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.
spk06: Good afternoon. Thank you for attending today's Halador Energy First Quarter 2024 earnings call. My name is Megan and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Becky Polenbo, Investor Relations with Halador Energy. Please go ahead.
spk04: Thank you, Megan. Thank you, everybody, for taking the time today to join our discussion on our first quarter 2024 earnings. With me today are Brent Deslin, our President and CEO and our newly appointed CFL Margie Hartgrave. Yesterday afternoon, we released our first quarter 2024 financial and operating results in a press release that is now on our website. 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 up 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 SEC 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, actual results may vary materially from those we projected or expected. In providing these remarks, HALFOR 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 10Q later this afternoon. And with the preliminaries out of the way, I will now turn the call over to Margie.
spk05: Thank you, Becky, and good afternoon, everyone. First off, I'd like to personally thank Larry Martin for all of his hard work at HALADOR and for making this transition so smooth and enjoyable. Larry will be on the call to assist in answering questions for this quarter. Before we get started, I'd like to define Adjusted EBITDA to refresh everyone's memory. Adjusted EBITDA is the sum of operating cash flow, less the effects of certain subsidiary and equity method investment activity, plus bank interest, less the effects of working capital period changes, plus cash paid on asset retirement obligation reclamation, plus other operations. For the first quarter of 2024, HALADOR incurred a net loss of $1.7 million, which equates to a loss of $0.05 per share for both basic and diluted earnings. Our Adjusted EBITDA for the quarter was $6.8 million, and our operating cash flow for the quarter was $16.4 million. Of this $16.4 million, we used $14.5 million to reduce our debt, and at quarter end, our funded debt balance was $77 million, and our net debt balance was $75.4 million. We also had $18.6 million of LCs outstanding as of March 31, 2024. Our liquidity at quarter end was $39.5 million, and our debt to Adjusted EBITDA, or leverage ratio, was $1.58, well within our covenant of 2.25. With that, I'll turn the call over to our CEO, Brent Milsland.
spk02: Thank you, Margie. Throughout the first quarter, we continued our progress on transitioning the focus of HALADOR from a coal production company to an independent power producer. During the first three months of 2024, our electric operations revenues exceeded that of our coal operations revenue. Additionally, we were successful in adding approximately $138 million in forward energy and capacity sales, growing our electric operations forward sales book to approximately $657 million as of March 31, 2024. This represents approximately 44% of HALADOR's total contracted forward energy, capacity, and coal sales through 2029, of roughly $1.5 billion. However, we believe future forward sales from our electric operations will soon eclipse our forward sales from our coal operations. Since January, we have evaluated and continue to evaluate several major power and capacity sales opportunities, including one proposal made to us that, if contracted, will result in more than a billion dollars worth of potential forward power sales. We continue to see strong indicators that demand and pricing remain on an upward trend. According to the Indiana Business Journal, in the last 12 months, there have been eight new data centers and or Bitcoin mining facility projects announced in the state of Indiana where our Mirren Power Plan is located. We have also seen a major utility amend their integrated resource plan and publicly state that it previously underestimated new electricity demand growth by as much as 17 times. MISO has released information arguing that their capacity reserve margin, meaning the amount of excess generating capacity in their system, could go negative by as soon as next year. Monitoring the equity markets further strengthens our belief that investors and other IPPs are also anticipating similar increases in power demand, demonstrated most clearly through the more than doubling of market capitalizations of at least two of those IPPs across the previous 12 months. In support of our expectation that Howodore Power Sales will continue to exceed our traditional Sunrise coal subsidiary, we anticipate changing Howodore's SIC code to 4911, electric services, from 1220 by Tuminus Coal Producer in the future. On the electric side of the business, indicators for future power pricing appear much healthier than we have seen in recent months. We believe these indicators are supported by both our forward power sales book pricing and third party future power curves. Additionally, natural gas future prices are in contango meaning future gas prices exceed spot gas prices that have been depressing overall power prices for the last several quarters. As we discussed last quarter, the dynamics of the natural gas market paired with the non-standard mild weather throughout the Midwest impacted pricing and our power plant dispatch rates thus far in 2024. Future prices seem to indicate improvement on both these fronts, which we view as a positive for our go-forward operations. In April, we also launched a targeted request for proposals for power demand supporting new development at our Marin Power Plant. Responses are due in mid-May, but early indications point to a high level of interest. The RFP is available on our website for any interested parties that did not