Q3 2022 Hallador Energy Co Earnings Call
[music].
Good afternoon, and thank you for attending today's Halliburton energy third quarter 2022 earnings call. My name is Jason 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 ask a question. Please press star one on your telephone keypad I'd now like to pass the conference over to our host Rebecca Palumbo Investor Relations.
Yeah.
Thank you Jay and thank you everybody for taking the time to join US today yesterday afternoon, We released our third quarter 2022 financial and operating results on Form 10-Q.
That is now posted on our website with me today on this call is Brent Bill Flynn, our president and CEO and Larry Martin our CFO .
After the prepared remarks, we will open the call up to your questions.
Before we begin please note that the discussion today may contain forward looking statements that are 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 binding.
Future sales legislation and regulations in providing these remarks, we have no obligation to publicly update or with.
Any forward looking statements, whether as a result of new information future events or otherwise may be required by law.
For a discussion 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 filed with the SEC.
As a reminder, this conference call is being recorded in addition, a live and archived webcast of the earnings call is also available on <unk> website.
We encourage you to ask questions during our Q&A and if you are on the webcast and would like to ask a question you will need to dial into the conference and that toll free number is 844 206 205 access code 84009, and with that I'll turn the call over to Larry.
Thank you Becky and good afternoon, everyone.
I will start with our review of operating results and before I do I would like to.
<unk> adjusted EBITDA as operating cash flow plus current income tax expense less the effects of certain subsidiary an equity method investment activity.
Thank you Chris.
Lastly, the effects of working capital period changes plus cash paid on asset retirement obligation reclamation plus other amortization.
For the third quarter Al Dor.
Good.
Net income of $1 6 million or $5 a share.
Lost 11, 9 billion net income or <unk> 38, a share for the year, our adjusted EBITDA for the quarter was $18 4 million $32 5 million year to date.
Our bank debt was decreased by 17 billion for the third quarter.
<unk> had a positive borrowing of a net $2 million for the year.
Our bank debt at the end of September was 113.7 million, our net debt, reducing reduced by our cash was $106 $7 million and our debt to EBITDA.
For the.
Three quarters is or for the for the prior four quarters is three five.
Times.
Well within our covenant of four and a half.
I will now turn the call over to Bill <unk>.
<unk> for our review of the quarter and beyond.
Thank you Larry and thank you everyone for joining us today.
Dirty.
Q3 was transitional in a very positive quarter for al Dor.
During the quarter, we signed contracts for $2 2 million tons of new coal sales at an average price of roughly $125 a ton.
But with a small percentage of deliveries began during Q3.
And we will continue through the year end 2025.
With the majority of these tons to be delivered starting in the fourth quarter of this year.
And throughout 2023.
These contracts put us in a position to generate up to $160 million of EBITDA in 2023 and will be a significant driver of our efforts to move towards a position of being net debt three next year.
During the quarter, we shipped $1 7 million tons at an average sales price of $49 <unk>.
This represents a price improvement.
At $8 78, a ton over the prior quarter.
We expect Q4 pricing to be similar and look for our average price to continue to improve.
Through 2023 to a price of around $58 per ton.
Yes.
To meet these new orders, we have been expanding our coal production by hiring additional employees.
And putting more units to work at our hotel binding complex.
Also opening a small surface pit.
Near Freeland Bill, Indiana.
And moving our eighth of the whole production to a small surface mine pit.
Petersburg, Indiana at our at our former prosperity mine.
This has required us to increase our capex spending which is up.
Roughly $20 million year over year.
We have been successful in increasing our head count.
4% year over year.
Thus, we have incurred greater employee acquisition and training cost.
Three one bill and prosperity production began during the third quarter volumes from these new pits are expected to be higher cost in our forecast to represent.
Approximately 8% of our 2023 production.
In Q3, how it or the operating costs increased to $37 46 per ton.
Our newer workforce and surface pits.
We will ramp up to reach peak productivity.
Expects and that only slight easing of inflation in 2023, we expect our mining costs to remain elevated in 2022.
Followed by.
Potentially a small cost reduction in 2023.
We believe that the increased market prices for coal clearly justify excuse me clearly justified taking on these increased costs and investments.
To help fund our increased capex and improve our liquidity.
We sold $29 million of convertible notes.
$10 million of which were sold in Q2 and $19 million of which was sold in Q3.
The $10 million of notes issued in Q2 have been converted to <unk> stock.
Bringing our current share count to 33 million shares.
If all of those are converted to stock this would equate to increasing our share count.
From $30 8 million shares at the beginning of Q2.
To $36 1 million shares at sometime in the future prior to year end 2026.
Representing an approximate 17% increase in share count.
Bank debt was reduced during the quarter by $17 million.
Bringing the balance owed at the end of Q3.
Two.
$13 7 million.
