Hallador Energy Company

Good afternoon. Thank you for attending today's Halidor Energy second quarter 2024 conference call. My name is Cole and I'll be the 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'd like to queue for a question, you can do so by pressing star one on your telephone keypad. I'd now like to pass the call over to Sean Mansuri, the company's investor relations advisor with Elevate IR. Please go ahead.

Thank you, and good afternoon, everyone. We appreciate you joining us to discuss our second quarter 2024 results. With me today are President and CEO, Brent Bilsland, and CFO, Margie Hargrave. This afternoon, we released our second quarter 2024 financial and operating results in a press release that is now on the Halador Investor Relations website. Today, we will discuss those results, as well as our perspective on current market conditions and our outlook for 2024. Following 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 SEC and are also reflected in today's press release. While these forward-looking statements are based on information currently available to us, If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, Halidor has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law to do so. We plan on filing our Form 10-Q later this week. And with the preliminaries out of the way, I'll turn the call over to President and CEO, Brent Bilsland. Brent?

Thanks, Sean. At Halidor, we've been undergoing a strategic and deliberate transformation process to capture increased value from our products and services as the company advances up the value chain. To accomplish this, we have focused on expanding our offerings from fuel production to wholesale electricity sales to ultimately powering the industrial end user. The acquisition of our Merrim Power Plant less than two years ago was the first step in this journey, enabling us the ability to transform our fuel into higher value wholesale electricity. We took another step forward earlier this year when we signed a memorandum of understanding with Hoosier Energy and Wynn REMC, creating a pathway to further increase value and drive margin expansion by enabling sales of wholesale electricity to industrial users of power. We have recently carried out a data center targeted request for proposal that has received a strong response. Our active negotiations on that RFP further strengthen our conviction that power is in critical demand and that we possess a crucial component to the success of these data centers. While we are encouraged by our progress with our counterparties, we caution that these negotiations are ongoing and take time given the potential magnitude for both our partners and our company. Nearly all of these proposed transactions would involve sales of large amounts of our energy and capacity for well over a decade. The state of Indiana, where our power plant is located, continues to solidify its position as a developing hub for high-tech and high-growth sectors. The Indiana Economic Development Corporation reports that plans for nearly $15 billion of new investments in Indiana's technology infrastructure have been announced by Fortune 500 businesses thus far in 2024, underscoring the growth potential in our marketplace. Businesses need power to enable them to build in Indiana, and Halador is one of the few companies that has it. We believe we are entering a unique time of electricity scarcity. We've heard multiple reports from across the country where utilities have told industrial customers they cannot timely provide them with power needed to support their growth. We have seen numerous companies reference the lack of available power as restricting their company plans. Last week, the results of the PJM capacity auction, a neighboring market to the MISO system where we operate, had certain zones where capacity prices traded up to the legal limit, as much as nine times more than the previous year. This result supports our belief that the value of dispatchable generation, like our MARAM plan, continues to increase. Energy scarcity is leading to higher long-term power prices, as evidenced by significantly higher energy prices starting in 2026 as contracted by Halidor and forecasted by the forward energy curve. I would also like to point to a recent Wall Street Journal article reporting that heavy industrial users of power, such as aluminum smelters, are struggling to compete for electricity with higher-value users of energy, such as data centers. According to the article, in the year 2000, there were 23 aluminum smelters located in the United States. Today, there are only four. During the quarter, we added $45 million in forward energy sales, bringing our forward capacity and energy sales book to $664 million as of June 30. When combined with our forward fuel sales, our total forward sales book at June 30 totaled approximately $1.4 billion. Unfortunately, the recent environment for spot electricity sales has been challenging. This past winter, Record high US natural gas production ran into the ninth warmest winter on record, according to NOAA. The lack of winter heating demand contributed to gas inventory levels climbing as much as 38% above the five-year average. As gas prices addressed downward, wholesale electricity prices also declined. In the first six months of 2024, approximately 90% of the off-peak energy hours at the Merrim Hub and approximately 60% of the total energy hours at the Merrim Hub priced below our production costs at our Merrim facility. Our goal is for Halador 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 half of 2024, power generated approximately 1.6 million megawatt hours during the first half of the year. We experienced sales prices of nearly $261 per megawatt hour for limited time, balanced against most days pricing below our variable cost to produce. These fluctuations led to an inconsistent dispatch schedule. We also performed 70 days of scheduled outages on half the plant during the first half of the year. We believe the environment will be better in the last half of this year to see higher dispatch rates as we have no scheduled outages planned for the plant for the balance of this year. Additionally, our plant already ran 437,000 megawatt hours for the month of July. Gas inventory levels have also improved from 38% above the five-year average in March to 16% above the five-year average at the end of July. For the first half of 2024, lower energy prices negatively affect both Hallador Power Company's generation model and the dispatch rates of Sunrise Coal's utility customers. In response to dispatching less, Those customers slowed coal shipments from Sunrise during the first half of this year. To match Sunrise's production levels and cost structure to that of market demands, we restructured Sunrise's operations in the first quarter of 2024. As we have previously noted, the restructuring included a reduction in force of approximately 110 people in February. We have since allowed attrition to further reduce our workforce by approximately 130 additional people, a total workforce reduction of more than 25% as of June 30th. We also restructured our operations to focus on our more profitable units and to aisle units with higher production costs. Transitioning our Oak Town mining facilities from seven units of production to four units of production was a deliberate process which took considerable time and effort and was completed in mid-July. We are encouraged by the early results of Sunrise's restructuring and have seen improvement in mining costs since we made the decision to adjust our operations. Our clean tons per foot of advancement, a key efficiency metric we utilize, improved from January to June by 27%. And our June cash costs at Oak Town were approximately $44 a ton, while our cash costs for the quarter were approximately $50. We expect to continue driving improvements in cash costs in the second half of the year, as we have already implemented further operational improvements in the month of July. It's worth noting that you will not find these cash cost numbers in our upcoming 10-Q filing as we have revised the presentation of our financials to conform with GAAP. Overall, we're enthusiastic about Howard's prospect for significant growth and value creation. The improving energy market landscape provides a solid foundation to return to growth as we exit 2024, and we believe the surge in demand to power data centers and other industrial users provides a real opportunity to transform our financial profile over the long run. I will now hand the call over to Margie Hargrave before opening Q&A and returning for closing remarks.