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Hallador Energy Company

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Hallador Energy CompanyUnited States Composite

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Q4 2015 · Earnings Call Transcript

Mar 14, 2016

Executives

Brent K. Bilsland - President and CEO W.

Anderson Bishop - CFO and Treasurer Lawrence D. Martin - CFO, Sunrise Coal, LLC Rebecca Palumbo - Director of IR

Analysts

Mark Levin - BB&T Capital Markets Derek Hernandez - FBR & Company Michael Goldenberg - Luminus Management

Operator

Good day, and welcome to Hallador Energy Company’s 2015 Year-End Earnings Conference Call. All participants will be in listen-only mode.

[Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions.

[Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Becky Palumbo, Director of Investor Relations. Please go ahead.

Rebecca Palumbo

Thank you, Andrew, and good afternoon to everyone. Thank you for joining us today to discuss Hallador Energy’s fourth quarter and full year 2015 earnings.

With me on the call are Brent Bilsland, our CEO and President; Larry Martin, CFO for Sunrise Coal; and Andy Bishop, CFO for Hallador. Following the remarks made by management, we’ll open the call for a Q&A.

This conference call is being webcast live on our Web site and a replay will be available for your convenience followed by a transcript later this week. If you have a question after the call, please reach out afterwards.

Before I turn the call over to Brent, let me remind you that the various remarks we make on today’s call regarding future expectations constitute forward-looking statements. And the cautionary language regarding forward-looking statements in our Form 10-K filed on Friday, March 11, apply to the remarks we make today.

With that, I’ll turn it over to Larry.

Lawrence D. Martin

Good afternoon, everyone. I wanted to go over our operating results for the fourth quarter and the year 2015.

Our net income for the fourth quarter was 500,000 or $0.02 a share and year-to-date we made 20.1 million or $0.68 per share. Our free cash flow for the quarter was 9.3 million or $0.32 a share and totaled 44 million or $1.51 a share for the year.

Adjusted EBITDA was 15.4 million for the quarter, which equated to $0.53 a share; 90.8 million for the year, $3.13 a share. We reduced our debt in the fourth quarter by 16.6 million, which equated to $0.57 per share and year-to-date was 56.9 million reduction, $1.97 per share.

We paid dividends 1.2 million for the quarter, $0.04 a share and a total of 4.8 million for the year, $0.16 a share. And we define our free cash flow as pre-tax income plus depreciation, amortization, less CapEx.

And we define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, plus the amortization of our stock compensation. At the end of the year, we had bank debt of 250 million and this coupled with our $16 million of cash left us with a net debt of 234 million.

Our debt target for the end of '16 coming up, we expect our debt to be somewhere between 220 million to 225 million at the end of the year. And at the end of '15, our leverage ratio was 2.67 times.

With all that being said, I would like to turn the conference over to Brent Bilsland to give his comments and insight.

Brent K. Bilsland

Hello, everybody, and thank you for joining our call. For 2016, we are forecasting sales of 6 million to 6.5 million tons.

At a minimum, we already have 5.6 million tons already under contract. In some cases, our customers have the ability to increase contracted tonnage and/or are required to purchase their distilled tonnage needs from our company.

In addition to our contracted position, we are experiencing some customers coming out for RFP now that we fully expect our customers to purchase additional tons in 2016. Clearly, our average price for 2016 is $43.88 a ton.

On the cost side of the equation, Oaktown’s cash costs for the fourth quarter was $28.98 a ton. For 2016, we are forecasting our costs to be $28 to $30 a ton.

Going forward, we expect our SG&A to be 12 million annually and cost associated with Prosperity and Carlisle to be 9 million annually. In the fourth quarter, we continued to generate cash and these funds were used to pay down debt, 16.6 million in addition to paying a quarterly dividend of 1.2 million.

In the 16 months since purchasing the Oaktown mine, we have repaid $100 million of bank debt equal to $3.42 a share. As of year-end, our debt to trailing 12-month EBITDA was 2.67 times but our own covenants have also stepped down to 2.75 times.