Subsequent to the end of Q3 on October 21.
We closed the acquisition of the one gigawatt Merit generation station.
Who is your energy.
At closing, we received net payments of $34 million.
These funds were part of capacity payments owed to how it or through our power purchase agreement with <unk>.
These phones.
With these funds, we paid down an additional $27 million of bank debt.
Thus when including the $17 million of bank debt paid in Q3 total debt was reduced by $44 million.
Or 34%.
The third quarters, beginning outstanding balance, bringing our total bank debt.
On October $20 million to $87 million and further increasing our liquidity.
This combination of debt reduction and rising EBITDA as quickly de leveraging our balance sheet, which.
Which we anticipate being less than two five times debt to EBITDA by the end of the fourth quarter.
And expect to be approaching a ratio of less than one times.
By the end of the first quarter of next year.
Our goal at <unk> is to deleverage our balance sheet.
And to create multiple uncorrelated revenue streams.
To take advantage of our unique place in this energy market.
The acquisition of <unk> is a significant step forward in this pursuit.
Is it provides us the ability to monetize our coal production.
Through both capacity and energy sales.
We are also providing the platform for potential future investments.
Including new generation and energy storage.
As capacity payments are currently covering most of the fixed cost of the plant.
<unk> provides optionality to Howard or in both the coal markets in the energy market.
Starting in 2024.
Our Sunrise coal subsidiary has the flexibility to sell up to 3 million tons.
Which represents 43% of our coal production annually tomorrow, if the economics of energy sales dictate or divert.
Divert some portion of the settlement.
To third parties, if the economics of outside coal sales create a higher value.
In 2024, how at our anticipated 4 million tons of annual coal sales to outside parties.
While maintaining the flexibility to utilize these remaining coal production to generate.
Up to $6 5 million megawatt hours of annual energy sales at Merrill.
We believe that this flexibility gives out are a tremendous opportunity to take advantage of the most favorable economic condition in each market.
With that I'm going to open up the line too.
Questions from the audience.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
For any reason you'd like to remove that question. Please press star followed by two again to ask a question star one.
We'll pause briefly ask questions are registered.
Our first question comes from Lucas pipes with Ridley Securities.
Yeah.
Yes. Thank you operator, this sexually Nick asking a question on behalf of Lucas.
Once you get the net debt target in 2023, how would you describe your capital allocation objectives.
Do you think M&A could play a role or.
Our capital returns more likely in that case. Thank you so much.
Well.
Like I said I think we've got the contracts in place to be net debt free.
Are we at least forecast.
We think we can hit that target in 2023.
But certainly we are deleveraging extremely quickly.
Which is great. This is where we want to be.
Kind of who we are.
So I don't know the word any hurry to make any decisions as to what to do with excess capital.
We probably wouldn't do anything until 2024.
I think youll see us look to.
What are the opportunities.
To use our capital.
May.
Forward energy sales.
We have a locked in margins and position the company from that perspective.
Some of the things that we're looking at today.
But all things are on the table.
We're not currently in any M&A discussions but.
If the right opportunity.
Came along I guess, we would consider it.
<unk>.
But for now our primary goal.
As stated is to deleverage the balance sheet.
And focus on.
Creating ways to get what I call uncorrelated revenue streams, so what I would say that as you know.
For a long time, our revenue stream has been selling coal.
With <unk> we have.
The ability to sell capacity sell energy.
Potentially use the landfill there to create take gas from other utilities create revenue there. We've got some permit work to do to do that.
But we see other opportunities around that facility.
At some point in time.
Has that become a.
So we re power of that site with solar or battery.
I think right now the market is saying it needs the capacity.
We plan to invest net plant and.
Have it serve the market.
For quite some time so.
But those are our thoughts today.
Got it got it no that's very helpful. Thanks, Thanks, Brendan and maybe just on there and what kind of.
Breakeven price should we think about on a dollar per megawatt hour basis.
As far as those tons that you that you plan to dedicate to mirror them today. Thank you so much.
Okay.
That's just not a number that we've released to the public yet so.
I would say this.
Because we have that cost co production that we can put to that plant.
We feel that plant ahead of us.
The lowest this bus cost.
Of any.
But many coal fired power plant in MISO. So.
We think it's definitely positioned.
In very good shape to be to be in a position to run.
If thats the best use of our fuel.
Got it got it okay. That's helpful. That's all from me for now ill jump back in the queue, but thanks for the color.
Our next question comes from Kevin Tracey with Oberon am.
Line is now open.
Great. Thanks for taking my question, So Brad and the 10-Q there was a note you acquired $17 million of coal inventory with the mirror of acquisition.
I understand Hooters original plans were to shut the plant next may so am I right in thinking coal supply.
<unk> may will be tough.
And given the spot prices are in the triple digits.
Probably won't operate much of the second half of next year.