already receive the information. Our goal is for Haldor Power to generate approximately 1.5 million megawatt hours on a quarterly basis, which equates to approximately 6 million megawatt hours annually. During the first quarter, Haldor Power generated 816,000 megawatt hours, or 54% of our target, despite an average price of $41.90. The favorable pricing is a result of experiencing sales prices as high as $250 per megawatt hour for limited times during the quarter, balanced against several days of pricing below our variable cost to produce. In forward selling capacity, we target annual sales of around $65 million to help offset our fixed annual costs at the plant, which are currently approximated at around $60 million annually. We have already sold a large portion of our future capacity, which we believe makes us our forward capacity sales goal readily attainable for the next several years. As a condition of acquiring the Marin Power Plant, we agreed to sell 1.66 million megawatt hours of energy in 2024 and 1.6 million megawatt hours in 2025 at $34 per megawatt hour to the plant seller, representing 27% of our annual 6 million megawatt hour goal. Since this original transaction, we have been successful in selling over 5 million megawatt hours of energy to third parties at an average price of approximately $54 per megawatt hour over the years 2024 through 2029. This roughly $20 per megawatt hour jump in average pricing has us very excited about future sales. During the first quarter, our variable costs at the plant were $31.88 per megawatt hour. While we believe that we can typically achieve lower per megawatt hour costs, the low energy prices during the quarter necessitated that we run our plant at slower speeds and resulted in more frequent than normal starts and stops to avoid selling below our cost structure. Running in this manner is less fuel efficient than if we were able to consistently generate energy at 6 million megawatt hour pace, which we think could lower variable costs by as much as 10%. Shifting to the coal side of the business, as previously discussed in late February, our coal operations segment undertook an initiative designed to strengthen our financial and operational efficiency and create significant operational savings and higher margins in our coal segment. This step helps to advance our transition from a company primarily focused on coal production to a more resilient and diversified IPP. As part of this initiative, we idle production at our higher cost prosperity mine and substantially idle production at the Freelandville mine with minimal production until current reclamation projects are completed in late May or early June of this year. As we have previously said, we expect this initiative to reduce our capital investment for coal production in 2024 by approximately $10 million. We also focused our 7 units of underground equipment on 4 units of our lowest cost production at our Oaktown mine. We also reduced our workforce by approximately 110 employees. Mining costs for the quarter were $53.38 per ton. However, at Oaktown, we saw mining costs in March decrease into the 30s on a per ton basis. While there are several factors that impacted this cost reduction, we continue to monitor operations and strategic initiatives to better understand the longevity of these favorable conditions. Historically, Sunrise Coal has generated approximately 6 million tons of coal annually. Following the restructuring, we expect Sunrise to produce roughly 3.5 million tons of coal on an annualized basis for 2024. If market conditions warrant, our current operations are capable of producing at a 4.5 million ton annualized pace. This year, we have also 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 the commodity markets for coal should further maximize margins while optimizing fuel costs at our Marin facility. We continued our build-out of what we consider to be a -in-class independent power producer management team in April. In April, we welcomed Margie Hargrave as our new CFO. Margie comes to Hallador with broad-based experience in power production and capital markets. Adding Margie is a continuation of the breadth and depth of the IPP talent we continue to add at Hallador. Over the last two years, we have been successful in hiring our president of Hallador Power, a chief legal officer with data communications expertise, our senior vice president of power marketing, and a manager of environmental engineering, all of whom are accelerating our continued development of Hallador's current operational and future power acquisition capabilities. These prospects and our strong future sales position make us at Hallador very excited about the future of our company. I also want to thank Larry Martin for his 17 years of service at Hallador. Larry has been a trusted advisor and a friend, and we will wish him success in retirement later this year. That concludes our prepared remarks. I will now open up the call for any questions.
spk06: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question goes to the line of Lucas Pipes with B. Riley Financials. Your line is now open.
spk03: Thank you very much, operator. Good afternoon, everyone. First, I want to add my congratulations to Larry and my best wishes for his retirement. Thanks, Lucas. I want to touch on your kind of forward sales position on the power side. There's that nice jump in 2026 versus 2025 to $55.37 versus just the 3606. I wondered if you could remind us what drove that. I have a suspicion, but would be curious to hear more about that. Could you maybe walk us through a pro forma revenue buildup of the power segment assuming the power price market holds and also you know, the remaining capacity. Thank you very much.