This step down in our covenant coupled with our reduced sales for '16 has led us to request the modification of our loan covenants. Such a modification will require 51% consent from our bank group.

In speaking with PNC Bank, our lead bank today, they stated we are on track to receive the required consent this week. This increased liquidity will allow us to continue to operate conservatively and/or participate in consolidating the current industry.

Personnel for us, effective April 1, 2016, Larry Martin, Sunrise’s current CFO will become CFO of Hallador Energy. Andy Bishop has been Hallador’s CFO for the last 26 years and become a consultant to Hallador where he will continue to file our 10-Ks and 10-Qs.

This is something we have been planning for a long time and as we continue to wind down our Denver office and transition those functions to Terre Haute, Indiana office. I want to personally thank Andy for his 26 years of service and we look forward to continue working with him for the foreseeable future.

With that, I’m going to open up to questions.

Operator

We will now begin the question-and-answer session. [Operator Instructions].

The first question comes from Mark Levin of BB&T. Please go ahead.

Mark Levin

Hi, Brent. How are you doing?

Brent K. Bilsland

I’m fine. How are you, Mark?

Mark Levin

Yes, doing well. A quick question.

Not so much as it relates to '16 but '17. It looks like for '16 you’ve got most of the coal put to bed that needs to be put to bed and priced at least around the minimum.

But when you think about targets for 2017 and how the market looks in 2017, if you were in our shoes and trying to model '17 and trying to think about what a reasonable sales forecast given what you know about supply and demand fundamentals in the Illinois basin, would you assume flat with '16, down from '16 or how would you think about it?

Brent K. Bilsland

I think sitting here at this juncture, '17 is going to look very similar to '16.

Mark Levin

That’s fair.

Brent K. Bilsland

We kind of see this contraction – if you look at the 4th of July, we had 65 degree weather; Christmas day, we had 64 degree weather. This week, we have 60-degree weather.

This has kind of created a glut of BTUs that’s just going to take some time to work its way through the system. And we see that process taking the better part of '16, at least the first half of '17 before we maybe return to something more normal.

So that’s just kind of how we see the market and that’s how we think '18 looks much better than '16 and '17.

Mark Levin

Got it. And is there a – I know you guys have already reworked contracts but I wanted to just kind of see where you were today given the weather again, the mild weather.

Is there any further risk for deferrals at this point or do you feel pretty confident about the way things look today as it relates to '16?

Brent K. Bilsland

I think in relation to '16, I think we’re in pretty good shape. These things change but I think the customer has done a lot of work trying to get their position straightened out in '15.

A lot of those tons did get put into '17. And I think customers’ models – I think their models are showing burning less tons in '17 and so therefore they’re playing it much more short than they have in the past.

So I don’t – to answer your question, I don’t see the deferrals being as great in '16 as they were in '15.

Mark Levin

Okay, fair enough. And then last question, Brent, as it relates to cost.

It looks like Q4 cost per ton were about $32.45, you were $31.82 in Q3 and about $30 in the earlier period. And I think as I understand if you’re guiding to $28 to $30 next year, is that $28 to $30 just inclusive of Oaktown or is that the all-in companywide costs for the 6 million tons or so plus or minus that you’ll sell this year?

Brent K. Bilsland

That’s just Oaktown.

Mark Levin

Just Oaktown. So when you think about the all-in costs, so if it’s $28 to $30 at Oaktown and then you layer on what’s left, what do you think is a reasonable way to think about '16 Oaktown plus?

Brent K. Bilsland

For '16, it will be $28 to $30 mark plus around 9 million we expect for the idle cost at Prosperity and Carlisle.

Mark Levin

Got it, plus the 9 million. And then when you think about '17 in costs, would you again assume that same plus 9 million or does that number change at all?

Brent K. Bilsland

Well, I think we’ll continue to evaluate Carlisle and it really comes down to how quickly we think we can get the production there back up line. Currently, we see adding tons there in '17.

And as that changes, we’ll adjust accordingly.

Mark Levin

Got it. Okay.

I will leave the floor.

Brent K. Bilsland

Thank you, Mark.

