Hallador Energy Company (HNRG) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the Hallador Energy and Hoosier Transaction Call. My name is Bethany, and I will be your operator today. [Operator Instructions] I will now hand the call over to your host, Rebecca Palumbo, Investor Relations at Hallador Energy. Rebecca, please go ahead.

Thank you, Bethany. Thank you, everybody, for joining us today for this investor call. And as a reminder, 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 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 the risks and uncertainties that may affect our future results, you should see the risk factors described from time to time in the reports we file with the Securities and Exchange Commission. With us today are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. If you have any questions after Brent's prepared remarks, you will have to dial in to the conference line. The number is 1 (844) 200-6205 and use access code 417-976. And with these required preliminaries out of the way, I will turn the call over to Brent.

Thank you, Becky. And thank you, everyone, for joining us today. On Tuesday, we announced Hallador Energy through its new subsidiary, Hallador Power Company, LLC, will acquire Hoosier Energy 1 gigawatt Merom Generation Station, located in Sullivan County, Indiana and return for assuming certain decommissioning costs and environmental responsibilities. The transaction, which includes a 3.5-year power purchase agreement, is scheduled to close in mid-July 2022, upon obtaining required government and financial approvals. I want to reiterate the transaction is contingent upon receiving said government and financial approvals, which we believe we are likely to receive but are not guaranteed. Today's call is to summarize the transaction, provide our thoughts and answer any questions you may have. Before proceeding, I would like to give a sincere thank you to Hoosier Energy for being a partner in what is now our second transaction with them over the past year. Hoosier's management team has been great to work with and together, I think we've established a win-win future for both of our outstanding companies. Again, just to provide more details, Hallador will receive the Merom 1-gigawatt power plant located on 800 acres in Sullivan County, Indiana. A CCR or coal combustion residual certified coal-ash landfill, rail facilities capable of holding up to 4 unit trains, a power purchase agreement for Hoosier to purchase from Hallador, 4 million-megawatt hours of energy and 100% of the plant's capacity through May of '23, then reducing to 22% of the energy generation and 32% of the capacity through the end of 2025. Also an extension of the start date of the renewable PPA Hallador and Hoosier announced in May of '21, for 150 megawatts of solar and 50 megawatts of battery storage. The renewable PPA is maintained as part of this transaction and now starts after Hallador decides the eventual retirement date for the Merom coal-fired power plant. Liability is not assumed. I think it's important to point out Hallador has not taken on any liabilities for the pre-CCR landfills located adjacent to the Merom power plant and is not assuming any legacy union liabilities associated with the workforce. This acquisition makes great sense for Hallador as it provides a market for up to half our coal production. Historically, due to market constraints, our Sunrise Coal subsidiary has produced, on average, 6 million tons annually. The acquisition of the Merom Power plant provides a market for 3.5 million tons of our annual coal production. Thus, we only need to sell an additional 3.5 million tons to third parties to maintain our desired 7 million-ton annualized production rate. To summarize, we will be selling more tons at higher margins with the acquisition of the Merom Power Plant. At current market prices, we project Hallador's EBITDA should increase from our typical $50 million per year to over $100 million annually. I want to reiterate that, at current market prices, we project Hallador's EBITDA should increase from $50 million per year to over $100 million per year. However, the Merom Plant is fuel limited in 2022. Thus, we expect to see minimal effect to EBITDA in 2022. Purchasing Merom expands our advantages, combining low-cost coal production, low transportation rates and an efficient heat rate power plant results in what we believe will be the lowest-cost coal plant in Indiana. Given this winning combination, we are confident the plant will run at a high capacity factor. The reason we are able to do this and Hoosier is not is because Hallador owns the coal supply to the plant. We think of Merom as a new coal customer for half of our coal company's long-term production, securing this long-term market, combined with a new ability to capture strong margins in the electric wholesale generator market through high operating capacity factors, along with higher energy and capacity prices should be an exciting and rewarding event for our shareholders. Hallador will be adding new capabilities. As we expect to hire an experienced third-party operator that will retain Merom's existing workforce, the third-party operator will oversee all operations, maintenance and support for the plant. This will enable a smooth transition from Hoosier to Hallador on day 1 and provides Hallador with a strong, knowledgeable partner to help make the right long-term planning and operational decisions related to future investment in the plant. We want to take a similar approach in hiring an experienced third-party energy management company to help us with managing around-the-clock energy supply. Our energy manager will work closely with our third-party operator to optimize all aspects of plant operations. Why is the Merom plant needed? As the trend of retiring and replacing baseload power generation with lower capacity renewable generation, plants continues. The supply of capacity in the market is declining. So much so that on January 1 through 3, 2022, MISO declared a state of emergency forcing all generation in the MISO system to make itself available. As we look forward, 50% of MISO's coal-fire generation has announced and it intends to retire in the next 8 years -- within the next 3 years. The MISO Q shows that nearly all of this generation is expected to be replaced by renewables. There's virtually no gas showing up in the MISO Q asking to hook up to the grid. We believe this trend will further exacerbate the short supply of MISO capacity and will cause capacity to become increasingly valued. What are the next steps? Well, first, let me say, we will honor all of our existing coal contract commitments. We are sold out in 2022 from a production standpoint, but we plan to ship all tons. We have worked hard to build good working relationships with all of our utility friends, and we plan for that to continue. While things are tight from a coal supply situation for the next couple of years, we still have 50% of our coal production that we'll be offering into the long-term market with our utility friends. As for Merom, we plan to provide the market with much needed capacity in the near term by operating as a coal-fired power plant, while our renewable power purchase agreement with Hoosier will provide a pathway to eventually repower Merom with renewable energy in the long run. We believe the experience we are gaining operating coal production, coal generation, and renewable development makes Hallador uniquely situated to help our customers manage the transition to renewable generation in a more reliable way. We think Hallador shareholders should be excited for reasons we discussed. And we think that Sullivan County, Indiana should be excited as well as we are maintaining good jobs and community support that would have been lost in May of '23 otherwise. With that, I'll open our call up to questions.

