Good afternoon, and welcome to the Hallador Energy's Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode.

[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms.

Becky Palumbo, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Nancy. We want to thank all of you for your interest in Hallador today and for taking the time to join us on today's call to discuss our second quarter 2019 results.

As a reminder, this event is being webcast live and you'll be able to access a replay of this call on our website. We filed our second quarter Form 10-Q yesterday afternoon and it is now posted on our website.

Participating on today's call are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Larry will begin today with a brief financial overview of the quarter, followed by Brent with comments on operations.

After Brent completes his remarks, we will open the line up for Q&A. Our remarks today will include forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially, for example, our estimates of mining costs, future coal sales and regulations relating to the Clean Air Act and other environmental initiatives.

We do not undertake to update our forward-looking statements whether as a result of new information, future events or otherwise except as may be required by law. And with that, I turn the call over to Larry.

Thank you, Becky. Good afternoon, everyone.

Today, we'll be reviewing our quarter and year-to-date results. To start out, I want to get – read at the - or go through a couple of definitions.

We define free cash flow as net income plus deferred income taxes, plus DD&A, plus ARO accretion and stock compensation, less maintenance CapEx and the effects of our equity method investments. We define adjusted EBITDA as EBITDA plus stock compensation and ARO accretion, less the effects of our equity method investments in Hourglass Sands.

For the quarter, we had a net loss of $3.3 million or $0.11 a share. And year-to-date, we have made $3.7 million in net income or $0.12 a share.

Our free cash flow for the quarter was $5.9 million, $20.6 million for the six months ended June. Our adjusted EBITDA for the quarter was $16.4 million, $41.7 million for the six months.

We borrowed $4.7 million in the quarter and we have paid a total of $15.4 million for the six months ended June 30th. We paid dividends of $1.2 million or $0.04 a share for the quarter; $2.5 million, $0.08 a share for the six months.

Our bank debt at 6/30/2019 was $173.1 million. Our net debt, taking out our cash and available-for-sale securities was $164.4 million.

Our debt target for the end of the year is $155 million to $160 million and our leverage ratio at June 30th was 2.2 times debt-to-EBITDA. I will now turn the call over to our CEO, Brent Bilsland for comments on the quarter.

Good afternoon, everyone. As Larry has previously highlighted, Hallador experienced a $3.3 million loss in the second quarter.

The majority of the loss was due to a $1.8 million non-cash adjustment in the fair market value of our interest rate swaps. Each quarter, we mark to -- we marked the value of our swaps to market and in the second quarter, the adjustment was larger than normal due to the Fed changing from a position of raising interest rates to one of lowering interest rates.

However, Hallador intends to hold its interest rate swaps long-term, negating much of the effects of quarterly non-cash fluctuation and evaluation. Additionally, the seasonal nature of our contracts led to the second quarter of 2019 shipments being 15% less volume than the first quarter of the year.

This reduced shipment pace was expected and shipments for the year are on schedule as first half shipments were 49% of our 8 million ton annualized target. During the quarter, we chose to produce more coal than we shipped, building coal inventory in anticipation of larger shipments in Q3.

Thus, our coal inventory grew to $29.3 million in the quarter and we borrowed $4.7 million to meet our increased working capital needs. Our liquidity still stays at a healthy $73 million.

And I think these circumstances detract from a quarter that generated $16.4 million in adjusted EBITDA. In the first half of 2019 it generated $41.7 million in adjusted EBITDA.

If we were to report earnings only once a year, these quarterly fluctuations would go unnoticed. But since we report quarterly, we must trust that the Hallador shareholder can see, as we do, that Hallador remains on pace to have a great year.

When we review the quarter, we are most thrilled with our continued success, locking in sales for the 2020 calendar year. In past calls, we have tried to highlight our growth in customers and sales as we have made a structural shift to become an 8 million ton a year company.

For 2019, we are a 100% sold at 8 million ton target pace and for 2020, we are now 88% contracted at our 8 million ton target pace. When we look at the remainder of 2019 through 2022 or the next 3.5 years, we have 21.7 million tons sold.