Yes, I think that.
Sure.
So I think your question was do we have a lot of fuel post may of 'twenty three.
The answer to that is no.
So we do not expect that plant.
To operate much.
<unk>.
From June to December of 'twenty three.
Current.
Fuel.
Pyramid.
It could change.
Yeah.
But that's what it does.
The position we're in today.
Okay.
And then the related question to that is I think the next capacity auction coming up in April for the year starting June of 2023.
So just given the I guess, what you just said kind of the lack of.
Call supply at least for the second half of 'twenty, clearly because that prohibit.
<unk> b is to enter into that capacity auction for the for what I think 68% of the capacity that you are not.
<unk>, who is your under the PPA or is there a way you can partially participate.
The months in 2024.
Oh, Tom can ensure coal supply.
Yes twofold.
One we do believe we have enough.
Coal procured.
To meet our requirements.
We also are working on as I said earlier in the call increasing our coal production.
Another way, we can put more fuel to the plan, we can acquire fuel from other third parties.
And those are all things that are on the table.
But we think we can fully participate.
And the capacity.
Auctions in markets.
In future years.
'twenty three 'twenty four.
Okay, great interest.
Firm this kind of $39 million of advanced capacity payments from Hoosier Theres no cost.
Costs are cash costs associated with the thought is there and then you have the PPA.
For 100% of capacity through next May, but then 32% of capacity.
Through 2025, and I guess should we expect under the PPA.
<unk> to pay for.
Additional capacity payments in future years.
Yes, they do they do pay future capacity payments in future years.
Some of those payments are in 2023.
They are reduced because the buying.
Less capacity.
Yes.
Sure.
So, but yes, I think we come back and say.
We still got capacity to sell we have a lot of interest from other parties.
And capacity pricing today.
It's very good so.
Okay.
There is there is theres more retirement.
Generation in MISO that have an on switch.
And they're being replaced.
In large part by generation that does not have an on switch and so <unk>.
Capacity continues to tighten.
And as our viewpoint and belief that.
Capacity becomes more valuable over time not less valuable.
Over time.
And.
We think that those are comments that are also being echoed by.
MISO directly.
If you if you read what they are saying I think they realize they've got.
A capacity shortfall in future years, and they are trying to modify their auction process.
To incentivize the market.
To stop or slow down retirements.
And speed up additions of capacity so.
We think from our perspective thank.
Thank you.
That puts us in a position where.
In most years, a significant portion of capacity.
A portion of our fixed cost of the plant.
Can be covered by capacity payments and if that holds true then.
From our perspective, we kind of get a free option to.
Put.
Fuel to the plant.
More fuel to the public now you are right I mean, we can't put zero fuel to the plant.
We can very very that amount.
And.
With third party market is willing to pay.
A significant premium above what we think the power markets will bring us.
Evidence of that that's what we did.
Basically in the Q2, we agreed to those contracts in Q2, we signed these contracts in Q3 to sell it to the market versus take it take it to the plant.
We felt that that was the.
Best risk adjusted return at that time that was available to us so.
And realize at that time, we werent, 100% sure we're going to close on our plan we were 90.
98% sure.
So we were glad to finally complete that transaction we're thrilled.
We're thrilled to have mirrored in our portfolio, we think it dramatically changes.
Changes our company and we think it puts us in a very unique position.
To be a part of this transition.
Today. The plan is very much needed in the grid from a capacity viewpoint.
In the future it gives us a great platform for.
For investment.
Now theyre shareholder investment.
New generation stores, which if I were sitting here today I would tell you that the solar and battery.
Time will tell.
Yeah, Okay, and just to clarify on that $39 million capacity payment and future capacity payments.
No kind of past costs.
So sitting with that revenue interest what youre standing by with the capacity willing to provide is that right.
Yes, so what that really obligates us to do with <unk> at a 30000 foot level.
Is by selling that capacity, we are obligated to bid that plant into the day ahead market each and every day now.
Now we have some flexibility as to what price that plant yet.
Bid in that there are rules around that and Theres a market market monitor.
Evaluate that to make sure that we are complying with those rules.
But by selling your capacity basically are saying, Hey look I've got.
An asset Thats ready to go I've got the employees staff too.
Make it operate in.
And okay.
At fuel procured and in position.
With my inventory on existing contracts to two.
To be able to meet the capacity factor that we think that plant will run at and we are in a position to say, yes to all of those things in 2023 and beyond so.
So let.
Let me we are even though we don't.
So even though we don't have correlated expenses related to that capacity income, we do have fixed costs at the plant in order to build that capacity into the <unk>.
Whoever is buying it at where the market.
Got it got it okay. If I could just sneak one last one in just on the Capex going forward I understand it's elevated this year as you're opening up these new sites.
But in the past coal capex.
