Q2 2023 Hallador Energy Company Earnings Call
Operating revenues in Q2 2023 include $23 $6 million sold to mirror that was elimination and eliminated in consolidation.
Yeah.
Our healthy coal production during the second quarter allowed us to grow coal inventories by $9 3 million.
This growth provided us with the flexibility to ship.
Excuse me it provides us with the flexibility to ship additional coal tomorrow, if the market so dictate and ultimately will allow us the option of generating more megawatt hours in the second half of the year than previously planned.
This flexibility is especially important.
As.
How old are power completed its obligation of selling 100%.
The output <unk> original owner.
Even with some of the initial limitations on where and to whom we could sell our output.
Older power contributed $9 2 million and net income during the second quarter.
Starting in June of 'twenty three.
Some of these contractual limitations expire.
Approximately 80% of our potential output from the plant became available to sell to the open market.
As our operations at how it or power continues to develop we are excited.
For the meaningful contributions that we expect how it or power to make in the second half of the year and beyond.
On August 2nd we successfully closed the new $140 million credit facility led by PNC Bank.
The facility consists of a $65 million term loan with a maturity of March 2026.
And a $75 million revolver with a maturity of July of 2026.
As stated before as of June 30, our liquidity improved to $56 $9 million.
This new facility is important for multiple reasons, including providing us with additional flexibility to make forward power sales and to react quickly to market opportunities.
We are encouraged by the general outlook on future power pricing in our liquid increased liquidity places us in a better position to potentially lock in future profit.
As I said at the start of my comments I'm incredibly pleased with the quarter results and the progress that how it or continues to make as a company.
With that I'll open up the line to for any questions that anyone may have.
Okay.
Absolutely we will now begin the Q&A session.
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The first question comes from the line of Lucas pipes with B Riley. Please proceed.
Thank you very much operator, and good afternoon, everyone.
Good afternoon. Thanks Lucas.
My first question is on coal pricing.
About three points back of the envelope $3 6 million tons on pricing for 2024, So I wonder what the mechanism.
Might be for pricing those concept, where you see the market today. Thank you very much.
Well, a large percentage of that business is.
Tons that are committed to ourselves that the manpower plant that we have yet to price.
And.
So we will look at the market.
Indicators and basically set those prices so that it's a fair transaction for both.
Sunrise and the man power plant in there as well.
Rules around that.
That that the market monitor.
We will review so I mean, that's kind of how.
How we do that so if you look at you know.
The general.
Pricing curve.
It'll be something something in that range.
Got it and can you remind me how many tonnes are likely to go to Marin in 2024 out of your own production.
We figure of about 3 million tons.
So essentially the committed but unpriced portion of your book should I think of that going to mirror.
Yes, three of the $3 6 million.
Uh huh.
This was committed and going to three three to $3 six is whats going to mirror.
Got it. So you really just have like 600000 tons that are uncommitted on price.
And you have to find a home.
Okay.
Yes.
That's helpful. Thank you.
And then.
Two quick questions on the <unk>.
Contract liability.
Good.
As part of the consideration.
Thank you Mark to two to $184 5 million as a PPA.
Based on where power prices are today.
Could you give us a sense where that.
Liability withstand.
And then somewhat related to the amortization of the contract liability of $96 million during the quarter would that be within captured within your operating expenses on the income statement or wherewith, how would that flow flow through thank you very much.
Okay.
That's all.
Okay.
Lucas the contract liability runs through revenue so it decreases revenue and if you look at the.
15.
Part of the corporate and other eliminations.
<unk> 3 million for the quarter.
The lion's share of that no.
Increases revenue increases revenue and then the 23 million.
The intercompany sale.
So sunrise sold.
Coal to the power plant and the power plant did not burn that yet so that's part of that elimination.
Okay.
Okay, maybe we can follow up on that offline, but but.
Yes.
Okay.
Yes.
Yes.
Help me on this question.
When I look to the reconciliation of revenue.
Page 22 on the 10-Q.
Sure.
It shows the capacity revenue.
<unk> energy PPA revenue.
Net assets to the $71 million that you also show on the income statement and then there is the amortization of the contract liability of $19 6 million.
To kind of back into I guess what would be.
Turning to sales.
Yeah exactly exactly so.
Yes.
The $19 million in revenue for the purchase contract liability that we got.