Thus, we have 77% of our contract – of our sales contracted over the next 3.5 years at an 8 million ton annualized pace. The reason for our continued sales success throughout 2018 and first quarter of 2019, our subsidiary – our Sunrise Coal subsidiary grew from nine customers in three states to 17 customers in eight states over that time period.

These new customers give us more opportunities to continue growing sales. Now we feel that being 77% hedged for the next 3.5 years gives Hallador investors unparalleled free cash flow visibility.

Of course, if you assume that 80% of EBITDA roughly – or excuse me, roughly 60% of EBITDA equates to free cash flow, then Hallador has an enterprise value to free cash flow yield in the mid-teens, while the S&P is yielding in the low-single digits. Thus, we believe Hallador represents a tremendous value.

To-date, only 5% of our current customer demand has announced a retirement date within the next decade. Now we realize there is potential for more retirement announcements for customers, but we are also confident in our ability to continue to grow our customer base as we have most recently displayed.

Additionally, we believe that exports will continue to take an increasing larger share of Illinois Basin production. To echo comments from recent coal company earnings of other – of our competitors, we too believe the downturn of the export market is cyclical in nature and not structural.

There are still more megawatts of coal-fired power plants being constructed in the world than are closing. So in conclusion, we strongly believe that Hallador has a great free cash flow yield with superior contract visibility, a growing customer base and plenty of excellent opportunities to redeploy capital.

So with that, I will open the call up to questions.

Sorry about that. That was an exercise in how to operate a dial-set.

So, I appreciate you taking my question. And good afternoon, everyone.

First question, look, the market appears to be softer right now. Brent, what can you tell us about the current market environment in terms of contracting activity?

Are there a lot of bids out there or are utilities kind of taking a wait-and-see approach? And what are you seeing out there in the market?

And then how much term can you get on any additional contracts? I would very much appreciate your perspectives on that.

Thank you.

Well, currently, we are not really in a traditional RFP period. We – the traditional RFP season is really more in this fall, September timeframe.

That's why we were very pleased that we were able to contract about 10% of our next year's business during the second quarter, which I thought was potentially a little unusual. But I think it comes back to - we are doing – we've grown so many new customers that were doing smaller pieces of business and really, the pricing has held in there thus far.

The export market definitely has deteriorated significantly from a year ago timeframe. But – and to some degree, I question how much of the drop is actual physical trades and more how much of that is just traders trying to get out of positions.

But we think that that exports will come back stronger, but it needs a little time to unwind itself. And again, longer-term, we continue to look at the growth in India and Eastern Europe and those markets and it just looks like to us that more Illinois Basin over time is going to be flowing into those markets.

So, we are in probably as good a shape as we've ever been going into a year at 88% hedged, sitting here in early August. I am not sure I know of another time that we've accomplished that, especially at our higher sales volumes.

So, we are really in good shape and we think we've got a lot of time to hit our target of 8 million tons next year. So, we are not feeling a lot of pressure.

We certainly are looking forward to the RFP season this fall and hope to continue contracting business. I think that's all I've got to say on that.

That's very helpful. Thank you, Brent, for your perspective.

I may circle up a question – that’s another follow-up on that topic. But to switch topics, earlier this earnings season, one of your peers in the Illinois Basin mentioned and I am paraphrasing, but it was along the lines of this is the most dynamic time that I've seen from a strategic point of view in my career.

Again, I am paraphrasing, but it was in regards to Illinois Basin and I was curious, how are you looking at the strategic landscape in terms of consolidation in the industry today? I would appreciate your thoughts on that.

Thank you.

Well, I think the announced or proposed joint venture between Peabody and ours in the Powder has a lot of people talking. It's not really a structure that we've seen in a while, and so it's a little bit unique, but it seems to make a lot of sense.

And, so I think everyone is kind of watching that that transaction to see what comes of it. As far as other basins go, it just really seems to be a time period of the haves and the have-nots.