spk02: Yeah, so as stated on the call, we sold a fair amount of 2024 and 2025 energy to the seller of the plant as a condition of selling the plant at $34 a megawatt hour. What we essentially have sold over 5 million megawatt hours since that time to other participants and including, well, anyhow, the market at $54. We continue to see fairly strong pricing in the forward sales curve. It's just a result of, I mean, you can't pick up the paper any day and not read or hear about how all this new demand we're seeing from AI and EVs and on shoring. We've got MISO expressing their concerns about could their reserve margin go negative next year, which I don't even know if that's possible, but it kind of speaks to the tightness of the market. And so as we continue to make forward sales, we're encouraged by the pricing that we see. We also, as outlined, saw an offer made to us for over a billion dollars worth of future energy and capacity sales. So the reason, we don't have that contracted yet and that deal may or may not happen, but there's a number of RFPs going on right now. Plus, for us, our RFP associated with mostly data center type customers trying to get them to locate on or near the property. So we think there's a lot of competition. And one of the things we just kind of wanted to state is that if you look back, I think in the third quarter we had something like we had a 300 million in sales and the fourth quarter like 400 million in the power division and this quarter 138. But we feel that there's going to be the potential for some very large transactions this year is there. And so we just kind of wanted to signal that to the market that we're hopeful that we can transact sometime this year on some very profitable and large transaction. So I think that was the first part of your question. When we look at what's the revenue line of the power plant, it's basically made up of energy and capacity sales. And so we have not been as hedged as we would like to be in the fourth quarter of last year and first quarter of this year, which has meant we've been selling in the spot a large percentage of our power division in the spot market, which at times can be very high prices. We sell prices as high as $250 a megawatt hour in January. But we also see times where it's below our cost structure and we're turning our plant off or we're slowing it down at night or something like that. So the goal is to contract a higher percentage of our forward sales so that we can get the plants up and operating and leave them on. And so we've stated that our goal is 6 million megawatt hours a year. That's something that we think is attainable and something that we are working towards. So look for more on that front out of us in the future.
spk03: So should we assume, thank you for this Brent, should we assume that you would be kind of more hedged in the future?
spk02: Yes, that's our goal. We've been trying to do that in a very low risk way. We've talked in the past about unit contingent, plant contingent type transactions in that if we can't produce we don't have to cover. So those have been slower to put together, but we've been successful in putting those together. And so we will hopefully continue to do more of that. None of that is ever guaranteed. We're just seeing a very large level of interest from a lot of different players. And so that's got us encouraged.
spk03: Very helpful. If you were to do something kind of behind the meter with the data center at the site, what would be a good benchmark for the power pricing? Would it be based on kind of MISO pricing and the curve or would this be a bilateral agreement where prices could deviate from those benchmarks?
spk02: Well, we'll see. I mean, we don't have the results back from the RFP. We're expecting those data points later this month. But certainly, you know, those type transactions will have to compete with what we can do in the more traditional markets. So we feel that competition is good for us.
spk03: Thank you. And can you speak a little bit to the connectivity at the site? Would your site qualify for any data center or could there be limitations due to constraints on the bandwidth of your connectivity?
spk02: So we have a 1 gigawatt interconnection at Miram. I believe the transmission lines flowing in and out of that substation there are around 1.6 gigawatts. And so, you know, it offers an interesting situation where, you know, we can potentially supply a customer directly from the plant or those electrons can be purchased from the grid.
spk03: Thank you for that. But in terms of the kind of fiber access, no constraints you're aware of?
spk02: Well, pretty much every location has to do some level of fiber built into the location, right? Because these are very potentially, you know, what I guess the first question is what will the size of the facility be and whatnot. So those are all questions that we've yet to answer. But again, you know, we kind of mentioned earlier that our chief legal officer kind of comes from the data communications world. So we've been able to tap into that network of people and get really good advice. So we think that in talking to the customers and talking to our advisors that this is very feasible and there seems to be a high level of interest.
spk03: Very helpful. Thank you very much for that, Brent. Best of luck. Larry, again, best wishes to you. I'll turn it over. Thank you.
spk02: Thank you.