And more in the $30 million to $35 million range I guess I'm. Just curious next year. What are you thinking and then if you have any comment on what kind.
Kind of normalized.
Capex will be in the title after the company that'd be great. Thanks.
So yes, we expect our coal cost cap, our coal capex going forward to be at $35 million to $40 million range could be a little higher next year, even with the surface equipment ramping up the <unk>.
<unk> surface mines, we have and then our Capex Act.
At <unk>, we have two categories of Capex there we have.
Just regular reliability maintenance capex that will be in the $15 million to $20 million range and then we have to.
Start analyzing our LG to getting into the effluent limitation guidelines.
With that plant by 'twenty, five and when we will start.
That process and and it's about $40 million to $45 million over the next three years and we haven't figured out our timing. It right now I think we we expect maybe $17 million to $18 million next year, but we haven't got into the planning and the Pos for that since we just bought the plant in October .
Got it okay. Thank you appreciate it.
Once again, if you'd like to ask a question at star one on your telephone keypad.
Our next question comes from Ted Waters, a private Investor Your line is now open.
Hi, Brent Thanks for taking my call. The question I had was could you tell me a little bit about your ability to sell megawatt hours into the future for instance, could you start locking in 'twenty four.
Megawatt hour pricing.
Going forward.
In the near term and if so what would that be equivalent to in terms of.
Coal tons for instance, you sold $125 tons in Q3, if you were to sell into the megawatt hours and 24 today.
Pricing is that putting us putting today.
Yes so.
The answer to that question is yes.
We do have the ability to sell.
Either in the day ahead market or we can sell.
Basically a bilateral agreement with.
And energy trading company or utility that would like to buy megawatt hours.
What is the price of that that's up for negotiation.
<unk>.
And.
So.
And Thats.
That changes every day and.
And every hour within the day.
We do have curves.
Kind of show anywhere where thanks to the power market.
It is going forward.
Yes.
I don't know if im ready to release any of that from for proprietary perspective as far as at the plant.
Basically one ton of town coal at the <unk> plant.
Generally its about two two megawatt hours right. So if you take that.
Theres various crews out there and various assumptions.
But if you take a megawatt hour.
The variable costs on that.
Youre going to have about $5 a megawatt hour variable cost.
So.
Yeah.
Let's just talk for easy math of megawatt hours 50 box.
It is the equivalent of one ton of colds and produced.
Two two megawatt hours to that $110.
Per ton equivalent subtract $5 of variable.
Excuse me there so $10 now.
So now youre roughly at $100 on lower coal and what's your fixed cost plant has a capacity payment covering your fixed costs of the plant, whereas it short or is it long.
As capacity payments exceed the fixed cost of the plan.
That's kind of how we look at it.
That makes sense.
Yes.
I assume that's how the math you do but when you decided to sell it to third party or do.
The megawatt hours Thats interesting.
That's basically exactly what we're doing we're looking at what our assumptions are on forward power prices. Realizing those change every day.
And what can we find a third party that would be willing to transact say in 2024 for those megawatt hours.
As you know.
And there is there is some requirements with that right.
There can be.
Letters of credit that are required from the counterparty to be.
Kind of secure guaranteed delivery of those electronics.
So those are all things that we have to kind of look at and keep it balanced but.
Yes.
Look there's been a lot of disruption in the energy markets.
With what's going on in Europe , right. So you've got a lot of coal.
And natural gas or LNG flowing to Europe .
So domestic coal is competing with that.
And.
If you look at it right now.
Gas gas is cheaper than coal.
But the market needs all the coal generators to run so you've kind of got coal generators in our opinion setting the price of power. So.
That will happen as long as demand exceeds all the gas generation and gas prices stay where they're at there's a lot of dynamic to a lot of prices that move each and every day.
But right now there's very healthy margins.
And producing power and very healthy margins.
And selling coal in the open market so.
Yes.
We're happy with the position that we're in as far as getting the company net debt free.
And.
Contracting for capacity and energy at prices that we think we can make profit it so.
That's where we're at.
Hello.
Our next question comes from Arthur column.
All of routine us with ANC capital. Your line is now open alright.
Alright, thank you.
Let me ask you something on it.
On the debt reduction to zero.
That's going to happen.
Got that locked in for this year right.
Yeah.
I'm not quite sure what you mean by locked in.
It's going to be paid off.
95% confidence interval, you know what I mean, I mean, given what youre looking at right now.
Not going to get any surprises.
We couldnt take it down at all I mean, right now you are pretty confident that should get to be de minimis right by year end.
Yes, I think from our perspective, we've contracted through the goal right. So we know that our average sale price.
Is going to come up significantly.
So we're going to see.
Significantly higher margins.
Something in the low <unk>.
We have to produce the goal.
Which we've always historically been able to do we're trying to.
We are increasing our production.
