Hallador Energy Company ($HNRG)

Good day, and thank you for standing by. Welcome to the Hallda Energy Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to Sean Mcoui, the company's Investor Relations Adviser with Elevate IR. Sean, please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us to discuss our recently signed asset purchase agreement announced yesterday afternoon. With me today are President and CEO, Brent Bilsland; and CFO, Todd Talaz. Following prepared remarks, we will open the call to answer your questions. Before we begin, 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 differ materially from those we projected or expected. In providing these remarks, Hallador 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. And with the preliminaries out of the way, I'll turn the call over to President and CEO, Brent Bilsland.

Good morning, everyone, and thank you for joining us on short notice. Yesterday afternoon, we announced that Hallador has entered into an Asset Purchase Agreement with Energy World Corporation to acquire approximately 460 megawatts of Siemens gas turbines, generators, a steam turbine and other ancillary equipment for our proposed Merom single-cycle natural gas-fired combustion turbine project. The total purchase price of the equipment is $350 million or roughly $760 per kilowatt, with an additional $100 million expected in transportation, refurbishment, insurance and logistics costs to deliver the equipment first to Siemens restorations facilities in the United States and then on to our Merom site. Before getting into the specifics of the transaction, I wanted to spend a few minutes on how we got here. For those newer to our story, that context matters because this equipment acquisition is not happening in isolation. It's the next step in our broader evolution towards a more diversified, multi-fuel independent power producer. Hallador is a company built to iterate. We believe companies that iterate faster than their competitors build a compounding advantage. That has been our playbook for more than 2 decades. Consider the last 6 years. In 2020, Hallador was an underground coal mining company. In '21, we acquired a 1-gigawatt interconnection to the grid, which opened an entirely new strategic option for the company. In '22, we acquired the 1-gigawatt power plant to plug into that interconnection, transitioning from a fuel supplier into a vertically integrated Independent Power Producer. In 2024, we began marketing long-term output of our plant directly to data center developers. At that time, the market was skeptical that data centers would ever purchase from coal assets. By '25, hyperscaler CapEx budgets were approaching $0.5 trillion and utilities were sold out of capacity and joining the market as buyers themselves. Late last year, we became convinced that the demand for our capacity was so robust that the market needed not only everything we had to sell from our existing plant, but much more. So we positioned ourselves to participate in MISO's expedited resource addition study, ERAS, and made a $14 million deposit and secured one of the coveted 50 slots in the study. To expand our skill set into Independent Power Development, we needed to add more experience and talent to the company. In the first quarter of this year, we added Barbara Sugg to our Board of Directors, the former CEO of Southwest Power Pool, or SPP, where she operated one of the largest power grids in the country. Barbara oversaw the development of SPP's own version of the ARRIS program and has helped us understand the opportunities and challenges of expanding our nation's power grid in this once-in-a-generation growth period. In March, we added Daniel Hudson to the Board, who, in our opinion, is one of the most successful independent power developers in the country. Dan has been instrumental in teaching our people the ins and outs of power development. I can easily say we would not have been able to make today's announcement without Dan's help and guidance and oversight. At the executive level, we brought on Todd Telesz as our CFO in June of '25. Todd has a long and successful career in financing power generation assets and we expect to continue bolstering our leadership team with additional senior hires in the near future. The experience and credibility of the people choosing to join Hallador reinforces our conviction that we are building a differentiated platform at an important moment in the power market. Last month, we executed a 12-year roughly $1 billion PPA with the utility subsidiary, selling 2/3 of our accredited capacity through 2040, bringing our forward sales book to roughly $2.1 billion. Stepping back, we are operating in a market where data center capital spending is estimated to approach $2 trillion in 2027. At the same time, roughly half the states in this nation have some form of proposed data center moratorium, which is funneling that capital into the few states welcoming data centers, like Indiana, where our assets are located. Let me speak to you why we won this equipment directly because it goes to the heart of who Hallador is. The seller of this equipment ran a competitive process. There were other bidders at the table. We believe we won because we were the fastest, the most prepared and most credible counterparty in the room. We convinced the seller that we could execute and that we did. In the seller's own words was set how to part with how professional and how aggressive we were throughout the process. That is the iteration capability I was just describing, solidified in a $350 million transaction. It is the same orientation that lets us pivot from coal miner to IPP, secure an error slot ahead of much larger peers, and lock in capacity sales meaningfully above historical prices. Execution speed is a strategic asset in this market, and we intend to keep using it. Here are the specifics of the transaction. We are acquiring approximately 460 megawatts of Siemens gas turbines, generators, a steam turbine and ancillary equipment for $350 million or roughly $760 per kilowatt. Combined with $100 million of incremental cost for delivery of the equipment. This equipment package represents more than half of the estimated total project costs, giving us much greater visibility into a major portion of the project's capital stack. Importantly, these turbines have never been