[Operator Instructions] Our first question comes from Neil Row.

Brent, this is Neil Rowe. I'm a shareholder. It doesn't look as though any of this will have any impact 1 way or the other on bank debt to start? Is that correct or not?

Well, we will have to work with our lead bank and bank syndicate to allow this transaction into our credit facility. We're not writing a check to Hoosier for this. It's not a large capital constraint. We have some working capital needs. We have some letter of credit needs. But no, we think that -- and again, we think that because there's so limited fuel for this plant available in 2022, it has minimal effect on profitability in 2022. But we think that in '23, which we're well hedged and beyond, we think that this greatly improves the profitability of our company, which we will use that cash flow to pay down bank debt. So we think this is a pathway to get us out of debt much quicker.

The next question comes from John Mosier.

Good morning. I was looking at the dividend schedule here prior to the pandemic, it looks like the last 1 was paid or declared January 30, 2020. Do you anticipate you would reinstate the dividend used to be $0.04 per share per quarter?

I think we've said on prior calls, we would not consider issuing a dividend until we got under 2x debt to EBITDA. I think in 2022, I don't think that would be likely that we will take that under consideration until 2023. We want to get this plant integrated and cash flowing and reduced debt. That's our primary interest at this time.

[Operator Instructions] We have a question from John Jones of Redbud New Energy.

You indicated that the closing of Merom would be deferred and that the PPA was likely to kick in around 2025. Is that correct? Are you now planning on 2025 retirement or is that yet to be determined?

No, that's yet to be determined. We have a power purchase agreement with Hoosier through December 31, 2025. And the plant is environmentally in good shape, has all the air investment in place that will require investments with the new ELG mandate to run beyond 2025. So we'll be evaluating if that's something that we plan to do at today's economic prices, we believe that's something we intend to do. But we'll see what the market brings and how this goes. We think the market is extremely short capacity. The market keeps retiring assets that are baseload that have an on switch and replacing them with renewable generation, which is great, but renewable generation doesn't have an on switch. You can't turn on a solar panel, you can't turn on a windmill. And so that's creating this shortness of capacity that -- in the market. So we think that a couple of things have to happen, either basically assets cannot retire as quickly as they are or we have -- the market has to start building gas plants. But what we're seeing is -- and we expect to look at the MISO to use the 30 gigawatts or 40 gigawatts of gas being proposed to be built. We're not seeing that. I think right now, there's 3 gigawatts. So for those reasons, the economics today look strong. I think the market signals are telling us that it needs this baseload generation to remain, and that's good for the economics of the plant. If battery technology improves dramatically, we can see that change. So that's something that we'll keep an eye on. But today, that's not what the price signals are telling us. So today, with these signals we would invest and run the plant beyond that retirement date of 2025.

The next question comes from Andrew Love at Hallmark Investment Corporation.

Brent, so if I'm understanding correctly, the switch to renewable from coal would be deferred as long as operating the plant as a coal-fired plant is more profitable? First question. And second question, is there any possibility that this plant would be converted to gas?