With those increases in production, we have a slight increase in cost, but some of that is coming from higher cost surface pit.
But we're forecasting.
<unk> cost per moving forward.
And we are relying upon our customers.
Providing transportation to pick up the coal which that pieces.
Out of our control and our customers' control.
From a forecast perspective, we see no reason why we shouldnt be.
Materially net debt free by the end of the year.
Okay, and then I'm sorry.
By the end of that I want to be by the end of 'twenty.
2023.
Yes, yes.
So again no different question. When you guys are looking at projects internal rates of return with the businesses.
Eddie.
I dunno discipline or are.
Are you seeing better opportunities you mentioned storage again must be difficult.
Do a spreadsheet to model that out.
Because what I am concerned about is I don't want to see you guys do like a lot of storage or something.
Yes, it doesn't work out that's all so I'm just trying to figure out what you did.
Upland is how you look at stuff and how you decided to exit.
That were to happen.
Uh huh.
Yes, I think I think our focus right now is.
That.
We are essentially long energy.
Long capacity.
Yeah.
We're in a pretty good sales position if you look at us for the next couple of years.
Our hedge position, there is pretty pretty well hedged.
We don't have a lot of excess electricity to sell until 2024, So we're trying to figure out.
What's the best way to do that and there's various ways to do that some of which require some amount of capital.
And so what we're saying is look 'twenty three is about <unk>.
Getting our balance sheet.
A very de Levered position.
Trying to position the company to have profitable power capacity.
Fuel sales in 2024.
So that's kind of what we're focused on when we talk about energy storage.
No.
The inflation reduction Act.
Was released and approved this year.
However, there is still writing.
Some of the technical rules around that.
And so I don't think it's fair for us to say today, we will or won't do battery storage.
Quite frankly, we're waiting for rules to finalize to understand.
Is that is that a good rate of return for us we're not today I couldn't tell you, yes or no right.
Okay I will wait.
OIBDA those rules, we will evaluate that I think what we're trying to point out everybody is to some people.
This acquisition appears as a coal company.
But a coal fired power plant.
And what we're trying to say is.
That's true today.
But in the future. This really is the transition platform.
Right I mean, what solar developers battery developers are dying for.
As a place to plug into the grid.
The MISO two studies has been backed up for years.
PJM Q studies, so far backed up they've stopped accepting application.
We don't have to do acute study we already owned the interconnect, we already have rights to that interconnect to debt.
So if our management team and board decide that.
Best use is too.
Close our power plant at some point in the future and Repower of that.
With solar and batteries.
We have we have very minimal work that we would have to do with MISO to get approval to do that versus the developer down the street.
Who's trying to jump on the grid somewhere.
They've got to apply.
And PJM and William and accept the application in MISO looks at the application, but they might be four years.
<unk>.
If your application happens to be on the edge of Mices grid near another ISO both ISO has to improve.
That application so that.
I mean, one other thing.
<unk>.
Causing a problem with this transition.
Fossil to renewables is there's not enough places to plug in.
And we're turning off generation has an on switch returning auction ration that can run.
75% of the hour then given year.
We're replacing it with generation that cannot be turned on from a grid operators per standpoint, and it's only got around 20 hours, 20% of the hours in a given year.
And so thats the challenges.
That the grid is seen today I spent some time last week with a couple of different grid operators.
Who basically outlined hey look we the number of levers we have to pull to keep the system imbalance is being reduced.
Which then leaves them as demand response.
Is the new lever Theyre looking to reach four will demand responses were shutting power off to somewhat alright, thats, what demand responsive who is getting there is power shutoff and hopefully they've agreed to that ahead of time.
Not always the case.
So for all the reasons.
Okay.
Go ahead.
Yes, so for all those reasons.
The value of a plant such as marrow.
That has been well invested in.
It has all of its environmental compliance.
Investment in place except for <unk>, we will have to invest in eog's around beyond 2025.
And we look to make those investments.
In that 'twenty, three 'twenty four 'twenty five period to be in position to do that.
That was our thinking today, we've not pulled the trigger on that yet.
What we are evaluating in real time.
But we think this asset becomes more valuable because of the attributes that can provide the degree of it because there are fewer and fewer generators that have these attributes that are available to the grid.
Automation of a public utility is very different.
And then a wholesale power generator, which is what.
How to power, our subsidiary, how where power than ones Byram.
Essentially what it is so.
For those reasons.
That's what we look like and.
This is what our thinking is.
Got it. Thank you and one last thing I was going to say we're in Boston. So we are going to have some we've already had shutdowns in the summertime.
The industry is nobody cares about but if we get some shutdowns national use type of stuff like in new England, right, where it's really tight.
I'm just thinking how you like where you guys are more specifically ask with legislation or regulation change to be more favorable to you as people realize.
Finally, the regulators to realize.
This is a valuable these things are.