fired. We are buying Siemens' equipment at a price we believe is highly attractive relative to comparable alternatives, particularly when you account for how quickly this equipment is expected to come online. In today's market, securing turbines is one of the most important gating items for any new dispatchable generation project. Equipment availability is tight. Lead times have extended meaningfully. Most companies cannot simply pick up the phone, order new turbines and have power online within a couple of years. This equipment package can get us there. We did not purchase a slot for a new build where we might get bumped in line by a higher bidder. This equipment already exists. The strategic value of this acquisition extends well beyond the equipment excel. First, it gives us a defined equipment package as we advance through the MISO ERAS interconnection process. That specificity reduces development timing risk, sharpens the study inputs and preserves our ability to move efficiently if the interconnection results, commercial discussions and financing align. And given the price at which we acquired the equipment, we believe that in a worst-case scenario where we decide not to move forward with the development, we would have the ability to resell the equipment at a profit. Second, it accelerates Hallador's transition towards a diversified multi-fuel generation platform. We will be adding long-life, dispatchable natural gas CTs at Merom, assets with an expected useful life of approximately 40 years. That also means we will be bringing a natural gas pipeline to the front door of Merom, giving us the future options to dual fuel the coal units with gas. This positions us to serve utilities and large-load customers seeking long-term, reliable power solutions across MISO Zone 6, a region where demand is real, capacity is short and supply tightness is, if anything, getting worse. It also meaningfully reduces our operational risk profile. Today, our largest single unit outage exposure is roughly half our fleet, adding the new gas CTs at Merom brings that number down to approximately 1/3. Combined with the dual fuel optionality on the coal units, we are building a more resilient generation platform. And third, this transaction reinforces what we believe is a genuinely scarce position in this market, a developer with secured turbine equipment and a proven marketing team and advancing interconnection pathway, strategic site infrastructure, long-term contracted cash flows and the financial flexibility and balance sheet to execute. Individually, each of these elements is difficult to secure. In today's power market, assembling those pieces is awfully the hardest part of building a project. We have it all under one roof. And finally, this transaction broadens who can own Hallador's stock. Today's ESG constrained funds, generalist growth funds, infrastructure funds and energy transition funds are all structurally unable to own a coal-only company. Each of those pools becomes available to a multi-fuel IPP. Lenders who declined to finance coal-only assets will finance dispatchable gas. Beyond just operating earnings, this path enables Hallador to lower its cost of capital and attract a wider institutional shareholder base. We are approaching this next phase with discipline. As of March 31, Hallador carried no outstanding bank debt and held a $120 million credit facility. Our contracted sales book has grown to over $2.1 billion, including the 12-year capacity agreement valued at over $1 billion that we announced earlier this year, working its way through IURC approval. That contracted revenue base materially enhances revenue visibility and underpins our financing capacity. Our financing strategy for the project itself is considering a combination of project level and structured alternatives, including equipment financing, structured debt and similar instruments designed deliberately to preserve flexibility with low to no equity dilution while retaining our focus on balance sheet integrity. We have meaningful choices available to us, and we intend to choose carefully. Our road map from here is straightforward. We have secured the equipment. We expect the MISO ERAS study to begin in the near term and to complete in September. In parallel, we continue to advance long-term offtake discussions and the project's financing arrangements. Following the completion of the ERAS study, we expect to evaluate the generator interconnection agreement, long-term offtake opportunities, financing arrangements, permitting, engineering and other customary project development milestones before making a final investment decision on the Merom natural gas project. If the project advances as we currently anticipate, this equipment provides a path to bring new dispatchable capacity online and began generating revenue and cash flow between late '28 and mid-2029. Equally importantly, we retain real optionality throughout this process. As I have mentioned earlier, if at any point, we determined that a different path creates value for our shareholders, we have the ability to sell the project together with the equipment or to sell the equipment on a stand-alone basis. In closing, Hallador's strategic advantage is not any single asset. It's the ability of this team to iterate, move with speed and convert opportunity into execution. That is what compounds. That is the moat we are building. We believe we have the right project in the right market at the right time led by the right team. Demand for dispatchable power of MISO Zone 6 is real and growing. Turbine supply is only getting tighter. Yesterday's announcement strengthens our position to capitalize on what we see as a generational opportunity in this region. We look forward to updating you as we advance through the next phase. With that, operator, we can now open the line for questions.

[Operator Instructions] Our first question coming from the line of Jeff Grampp with Northland Capital Markets.

Congrats on the news. Brent, maybe for you or even for Todd, when we think about the potential funding of the project and understanding you don't want to be too prescriptive here on the call, but is there a general -- I don't know, corporate leverage ceiling or LTV of the project we can think about in terms of nondilutive sources that you guys would be comfortable putting on the balance sheet?