That's a good question. You understand me correct. We have no scheduled retirement date for the plant. We will let the market determine or it could be government intervention through a new regulation that eventually retires this plant. We don't think that's possible at this juncture. And when you listen to politicians, the president, they're saying 80% renewables by 2030. When you talk to the grid operators, they're publishing that they don't think it's possible to go 80% renewables until 2050. So time will tell. All we're saying is that we've created a structure that's flexible that if the market signals are telling us to run this plant -- coal-fired power plant. That is what we'll do. And that is what we think is likely at this juncture with the information that we have. But when that eventual day comes, Hoosier has worked with us to create a structure so that we can convert that plant that interconnect into a solar and renewable project. But that start date really doesn't get triggered until Hallador chooses to retire the coal-fired power plant. The second question was, would we consider converting that plant to gas? I think we would consider it, but that's not currently the plan. The current plan is to run in the coal-fired power plant and eventually, when it has its last day, whenever that is, and I hope it's a long time from now, but whenever that is then we would flip into developing the site for renewable energy.

The next question comes from James Exline at Wabash Capital.

Brent, on Jim Exline at Wabash Capital. The land that Hoosier owns is not part of this transaction, I understand. And is the coal-bed methane collection system they have as well as the turbines that were formerly at Osprey Point. Are they outside of this transaction?

Correct. Both the land and Osprey Point are retained by Hoosier. We get -- we were receiving the 800 acres of the -- the plant, the rail facilities and 1 of their 3 landfills, the certified CCR landfill reside on. They are retaining roughly, I don't know, roughly 5,800 acres of land.

We have no further questions in the queue at this time. [Operator Instructions] We have a follow-up question from Andrew Love at Hallmark Investment Corporation.

So I take it, Brent, that you're acquiring sufficient land from Hoosier to install the solar panels and so on that's required. Any reason why you couldn't start producing solar and at the same time, continue producing coal-fired electric power?

So first of all, it's incorrect. We are not acquiring enough land to repower the interconnect from Hoosier this renewable power. We will eventually acquire or lease property for that, I think we have several years to get that done. Hoosier's land in large part is not that suitable for solar development. That -- in that number, roughly an 800-acre -- or excuse me, 1,800-acre cooling lake. There's river bottomland. There's all sorts of hills and haulers that kind of surround the lake, some of the parcels might be suitable, but that's not the transaction that we did with them. The other thing is so we plug into the grid through basically a 1-gigawatt interconnection. The plant has to run through that. Think of it like this. If you have a single outlet in the wall, you can plug in the plant or you can plug into solar, but you can't plug in both at the same time, practically speaking. So the plant will run until it's last day. And at that point in time, we will be, again, developing the solar project. When the plant goes -- when the plant retires, we'll have 3 years to have something else plug back into the grid and retain that interconnection. So that will all be a coordinated transaction. We're working on that but not quite all the pieces are put together to complete that today. Now I thought it's something well within our capabilities. We have full land crews and title companies and leasing agents and all of that. Today, Hallador has leased somewhere in the neighborhood of 30,000 acres worth of coal rights in that area. What's interesting about this coal-fired power plant is the closest plant to our mine from a transportation perspective. So this is in our backyard, which is part of the reason why the transportation rate is attractive. So when we talk about our low-cost coal production, we also have a low-cost transportation rate to get the fuel to this plant. And then the plant also has a very good heat rate. So as far as converting that fuel into electrons, it's a very efficient plant as far as coal fire power plants in the United States are concerned. So all of that, we think, is just really a winning combination. And we talked about our advantages from owning the fuel supply that Hoosier is not in that position, they don't own coal mines, which is why this works much better for us than it could for them. They've just been flexible enough and to work with us to say, hey, look, we know someday, this plant will close. And when that does happen, we want to see this converted to renewable energy. We think it's the right thing for the community is the right thing for Hoosier and its quest to become greater over time and Hallador is developing those skills to develop renewable energy. So for all that thing, I think we have just kind of a perfect combination. And we've been in business with Hoosier for a couple of decades. So we know each other really well. And we've always worked with each other and they're just great people that have not only their members' interest in mind, have the community interest to mine have their employees' interest in mind. And so they've been very flexible to come up with a combination that I think accomplishes both of our goals. So for that, again, I couldn't say enough good things about the Hoosier's management team and their vision. And I just think that from the Hallador shareholder, we have -- this is just a fantastic transaction because it gives us so many new capabilities and so much more profit potential than what we had in the past.

We have no further questions at this time. So I'll hand it back to Brent and Larry to conclude the call.

Well, I thank everyone for taking the time today to dial in and hear our exciting news. We will share more information, I suspect, in our 10-K, which we plan to file on March 28, and we'll have another investor call within a day or 2 of that. So with that, appreciate all the interest in the call, and we'll get back to work. Thank you.

Thank you.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.