So right here, we're just back in half that $19 5 million out of revenue to show you what it normalized revenue will be after that is <unk>.
Amortize.
Yes, so so essentially the same thing.
Tom.
The $71 million of GAAP accounting, which includes the purchase price and then a $51 million would be normalized revenue if we had no.
Purchase price adjustment.
Got it so the 50 151 million to $51 million of solar power.
After the empower.
Yes.
Yeah.
But just to be clear here.
And again, maybe you can follow up on this offline but.
But your.
Essentially the $71 million.
Is it more market based figures that is that right.
More market based back in October .
Yes.
The issue is.
One of the issues here.
Is when you negotiate.
<unk> such that it takes a lot of time right.
And so the price.
The seller would say well hey look I've got the cole purchased.
To generate my electrons through May of 'twenty, three right because that was the one they intended to close the plant.
The other thing we will look all all enter into an agreement with you where.
We.
Sell your coal at a certain price.
And.
By electrons at a certain price and then when we get to the closing of the transaction, which was probably.
Quite some time later, we have to worry to October February to October we have to mark that to market right and there was a lot of.
There are a lot of volatility in the market last year. So that's.
Essentially what happened and now now we're accounting.
For that.
For that Mark to market. So yeah, I mean, so in February .
February we were close to market by the time, we closed in October the market has taken off as everybody knows so we had to mark those.
Contracts to market at the time so.
So Lucas you are right in saying that the 71 as market that was market in October not necessarily market today.
Got it okay.
<unk>.
So really what this is all helpful. Thank you so so.
Guess, what im trying to get at is market.
The market today.
Where would you put it both on the.
Dollars per megawatt hour and then the capacity revenue.
Well.
That's not something that we disclose because we always have ongoing trading.
As far as selling capacity and selling of energy, but there are certainly.
Market curves out there that you can look out for.
Indiana hub, we actually sell through.
To the mirror hub, but.
It was a more public market of the Indiana hub I think that can give you a.
Our feel for what electrons are selling for at.
At various periods of time.
Capacity is a little tougher the capacity market auction is the.
Most.
Visible mark to market, but we have found that those prices have been all over the place.
And so to us the market.
The MISO capacity auction prices have really not.
Been very.
Correlated to the actual price that capacity is trading at I think we've said in past quarters that we feel that we are able to sell capacity.
At prices that.
No.
Our relatively cover our fixed costs.
Okay.
Got it most of it.
<unk> sold through bilateral agreements.
The various utilities and trading companies.
And very little volume for us is actually sold through.
The MISO auction.
So I'd like to also point out here you asked about the $19 5 million. We also in that same.
In the same transaction with Hoosier. We also said we got we saw power under market.
October we also got a coal contract way under market in October as well.
So that is what the $12 9 million is on page 22 for the amortization of the contract asset. So so they kind of they offset a little bit we saw power yes.
Less than market.
October because it said because we started in February we also got a coal contract less than market, we had to pay less the market for.
Got it.
Okay.
Table on page 22 is trying to.
Add even more clarity to is.
Hey, here's how many megawatt hours. We saw here was our capacity revenue here was the price we got per megawatt hour in here was our cost per megawatt hour.
And we've mentioned here on the call with our net income was for the plant.
We're trying to add more clarity there we realized GAAP accounting around the.
Purchase purchase asset and liabilities.
And make it a little challenging to fall.
Yes.
Now this is this is helpful.
Okay.
I appreciate the color best of luck.
To the entire <unk> team and I will turn it over thank you.
Alright. Thank you thanks Lucas.
Thank you Mr pipes.
Again to ask a question please press star one.
Policy of British will allow questions to generate in Q.
The next question comes from the line of Kevin Tracey with Omron asset management. Please proceed.
Great. Thank you.
Brent So I appreciate this page 22, all the disclosures we've added here.
I'm going to ask you for another one so I think what most investors are key.
Keen to know kind of what's the non fuel cost of the power businesses.
There's obviously a lot going through kind of the fuel expense line with the.
Amortization of the coal contract asset and as intercompany sales from Howard or and so on do you have the kind of fuel expense in the quarter, Andy or would you be willing to disclose that.
Well, that's that's not something that we are prepared to disclose today, but we will certainly.
Take that into consideration for future quarters.
Okay, that'd be great, maybe I could ask it a different way or this variable expense.
You've disclosed.
