunities? What sort of options are you considering here at this time?
spk04: Yeah, so what we're looking at is we say closing is subject to permit transfers and financial approvals. So as such, we have to get permission from our bank group to allow power, I think that's the Merrim plan, into our collateral position. At the same point in time, our credit facility goes current towards the end of this year. And we want to increase our liquidity so that, you know, as we take on more working capital And we want to make sure we have enough liquidity that if the market gives us the right opportunity to hedge an evaluation that we think is appropriate, that we can put up the LCs to take advantage of those opportunities. So power prices keep rising. Again, energy prices are up, right? I don't think it's any secret that the world changed when Russia invaded Ukraine. I mean, Russia is the world's largest gas exporter. I think they're the number two oil exporter in the world, and they're the number three coal exporter in the world. Their coal exports equal roughly a third of U.S. coal production. And suddenly, you know, 80% of the world says we can't touch Russian coal. So Europe now is looking to the United States. That has dramatically... increase pricing, which is pushing up power pricing here as well, because the power markets have to decide, do those BTUs go overseas or do they stay home? The advantage that we now have is, how will we have the choice? Do we want to put tons to the plant and generate electrons, or do we want to sell those tons elsewhere? So that is something we'll continue to evaluate. At this time, we think it still makes sense, even though coal prices are much higher, we still think it makes sense to put coal to the plant and generate electrons. We feel that's more profitable. Plus, we have some obligations as well. So those are the things that we're evaluating. We think it just puts us in such a unique position to be able to decide where the best place where are the best places to put our tons for the return of the outdoor shareholder? So we're ecstatic about what we see. Like I said, the company is becoming bigger, both on the coal side and now with outdoor power. And this is going to have a tremendous effect on our share price here in the coming years.
spk02: Thank you. And so the way to think about the – maturity is that this is being renegotiated here as part of this transaction.
spk04: Correct. It is being renegotiated. We're looking for a term extension. We're looking for increased liquidity and to allow it into the collateral package. Those conversations are ongoing now, but we feel good about it.
spk02: That's very helpful. Thank you. And then my last question, we all know and feel the inflationary pressures. What's your guidance for cash costs? I may have missed it, but how do you think about the cost pressures affecting your operations? Thank you.
spk04: Yeah, we're all seeing inflationary pressures and supply pressures. You have to fight inflation. right now to get inputs, such as glue and parts and various things. I think all our suppliers are stretched towards the upper end of their limits as well. How long that lasts, I think it's, everything you read says, well, this will dissipate throughout the year. You know, interest rates are rising. Fuel prices, electricity prices, food prices are all higher. That will have a slowing effect on the economy at some point in time. I think what we see is for this year, we're showing an increase in our cost structure. We said we thought we would average $31 a ton at O-Town for the year. So, again, we've added people. Our productivity is coming up. It hasn't come up as fast as we would like, but we're seeing gains every day. We're seeing life at the end of the tunnel. We're getting... We're spending a lot of time and effort to take a mine from five, five and a half units of production to seven. That takes some time to get set up, get everybody in the right location, get people hired, get people trained. But that's happening. That is happening. So, you know, costs weren't great in the fourth quarter. Appreciate everybody's patience on that. I mean, we think we are absolutely headed in the right direction. And the potential of what we see coming, you know, this year should be better than last. 2023 and 24 and 25, for that matter, we think are just fantastic. So... When we look at the type of cash flow that we think will be coming out of a company today that has a market cap of somewhere north of $100 million, I think the return on investment for the shareholder has the potential to be outstanding.
spk02: Thank you very much, Brent, and all the best of luck. All right. Thank you, Lucas.
spk01: As a reminder, to ask any further questions, please press star followed by one on your telephone keypad now. We have no further questions. I'll now hand back to Brent Belsland for closing remarks.
spk04: I appreciate everyone's time today and interest in the company. Again, I just want to reiterate how excited we are about what we see coming around the corner and the opportunity that's in front of us. And thank you for your continued interest. Thank you.
spk01: This concludes today's call. We'd like to thank you for your participation. You may now disconnect your lines.
Disclaimer