Yes. Thanks, Jeff. It's Todd. As we look at it, one of the 2 key fundamental underlying principles that we're focused on as we think about this project and this financing of Hallador Energy and our operating companies overall, one, we want to make sure we retain our financial flexibility and optionality and then also maintaining a focus on our balance sheet integrity and liquidity. I think we have a number of different levers we can access to acquire the equipment and finance the project. We start with our existing liquidity facility that we've got in the Texas Capital Bank and our 2 long-term relationship lenders, Old National and First Financial. Obviously, in this market, what you've seen over the course of the last year or so has been increasingly a desire for equipment financing, turbine financings to get done. So we think that's a very viable path to execute the financing on this project at a highly levered basis at the equipment financing level. And then we have the forward contracted sales book, the PPAs we've executed over the course of the last 60 to 90 days that we believe we can back lever as well at the Merom Power level. And then ultimately, commercialization of the ARRIS project provides another avenue to debt capacity to lever those cash flows to build out the project overall. So I think we have a number of different levers we can execute on that would provide us some of that flexibility and optionality and limit the dilution while maintaining balance sheet integrity.

Got it. I appreciate those details. And regarding potential commercial contracts for the natural gas side of things, is there a general, I don't know, target in terms of [indiscernible] you guys would hope or expect to enter into agreements to do before reaching FID? And also wondering, given the kind of base-case plan to have this be more of a feature plant, should we expect there to be much or any energy sales contracts? Or is this more capacity contracts we should expect ahead of an FID?

Well, our Pike project is certainly a capacity first play. There will be some associated energy. I mean, these are fairly efficient units, even though it is a single cycle plant that we're going to be building. And as far as offtake, again, we just kind of come back to the pinch point in AI, particularly in MISO, seems to be accredited capacity. And so that's what this is about. It's about bringing more accredited capacity to the market because we think we can sell it. We see a lot of customer interest and hopefully, we can execute on that at desirable prices.

Our next question coming from the line of Jake Sekelsky with Alliance Global Partners.

Congrats on the news. So just on the purchase agreement, are you able to provide any color on sort of the terms related to the payment, was there a deposit required? And is it structured as a lump sum?

It is not structured as a lump sum. There's a series of payments. And with our 8-K, we did file the agreement as a material agreement. And so it's got some of those payments detailed in there. So I'll just point everyone to that rather than go through all those. But we did structure it as a series of payments as the project as the equipment moves through its various stages of getting towards Siemens.

Got you. Okay. And then you mentioned the turbines have never been fired, obviously. Any comments on why they weren't fired by previous owners? And maybe how long they've been in storage and what level of refurbishment you feel they might need?

Yes. I mean these turbines were purchased put together or somewhat put together and they never got fuel supply hooked to them. And so they sat for a while. They've never been fired. Siemens has inspected them. They've given us a full report as the condition to the turbines. Our plan is to bring them back, run them through their refurbishment shops and potentially Charlotte and Memphis, Tennessee for the generators and just make sure that they're in a new spec condition, obviously upgraded to the latest and greatest technology for those units. And so the point we wanted to make here is that we're not buying used equipment that's 20 years of life has been used off of it. This has never been fired. It's going to be refurbished to new spec and brought to the Merom site to be assembled.

[Operator Instructions] We'll give it a moment. And we have a follow-up question from Jeff Grampp with Northland Capital.

Brent, could you touch on -- I noted that you're getting a steam turbine, some related assets there as well. given the plans to have this initially be simple cycle, can you touch on any kind of optionality plans you guys are considering given the additional assets that you're getting here?

Yes. I mean their project originally was to be a combined cycle. At some point in time, they sold off some of those components. And it fits our site better as a single cycle project, we wouldn't be able to get all the steam components and time to build it as a combined cycle plant. So we've just decided to go forward as a single cycle unit. So yes, we'll have some extra equipment that we'll have to figure out what to do with. But that's just what came in the package.

Understood. Okay. And the CapEx kind of, I guess, I call it ceiling that you guys talked about. Does that include the cost to build the gas line to Merom and therefore, we should consider that as kind of a sum cost in this project number providing the optionality to duly the existing assets? Or how is that component of the cost structure embedded in some of those numbers?

Yes. So if we're going to bring a gas line in for the CTs. We'll overbuild that. So it's got the capacity to also serve Merom as well. That's our current plan. Obviously, we've got a little time before that gets built to kind of tweak things, but that's our current thinking today. We want to maintain that optionality if we decide to do a fuel Merom at some point in the future.

Of course. That makes sense.

And I'm showing no further questions in the Q&A Q at this time. I will now turn the call back over to Mr. Brent Bilsland for any closing comments.

Yes, I want to thank everybody for their interest in joining the call, particularly at short notice today. We're excited about this project. We're excited about the contracts we announced both a month ago. with this project coming online sometime in early 2029 is our general guidance. We think 2029 could just be an absolute breakout year for the company. So we would ask investors to look at that and consider that when investing in our company of that hopefully is going to be the potential big year for us. So with that, I'll end today's call and thank everybody for their participation.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.