Yes.
I think anyone who sits in the dark for any period of time realizes valuable.
Electricity as they say.
Power generation and 7%.
Of the USD GDP, but it's the first 7% because without it nothing else works right.
So.
Yeah. So we've seen this happen look every.
Every grid that approaches.
30% renewable.
We've seen multiple crashes and cassio we've.
We've seen it in Texas.
Energy capital of the United States, we've seen we've seen a five day outage cost over $200 billion and 100 people lost their lives and we saw Texas make massive changes.
So the rules around power generation in Aercap right.
Electric reliability Council of Texas.
So I hope this doesn't happen.
In other ISO throughout the country, but I wouldn't I wouldn't bet against it.
You've got literally the grid, operator MISO, saying.
Our plan is to be backed up by PJM.
Pjm's plan is to be backed up by myself.
But if they're having a bad day to same day, we're having a bad day. This Nathan is going to have a bad day.
Public quote from.
The Chief operating officer of MISO. So.
They realize that.
The greatest changing very rapidly.
And this is bringing a new risk profile to the grid.
Yeah.
It's being done in the pursuit of trying to reduce climate.
Change.
Theres new risks that are associated with that so from an economic perspective.
We think all of this is happening too fast we think the <unk> plant these stick around for a while.
We've said all along we have the right to shut it down when we wanted to convert to something else, we're going to let the economic market decide and right now the signals are telling us this plant.
Should remain online and we should continue to invest on it than that.
That's where we're headed today.
Okay, great great commentary, thank you very much.
Thank you.
Sure.
Our next question comes from Andrew Love with Hallmark. Your line is now open.
Thanks, Congratulations on a good quarter.
My question is could you explain.
A little more.
Clearly what it means when you sell capacity are you selling.
Something that then.
Lateral obligation to deliver electrical energy at a market price or at a predetermined price or what.
So.
If you are a public utility.
And do you have.
So youre load following member of the grid, which means.
I have.
And that particular scenario someone who has 500000 customers.
And they need to be able to buy.
Electrons from MISO.
To sell to their customers right. So MISO basically says if you want to buy.
A gigawatt worth of power in any given hour.
You have to supply MISO with a gigawatt of rated capacity.
So there's all sorts of different ratings on power plants.
MISO is nameplate or excuse me <unk> nameplate.
<unk> thousand 70 megawatts.
It's will.
We will actually produce somewhere around nine.
960 megawatts in any given out.
Its rated capacity with MISO today, which changes every year.
Is 917 megawatts right so.
We can sell.
Because we are not a load following remember we do not have customers that we're selling electricity to we don't have ratepayers, where wholesale power generator.
So since we are not buying electrons from MISO.
We have no obligation to provide them capacity.
Yes, we have capacity so we sell our capacity.
Two different utilities in this case with selling part of it to Hoosier.
We have one agreement with another utility in place today.
Where we're selling capacity so they can use that contractually.
To show to MISO that they've met that obligation.
Bye.
Electrons from the grid. So if somebody wants to buy 100 megawatts worth of electricity from MISO in 2023 for the 2023 calendar year, which is June one through 23 through May 31 24.
They could come to us. They're however, we would like to buy 100 megawatts of capacity from you all.
Here's the terms.
Yes.
We agreed to.
But when you solve that but what does that obligate us.
So what does that obligate us to do that obligates us.
It obviously palette or to bid in this plant.
Into MISO, each and every day, which basically says we.
<unk>.
Our message to MISO, saying that for tomorrow, we are willing to bid in that these hours. This many megawatts at these prices.
And.
But you must have a novel pricing model.
You must have an obligation to meet some price criteria and otherwise it doesn't mean anything.
Yeah.
Correct. So.
There are parameters about what price we can bid in.
I think the limit is up to three times our cost.
We can bid.
So as we want right we've been in a loss if we so choose.
And then if they accept that you must deliver.
Correct.
And what we get paid so let's say we did it at $40.
Yes.
So, let's say for that given hour or the next day.
The last generated a turn on for that our bid in at $60, we would get paid the $60 price.
So we are totally totally turned on.
All <unk> is doing is matching demand.
To supply.
So think of it like a layered cake right.
Sure.
You've got the wind operators may be bidding in at $5, a megawatt and you've got the solar guys coming in and saying look we'll provide at these hours.
At $6 a megawatt you've got the nuclear plants, saying, hey, we're either on a raw we're going beyond where we are going to bid in at $10 a megawatt.
Now you have the asset such as gas and coal coming in higher up the stack.
And.
Bid again, and what MISO is saying is hey look we're going to we're going to bid. This all the way up.
Until we get enough electric Lf generations to meet load.
But everybody gets paid the highest price for that particular.
And then a follow up.
All in all what what's your prediction of Capex for 2023.
Yeah.