spk06: Thank you, Lucas. As a reminder to register a question, please press star followed by one on your telephone keypad. Our next question will go to the line of Jeff Bronchik with Cove Street Capital. Your line is now open.
spk01: Hello now, ladies and gentlemen. Hey, Brett, and maybe just go over the cash flow implications of what we have today and the current structures in place and sort of an expectation for cash needs over the balance of the year as far as you can see. And then help us walk through what the model look like under you get rid of the contractual low sales and you're signing these conceptual big contracts. How does the cash flow model look going forward?
spk02: Well, you get a lot of questions wrapped up in one there. So I think we're clear that we don't give out forward looking guidance. I think we can talk at a high level of what our cost structure looks like and what our revenue looks like. I guess,
spk01: yeah, I'm not looking for guidance. What I'm saying is you guys have woken up and said we're changing the model and the model change clearly has cash flow implications which are at least transitory not good and therefore you guys are tapping different versions of liquidity to kind of keep the engine rolling. And I'm just curious, I understand transition issues but on a higher level like an independent IPP that's publicly traded, we should look like what as far as a cash flow profile? I'm talking pre-cash flow. That's what I'm trying to get at.
spk02: Yeah, I think what we're trying to say is, you know, look on a revenue side we've got, I mean we clearly state what our prices are, right? Our average prices are for the energy somewhere between $36 a megawatt hour average in 2025 to as high as $55.37 in 2026. That's for the energy. Capacity, you know, we're targeting $65 million in sales. Some years are better than that. Some years are worse. But if you divide that by 6 million megawatt hours that's going to be, you know, a little over, you know, somewhere between $10 and $11 a megawatt hour, right? So total those two lines together and you have, depending on the year, somewhere between $47 and $56 or excuse me $66 a megawatt hour. That's the revenue line. On the expense side, you know, we have a cost structure that's going to be in the, you know, variable cost that's this quarter was around $32 and a fixed cost that, you know, it's 60, assuming it's $60 million cost divided by 6 million megawatt hours would be $10, right? So now, you know, $60 margins, $40 cost, that's a $20 margin, 6 million megawatt hours, that's $120 million if we can hit all of our goals. We'll see if we're successful in hitting all of our goals.
spk01: But isn't, by definition, the IPP world, I mean, you're never going to sell, you don't want to sell out 100% of your capacity at the prices that the buyers want and vice versa. So there's always a contracted versus spot. Hence, is not the IPP model highly variable in, you know, you'll gush cash in the next year, you'll be, you know, doing converts from the board. I mean, just help me out on how you're looking through this over multiple years. Let's assume you guys execute perfectly. That's what I'm trying to
spk02: get at. Well, I think on the capacity side, we clearly list out that we have a high percentage of our capacity sold. And so obtaining that goal, there's a high likelihood of doing that because we've already got a high percentage of it sold, right? I mean, if you're looking at percent of capacity contracted, you know, it's 100% this year, it's 82% next year, it's 77% the year beyond that, it's 64% the year beyond that. So we don't have a lot of work to do to obtain that goal. What we've got to do work is on the energy side of the business, which is why, you know, we think in the next handful of months that we have participated in RFPs of our customers and we've launched an RFP to target data center or industrial uses of power through an agreement with Hoosier Energy that we announced last quarter. So we'll see how successful we are, but we would like to get a decent percentage of our plant contracted out so that we can get both units up and running and at least have both units running at minimum load, which would be about 65% of our generated output to run at minimum load all the time. So that's kind of the goal and that's, I think, what we're looking at. And then, you know, the coal side of the business, our power plant is, you know, one of our largest customers. And so, you know, that kind of has an internal hedge on our cost structure being able to produce coal at cost and deliver it to ourselves. We do purchase some coal from outside parties just to kind of diversify that risk. And, you know, that seems to be working out as well.
spk01: Thank you very much.
spk02: Thank you.
spk06: Thank you. As a reminder to register a question, please press star followed by one on your telephone keypad. The next question will go to the follow-up of Lucas Pipes with B. Riley Financials. Your line is now open.
spk03: Thank you very much for taking my follow-up question. Brent, I want to ask you about recently unveiled EPA Clean Power Rule. At what point would you consider making investments? What do you think is the legal outlook for this rule? I appreciate your thoughts. Thank you.