It came in at roughly.
$11 or sorry, sorry, $30 per megawatt hour.
Do you have a sense of what kind of the non fuel variable cost per megawatt hour should be on a ongoing basis.
Well, we've disclosed in the past that our capacity covers that cost our capacity revenue I.
I think that's all we're willing to do this quarter.
<unk>.
Yeah.
Okay, and just to be clear the capacity revenue covers the fixed cost right not the variable cost or are you talking about capacity revenue covering all of your knowledge.
No youre correct fixed cost.
We've stayed with that.
Three quarters that our capacity revenue cover fixed costs.
Yes.
Are you asking about non fuel variable costs is that what you are yes, yes, yes, thats what im asked yes.
I mean, it is in the variable cost and it is I mean, the lion's share of our variable cost of steel.
Okay fair enough.
And then can you talk about what the inventory position looks slightly Miriam I mean, you talked about hopefully being able to generate more electrons in the second half of the year than maybe you envisioned at the beginning of the year where does inventory.
Miriam and then I think you have 4 million tons of kind of contracted price tons to sell to third parties in the second half.
Is there a chance that your customers might be willing to defer some deliveries outside of this year and that might unlock more inventory to burn Miriam.
Well I mean as far as what our customers are willing to do that kind of changes on a daily basis, but yes, I mean, I think what we said in the call is and what we've said in prior calls.
Power.
The.
The power or coal prices last year took off we sold.
A large percentage of our coal to third parties.
And now <unk>.
Our production has been.
Or has exceeded sales we are generating inventory in the first half of the year.
That we think that we'll be able to burn profitably in the second half of the year, that's going to be dictated by the price of power.
Right I mean, we these are not contracted forward power sales for the most part.
So the benefit.
And the burden.
Of.
Having our power book.
20% contracted 80% open market for the balance of the year.
Is <unk>.
We think we can achieve higher prices than what were previously contracted for in the first half of the year.
But that will be up to the market right. I mean, some of that is weather dependent some of that is gas price dependent.
Power prices change everyday all we're saying really is.
We have more fuel.
And because of that.
We'll be looking to burn and generate more megawatt hours in the back half of the year.
It was maybe another way of saying is there is potential depending on power prices for the power plant to make more money in the second half of the year than in the first half of the year, but that is wholly dependent upon.
What what we see in the market as far as the price of power. We just have the inventory to do it should the market shows values that makes sense.
Okay. So would you say the power plant.
Is not inventory constrained.
To the extent the power prices are favorable in the second half of the year could you run the plant.
At a high capacity factor or is there a point where you are.
<unk> run out of inventory.
No we feel we could run at a high capacity factor of the market showed us the appropriate pricing.
Okay great.
And then on the cash flow.
So the free cash flow conversion hasn't been great in the first half of the year, but now that you've completed your coal purchase contracts acquired with <unk> is it fair to say that youre going to burn down a lot of that coal inventory in the second half.
Free cash flow should be quite robust in the second half and I didn't hear you say I think the prior goal was to hopefully be net debt zero sometime early next year is that something.
But you reiterate.
Second quarter, yes.
We think we will be net debt free and to answer to your question on the inventory, yes, we plan on drilling inventory down.
As much as possible at the end of the year I think we had like $9 4 million increase in inventory, which as you point out.
Decreased our cash flow, we expect that to turn around and then some because we will draw our inventories down it's dependent upon higher prices dependent upon customer, but our plan is to grow inventory down.
Two a very low inventory balance at the end of the year.
On power prices.
Yes.
Okay, Okay dependent on power prices, we have the coal sold to third parties. So they are obligated to come and get it whether they I mean there'll be something.
They're if they don't come and get it I mean, there'll be a carryover would be some kind of settlement but.
And then power prices.
Okay, and lastly on the coal cost per ton is kind of low forty's.
A good expectation going forward.
We think we think we can get those lower.
Two years ago, we were at 32.
I don't know if we ever get back there with inflation, but we are working on.
Things at the mine to help geology to help mining conditions and more.
The more efficiency, we think we can get them down from 41, but im not going to throw a number out there.
But we are working on them and think we can.
Okay, Thanks, very much growth.
Thank you.
Thank you Mr. Tracy.
Again to ask a question please press star one.
Yeah.
We have a follow up question from the line of Lucas pipes with B Riley. Please proceed.