Yes, it was that 35 to 40.
<unk> coal ash.
And.
It was about 15% to 20 for reliability at the plant and then.
Around 17 18 for EOG.
It means what.
The fluent limitation guidelines that.
That the EPA put out a few years ago that has to be we have to be in compliance with by 2025.
And that it had been rapidly that's roughly 40% to $45 million.
Dollars over the next three years.
And.
So.
Okay. Thank you.
Thank you Amy.
Our next question comes from Jeff <unk> with Cove Street capital.
Your line is now.
Thank you very much good afternoon gentlemen.
So just quickly.
<unk> added $150 million EBITDA quote unquote expected in 2023.
Yes.
Is that all coal or does that include the.
Capacity payments from from Europe .
No that includes the capacity payments for Amir.
But most I mean the majority.
Right here in front of me the majority of our EBITDA in 2023 will be coal because of the.
PPA we've entered into.
And the fuel limitations for the plant.
Got it and when you say the capacity payments basically enable you to run Miram at breakeven and then you get all the Optionality is that on an operating basis were said the cash flow basis, including that 15% to 20 maintenance and then the LG payments.
Yes.
Okay.
So what we're saying I'm sorry, Jeff what we're saying is.
The majority of our EBITDA.
Is coming from our coal production in 2023.
In 2023 from a plant perspective, we have a fixed cost.
Of that plant, which is mostly labor.
Right, we get capacity revenue.
We had in 2023, we anticipate we will mostly cover.
Nearly nearly all of the fixed cost of that plan.
We do not have we're going to run.
You've got a fair amount of power sold to Hoosier.
In January February March April and May.
But that's at a relatively low price. So we've made the margin on it but we don't make a huge margin on that.
We are more unsold.
Starting in June through December .
Of 23.
But we don't have a lot of fuel to put through the plant. So we don't expect even though we can make.
Potentially more money on a per megawatt hour basis, because we could sell electrons at a higher price.
We currently don't have a lot of fuel Bart will have some fuel bought nothing meet our requirements.
In 2023, so all we're trying to signal is.
That we don't we don't today, we don't anticipate.
Making a lot of money at the plant in 2023, we expect that to change.
In 2024 in that.
We have unsold coal at <unk> that we can take the mirror.
And we can sell that.
We can sell electrons out of Marin either on the day ahead market or.
Through bilateral sale to play a public utility of our trading company.
<unk>.
Judging by where we forecast prices be today.
That we can make a good margin in that in 2024, we've not put out any forecast for 2024 results.
But.
Al.
I've got the euro.
You still have to spend 15% to 20, whether you run the plant or not unless you truly close it down for good right.
Correct. So what we're saying is is that.
Hoosier within the in the mode of we're going to shut that plant down and so they.
As you do did not spend as much money on maintenance.
The plant.
Here in the last.
Nine to 12 months, so what we're saying is that we've got some maintenance.
Elevated maintenance expense on that plant to kind of get it.
Little better condition medicine today are better condition, not a little better.
And then we've got some money that we need to spend to become EOG compliant.
As far as environmental controls this plant has.
No.
Most everything you need.
To meet today's compliance requirements, but for.
It does not have an affluent limitation guidelines control system.
So.
That is an investment that were evaluated today to make sure that we.
Choose the right technology.
The EPA is still tweaking the rules around them. So it makes it a little challenging to know what to order.
They still haven't set the rules and then race to get into compliance by the end of <unk>.
At the end of 'twenty five 'twenty.
2026 year, we wouldn't do that expense.
If we didn't plan to run the plant beyond.
2025, so we feel we can make money at it.
And quite.
Quite frankly, we think this has put our company in a much better position.
In that.
Our coal.
As.
Not the most liquid market right I mean, there is limited buyers is limited sellers, we tend to lock up for periods of time, but the window of opportunity to sell only opening closes so often.
If we take our coal to our plan.
We can sell electrons everyday market.
So we have.
Dramatically improved.
The liquidity of our revenue stream.
With the acquisition of the Marin platform.
And we have got it dramatically improved.
Go ahead.
No.
I think I guess youre getting and so that sort of in a similar answers. My next question really.
It was either this plant was a 100% closing or are you really only guy because right because you obviously, it's a story of life.
If you could sorry, 10 year contracts at $125 a ton.
When we do that and Conversely, your customers wanted to you to sign 10 year terms at $32 at the bottom so.
Yes.
That's really your answer that look we need to we should be balancing.
The World and not every day is going to look like it does today ergo, we should be we will sell 2 million tonnes at 125, but we were always looking for ways to de risk and take less for longer duration and mirror.
Fits into that gateway is that am I getting that right.
Well I think I think the plant gives us a lot of Optionality Jeff.
Yes.
With that I think is what youre, saying is that the.
Fuel market our traditional market.