Operator

The next question comes from Lucas Pipes of FBR & Company. Please go ahead.

Derek Hernandez

Hello, there. This is Derek Hernandez on for Lucas today.

I want to follow up a little bit on the cost guidance going forward into 2017. I know we have the guide for Oaktown in '16.

Just wondering how you may anticipate seeing that evolve into 2017? I know previously you had targeted Oaktown costs altogether in possibly the mid to low 20s per ton and kind of just wondering how that outlook looks possibly over the next few years as well?

Brent K. Bilsland

I think the cost structure will be solely dependent – maybe not solely dependent, it will be very much influenced by what tonnage volume we’re running. So as we move to 6.5 million, 7 million tons, you’re going to see our cost go back down and approach $27 at Oaktown.

If we’re running at 5.6 million tons, I think we’re going to be more in that $29-ish range. So that’s what’s influencing our costs.

If you watch our sales – as we layer in more sales, I think that will push us to one end or the other of our cost range.

Derek Hernandez

All right, I see, very good. And in terms of potentially looking at supplier costs or other operating costs that you may be able to pull out that are more independent of volumes.

Do you see many opportunities there into the coming years?

Brent K. Bilsland

Yes, I think we’re every day working on getting input cost down and we’ve seen a fair amount of those costs continue to drop as vendors fight for business and the overall cost of the base commodity has gone down. Price of oil is down, price of tires is down, price of steel is down, so overall costs are coming down.

So these costs dropped, it will help our bottom line but we don’t see drastic changes.

Derek Hernandez

Very good as well. And then I guess finally you mentioned potentially participating in consolidation in the industry.

I was just wondering if there were any regions or coal types or operation types that you may be looking at more specifically, anything that catches your eye outside of potentially immediately accretive acquisitions? Thank you.

Brent K. Bilsland

Well, I think in general we think there’s a lot of pressure on the industry and the higher cost producers are in for a rough time. The trick is, can you find the right asset at the right price.

Do not look for us to be going outside the Illinois basin. Our expertise is in the Illinois basin.

So if we were to buy something that’s where we would be looking.

Derek Hernandez

I see. Thank you very much.

Those are the questions for today.

Operator

[Operator Instructions]. The next question comes from Michael Goldenberg of Luminus Management.

Please go ahead.

Michael Goldenberg

Good afternoon.

Brent K. Bilsland

Good afternoon. How are you doing, Michael?

Michael Goldenberg

Hi. Do you have a large overlay between your term loan and the revolver?

Brent K. Bilsland

All of our 17 banks that are in our current credit facility, they’re both in the term loan and in the revolver. There’s no differentiate --

W. Anderson Bishop

Correct. Same percentage in both.

Michael Goldenberg

Okay. So in making the decision, that’s what I meant to kind of making the decision on behalf of all the debt as opposed to in anywhere preference, take one tranche versus the other?

Brent K. Bilsland

Correct.

W. Anderson Bishop

Yes, but it’s all the debt.

Michael Goldenberg

Okay. And I understand what you’re saying about if the markets improve, then '17 will look same as '16.

As a sense right now just looking at the forward, obviously have less contracted in '17 versus '16, so the revenue may be down a little unless the market recovers. My question is when you’re going to solve this issue with the revolver, do you plan to – are you going to be complaint just for '16 or even if there’s a step down in '17, you’re going to rework in such a way that you’re not going to have to face this issue next year if, for example, the market does not recover?

Brent K. Bilsland

We’re asking for a covenant modification that we believe we could comply with through the end of the term of the loan, which is in 2019.

Michael Goldenberg

So you’re preparing for something. Even if there’s a step down, you may not need to – you will not need to go over this again.

W. Anderson Bishop

Correct.

Brent K. Bilsland

Correct.

Michael Goldenberg

Okay, got you. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Becky Palumbo for any closing remarks.

Rebecca Palumbo

Thank you everyone for joining us today. We look forward to hearing from you again next quarter.

Good afternoon.

Operator

The conference has now concluded. Thank you for attending today’s presentation.

You may now disconnect.

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