Thank you very much operator, thank you.
Final question, just looking at the <unk>.
One hour sold in the first quarter and second quarter 2023, we have that drop from $1262 to 1043.
Yes.
Is that just seasonal.
Kind of looking ahead at what level do you look to.
Run the plan going forward. Thank you very much.
Okay.
Well again.
What power price dependent Lucas in the first quarter of 100% of the output.
We're committed to the seller.
Of the plan.
And that debt.
Essentially it was the pace that they wanted us to run at in the second quarter.
Two of the three months.
And then <unk>.
Managed the same way so really June was the first time.
That.
We were in position to.
So the majority of our electrons to market in that kind of dictated the pace of the plan. So.
But you're also in the shoulder month right. There right I mean, you've got April you had to shoulder months in the second quarter and only want I mean.
March really isn't.
Correct.
Order month in April .
What was a very hot so.
You typically expect your plant to run more in July August September those are hotter months than April May June .
Yes.
And we will see.
Winter brings.
It was winter show up in November it was when a show up in December or does it show up in January so.
The power business is a much more seasonal business.
Particularly when.
We have.
More market exposure.
Versus.
What we're seeing what we've typically experienced in just the core business right typically the coal business, you've got it under contract and it really just kind of comes down to will.
Hey, good visibility on the sales what are my cost of production and what volume are you going to be at.
Said another way.
Think of that.
Longer term.
You'll see the plant probably run more at.
1 million.
And a half megawatt hours per quarter.
Those will be probably a little more aggressive.
In the heating and cooling season, and a little lighter.
In the shoulder seasons.
From a volume perspective.
That's where we'd like to be.
And.
In June with the utilization rate higher or lower than in April .
Prices were pretty soft in June it was pretty mild here in the Midwest quite frankly.
We havent heat showed up basically in the first three weeks of July .
So July was pretty good.
I think it's been relatively mild here.
The first week of August , but we'll still see what the what the summer break and gas prices affect this.
This too.
That said I think long term I think the I think the margin potential of the power business is very good.
And so I think.
No.
We haven't really had.
Youll look to see us.
Price a little bit more of our power going forward.
And hopefully next quarter, we can be in a position to disclose more of that.
I think the market will be.
Pleased.
With the pricing that we're seeing that that will.
We will talk about those deals when they.
When there is when they are signed and we can report it.
Okay.
That's helpful. Thank you then.
Back to page 22.
Alright, you net out the amortization you show that average price per megawatt hour.
Delivered energy and Tpa revenue.
$32 89 per megawatt hour and you show that cost on.
Comparable basis.
<unk> $30.
<unk>.
Okay.
Those two metrics may be the best to kind of where the market is today.
To model this business going forward.
I don't think on the sales side that is not market today I think on the cost side, you're starting to see a couple of quarters here.
Where our costs.
Our app.
So the plan for.
And that's both steel variable cost.
Realized like second quarter second quarter Lukas as Brent said is a shoulder month. So it's lower prices to begin with and it was quite cool in April may and June wasn't that great either so.
So kind of what I think.
We will not cold.
Yes, yes.
Yes, that's clear.
So in other words the.
Okay.
Kind of.
At current market prices.
Average price.
For megawatt hour delivered energy and effort PPA revenue.
Which would be somewhat higher.
Yeah.
Matt again.
It kind of gets into what time period are we talking about right I mean, if we're talking about spot power tomorrow.
If the temperatures mild and gas prices are cheap that's not going to be a very good price. If we're looking further out on the curve.
I think we're pretty pretty excited about what we see out there.
So it's it's.
I just don't want them.
First of all we have ongoing negotiations so I don't I don't want them.
Tip, our hand, but also.
Yeah.
I don't want to.
Confuse the market either because pricing today is.
Essentially very different and pricing two years from now.
Got it so so.
That's very helpful.
Again, thank you for taking my follow up question, then and again best of luck.
I appreciate it thank you.
Thank you Ms Sternberg pipes.
Again to ask a question please press star one.
We will pause briefly to allow questions to generate in Q.
There are no additional questions left at this time.
So back to Brent for any closing remarks.
I want to thank everybody for their interest in <unk>.
Al Dor, and joining our call today.
And we look forward to reporting more great results to you all in the.
Thank you.
That concludes today's conference call. Thank you you may now disconnect your lines.