spk02: Well, look, I think the world is trying to balance a couple different things. On one hand, we want to keep the lights on 24-7, and we seem to have for the first time in 20, maybe 30 years, you know, significant growth and demand for electrons. And at the same time, you know, the world desires lower carbon emissions. So that's kind of the tug of war that I think goes on there and the challenge that we're all being guided to. And, you know, the grid took 150 years or so to build, and it's designed for a system of baseload power and spending generation. And in many cases, it needs onsite fuel. And so we're trying to transition to something else in a short period of time, and that's going to be really, really challenging. And so, you know, we've seen this new carbon plan come out. I suspect it will be stayed, and I, you know, we've read different legal theories and the like that, you know, it's probably headed to the US Supreme Court. And if I had to bet, I would bet they'll probably say it was unlawful. But regardless of that, to me, it does give a path for our business to run through 2039. And, you know, that would be with co-firing with gas, which we have for the last nine months been studying to see if that is an alternative that, you know, a lever that makes sense for us to pull. So we're continuing to evaluate that, and we're continuing to evaluate these new rules. There's going to be a lot of changes, but I think at the end of the day that the fact that will always went out is the lights must always stay on. And if they don't, they'll be new leaders, right? Because people are just aren't going to accept rolling blackouts in this country. And so I think physics prevails. That doesn't mean that the desire isn't there, we're not working towards that path. I just think we have to do so in a very responsible way. And so all this is probably going to take much longer than what politicians and headlines would have you believe. I mean, it wasn't that long ago, three or four years ago, they were saying that we were going to be carbon free by 2030 and then it was 2035. And now we have a pathway for the existing fleet to stay on until 2039. And if this rule stays around, it essentially means that any new gas plant build have to have carbon capture and storage, which to me makes it challenging for anyone to build a new gas plant. So it kind of means that we're probably going to rely on the existing fleet in some capacity for much, much longer. But there'll certainly be a lot of lawyers that spend time analyzing these bills. I mean, these rules were 1400 pages long. So they're very detailed and specific. And I think the industry is still trying to figure out exactly what the exact interpretation is, because it gets very specific for each fuel source. But to me, it's a near death flow to a new gas plant build, which further makes, all right, so how do expand the grid? You can't build new gas. Nobody's building new coal. Everyone who's tried to build a new nuclear plant has huge, huge cost overruns by 2X or more. And the capacity accreditation that we're seeing MISO hand out to wind and solar is 5% of nameplate. So you've got to build 20X of wind and solar is to get, you know, you got to build 20 gigawatts of solar to get one gigawatt of capacity. I mean, that's, that math is very problematic. So I don't think there's any easy answers or solutions here. But we are becoming more and more convinced about the longevity of business, the profitability of our business. And, you know, mostly because we are kind of transitioning the company from a business that had a shrinking demand to a business that has a growing demand. And I think that has great benefit to the long term shareholders of Halador.
spk03: Very helpful. Thank you, Brent, to follow up some of this. First, coal firing with natural gas, how much would that cost to make a plant change for that? How long would it take? And then on the plant, be it in MISO or across the nation?
spk02: Yeah, so we're still, like I said, we're still evaluating what co-firing the plant would look like. And there's different ways of doing that. So we're not really ready to come out with a cost estimate, though it is feasible. And then secondly, excuse me, I gotta interrupt it. The second part of your question again, Lucas, was what?
spk03: Yeah,
spk02: I think we're always in the market. And we're always having some level of conversation with someone about acquisitions and what that might look like. It's definitely something that, you know, as we talked about on the call, we continue to build out our team of experts and kind of bolster our capabilities to, you know, acquire plants, operate plants, and increase the overall value of those assets. And I think that's what we're trying to do. And that's, you know, part of the reason of the RFP with the different data center groups, to see if that's another way that we can add value to the platform that we have.
spk03: I'd like to thank you for your time, and I appreciate it. Brand, appreciate all the insights. Again, best of luck.
spk06: Thank you. Thank you. Again, to ask a question, please press star one, please press star followed by one on your telephone keypad. We will pause here briefly as questions get registered. There are no additional questions waiting at this time, so I'll pass the conference back over to Brent Bisland for closing remarks.
spk02: Well, I just want to thank everyone for their time today and their continued interest in HALADOR. Thank you.
spk06: That concludes the HALADOR Energy First Quarter 2024 earnings call. Thank you for your participation. I hope you have a wonderful rest of your day.
Disclaimer