You've got companies, such as ourselves, that have good liquidity and paying down debt. We think by the end of this year, we go under two times debt-to-EBITDA and so, just not a lot of leverage, our EBITDA is growing.

So, – and we are a low-cost producer. There is other producers out there that certainly aren't quite as well hedged and to me, you are going to see the contracts flow to the low-cost producers and you are going to see production be curtailed at the higher cost producers.

That always takes a little bit of time, because it takes time for contracts to work-off. And like us, we are 3.5 years.

We've got 77% of our target contracted. So, but we've worked to get in that position and we think we've got some ideas out there to be able to pick up market share, because of the strength of our low-cost operations, because of the flexibility of our transport options that we can give customers and the health of our balance sheet to make people realize that Hallador is going to be here for a long time to come.

So, on the other side of the ledger, you are seeing quite a few bankruptcies with various players and in some cases, they've struggled to raise debt financing and they've struggled to find buyers for some of those assets. And that's because you are seeing a handful of assets out there that can't generate positive cash flow with zero debt.

And so, as the market gives us these challenges, you look for the stronger producers to pick up market share and the weaker producers to lose market share.

Got it. Okay.

That's very helpful. I appreciate that perspective.

And then, maybe to hone in one of the points you raised regarding taking market share. Second of a two-year plan, three-year plan and when you think about some of the structural headwinds that are pretty widespread in the industry, kind of how does all that fit together?

And where do you see kind of volumes longer-term? Thank you very much for your perspectives.

So, as far as picking up market share, it's something we work on every single day. Now that being said, there are times of the year that the buying window is open and there are times of the year that the buying window is closed.

And, that's why we always find the questions around pricing, people will see and say what's the spot price of coal today? And when the markets – when the window is closed, it really doesn’t matter what the price is.

It only matters when the window is open. And so, and traditionally, people are going buy to an 80%, 90% hedge rate in the fall and fall months.

They are going to then get into spring and see what did winter bring and where are their inventory levels and maybe they are going to make some summer spot price purchases, which is somewhat of what we experienced this year. So, as far as opportunities to pick up market share, you kind of have to get yourself in a position with something unique for the customer and then wait for the window to open.

And so that's what we are constantly doing is trying to get into that position and then we’ll see definite opportunities out there. We just have to wait patiently for the window to open.

And Brent, when you think about where you can pick up market share on a regional basis, would that be Indiana? Would that be, maybe in the southeast?

Or maybe other states in the Midwest? I would appreciate your thoughts on where you see the biggest opportunities.

Thank you.

Well, we can't share all of our cards. By and large, we are 70% of our volumes stay in the state of Indiana, 30% goes elsewhere.

Most of our new clients in the last twelve months have come from outside of Indiana. Part of that from a structure point of view, you saw the add last year, our Princeton Loop that gave us new capabilities, the ability to access some of the NS market, ability to give traditional CSX customers more flexibility on where they take their product from.

So, and then, we've just been blessed that Indiana, by and large has not seen the largest number of retirements. So, those assets, there was quite a bit of environmental controls put on the coal plants in Indiana.

And so, I think the utilities look at that and say, well, gosh, if we set these assets down, we still have to pay for all these investments that we made a handful of years ago. So, that's why I think you are seeing those assets stay online much longer than what you are seeing, say, assets in the Powder River Basin that didn't put on environmental controls to meet sulfur emissions and things like that.

So, that's why we really think our customer base has a longer staying period and why some of the structural headwinds aren't blowing as hard against us.

Got it. Okay.

Brent, really appreciate your color and continued best of luck. Thank you.

Thank you, Lucas.

Well, I just want to thank everybody for taking the time to dial-in today and listen to the call. And appreciate Lucas for his questions.

And we look forward to talking to you next quarter. We think we've got the year set up to be a good second half of the year for Hallador.

And hopefully, we plan on delivering on that. So, thank you all for your time.

And this ends the call. Thank you.