<unk> available to us and if thats the best market, that's where we'll go with that makes you how it or shareholder the most money.
On a risk adjusted basis.
Then that's where we'll go.
We didn't I didn't think that opportunity would exist personally.
Again it happened.
In the second quarter of this year now to be fair.
I say risk adjusted right, we didn't have the plant in our control at that time.
And it wasn't certain to us with power prices be by the time, we had the plant.
In control. So we are very easy to say well, we're going to tell us on the open market, we're going to lock that in that gives everyone great visibility as to as to what our economics look like going forward. What we're saying today is look we're working right now to get more fuel.
Or to find a way to get mirror to be more profitable in 2023, because we have the capacity to generate electrons.
We need to.
And we're working on some ideas but.
Keep in mind, we've owned this plant now for less.
Less than a month.
And no one really you could talk about ideas with third parties prior to owning the plant, but it always comes back to are you going to buy the thing one is going to happen those questions are behind US now so now conversations with third parties are much more meaningful.
And we're hopeful that we can transact.
And a capacity that.
As to the EBITDA.
That we're projecting for 2023, so we think there is upside.
If we are successful.
What we're trying to put together will time will tell.
As far as 2024, we at today's market prices. We know we can make money at the plant in 2024 significant.
As we get closer to that and as we locked in more will shed more insight into that.
But.
For now we know that it's given us a lot more liquidity because it's given us another avenue to sell and we could always sell in the day ahead market now you are a price taker.
But as liquid.
Got it Okay and my last to spend last thing physicals.
This is a.
Our bold scheme.
Paul interesting Optionality and get it.
Could work really well could be a neutral could be a complete time sucking mask lie.
Life is full of uncertainty.
And my point being is that you guys.
I would say this.
You guys have you guys adopted a new.
You've got a grant for the RF you plan that is just time weighted.
And I would say if I were you that with the board I would have doubled or tripled.
The <unk> package, but I would have made it.
Committed to either some sort of a shareholder return or some sort of an operational thing that would greatly pay you and heads us. If this plan is bold and fruitful and it would knock you. If it's well gave it a world didn't work as opposed to just kind of waking.
Up and getting three year to invest in our issues would be my mental comment, which you don't have to address but I would just throw that in your lap.
So well.
Okay got it.
R R.
Our executive team at <unk> based on.
Metrics.
Based on EBITDA.
EBITDA.
And.
Yes, but the annual number.
Short term.
Sure.
Yes.
Yes.
I'd like to argue CEO should be paid more.
That's a winning argument for you. So you should just take it as Dave and I appreciate your time.
Okay.
Our next call comes from Lucas pipes.
From B Riley Securities. Your line is now open.
Yes. Thank you so much for taking my follow up.
You spoke about the converts in your prepared remarks, and just maybe as you think about potential future sources of capital would you be open to more converts or might you look to other sources at that point. Thank you so much.
Well I think at this juncture.
We are significantly deleveraging our balance sheet and when we did the convert.
It was at a time, where our EBITDA performance was poor.
Our.
And we had that yet at the same point in time, we were knocking on the door of all of this opportunity.
But to take advantage of the opportunity.
And when I say opportunity that is so.
Coal prices increased production and acquire the manpower plant those those are the kind of the three.
Things that were lying in front of us.
So to take advantage of that we knew we had to spend more money on capex.
And we Couldnt go really rely on any more of the debt markets. So that's why we went through the <unk>.
<unk>.
Looking forward, we're seeing the app that our balance sheet completely deleveraging.
So we feel that the debt capital markets.
Should be sufficient to meet our needs. So I don't at this juncture.
Look to do any more converts.
And we just look to deleverage our balance sheet.
Work on.
Continue to to create.
Cash flow streams.
For the <unk> shareholder.
Got it.
Very helpful. And then maybe just one more for me.
You referenced rail performance earlier, and I believe last quarter, you referenced around 85% of scheduled deliveries were being shipped.
This figure improved and maybe just how are discussions progressing with Israel.
Since you are kind of looking to return to higher levels.
Okay.
Yes, it's kind of a customer by customer some customers is doing real well picking up.
What they are required to pick up and others are not.
And we are in communications with both of those.
And we had.
No.
I would say the performance on that front has been.
More of the same.
Got it fair enough. Thanks.
Thanks for all the color and continuous in luck.
Alright, thank you.
There are no further questions. So I'll pass the call back over to the management team for closing remarks.
Look I appreciate everyone, taking the time today and.
We're very excited about.
The future of how it or in a position that we're in and we see as much opportunity in front of us as I think we've ever seen in the history of our company. So we're excited about that and.
We think we've got the management team and getting the capital structure in place.
To take advantage of those opportunities so look for more in rest of the things that have us.
And.
Look forward to talking to you next quarter. Thank you.
Okay.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.
Yeah.
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