Mar 14, 2017
Executives
Becky Palumbo - IR Brent Bilsland - CEO Larry Martin - CFO
Analysts
Lucas Pipes - FBR & Company
Operator
Good day and welcome to the Hallador Energy Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode.
[Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Becky Palumbo, Director of Investor Relations.
Please go ahead.
Becky Palumbo
Thank you, Tad. And thank you all for participating in today's call.
On Friday afternoon, March 10, we filed our Form 10-K with the SEC, it is available during this call on our Web site under SEC filings tab. This call is being webcast life on our Web site and will be available for replay and a transcript of this call will be posted on our Web site later this week.
With me on today's call are Brent Bilsland, our CEO and President; and Larry Martin, our CFO. Our remarks 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.
Following our prepared remarks, we will open the call for Q&A. With that I'll turn the call over to Larry.
Larry Martin
Thank you, Becky. Good afternoon everyone.
I'm going to go over the operating results for the quarter and year. For the fourth quarter 2016 we had a net loss of 3.8 million or $0.13 a share for the full year, net income of 12.5 million or $0.42 a share.
Included in those numbers is a $16.6 million impairment that we incurred in the fourth quarter that Brent will describe more in detail later in the call. Our free cash flow for the quarter was $12.3 million for the year $58.3 million.
We define free cash flow as pretax income plus depreciation and amortization, plus amortization of stock comps, plus impairment charge, less CapEx. Our adjusted EBITDA was $19.9 million for the quarter, $80.7 million for the year and our adjusted EBITDA we define as EBITDA, plus stock compensation amortization, plus impairment charge.
We incurred debt in the fourth quarter of $9 million, total debt incurred for the year was $24 million. We reduced debt by $8.4 million in the quarter, the total reduction of $34.9 million for the year for net $11 million reduction in debt.
We paid dividends of $1.2 million for the quarter $0.04 a share total for the year was $4.8 million or $0.16 a share. As described before we had a $16.6 million impairment related to the Carla mine at the end of the year we add $238.6 million of debt with our cash and our cash equivalents marketable securities we had a net debt of $219.8 million.
Our debt target for the end of 2017 is $210 million to $215 million, and that's bank debt with the -- and then our debt-to-EBITDA for our bank covenant which is Sunrise only EBITDA divided -- or debt-to-EBITDA of Sunrise only was 2.95 times which was well under our covenant of 4.5 requires. I'm now going turn over the call to Brent Bilsland our CEO to talk about our general statements and operations for the quarter.
Brent Bilsland
Thank you, Larry. Well we continue to be pleased with the financial results of Hallador Energy, especially when you consider the challenging coal markets for 2016.
Last year we began the December-February timeframe with the warmest on history. This lead to 700 bcf of additional natural gas at the end of March forcing the natural gas price to go down to unsustainably low pricing.
Coal inventory levels at customers rose and in response we slowed our shipments in the second and third quarter of 2016. By the fourth quarter coal inventories were more balanced and our shipments increased.
Yet despite operating at only 60% of capacity Hallador generated strong free cash flow of $58 million and adjusted EBITDA of $81 million. This allowed us to continue to paydown debt maintain our dividend and invest in our business.
We attribute this success to men and women of Hallador, who choose to work here, and their dedication to maintaining our low cost structure. The shipments set up at the end of 2016 the December-February heating season of this year set yet another new record for its warmth, but despite this fact our market remains much stronger than in 2016.
Excess gas at the end of March is predicted to be half of what it was last year. Natural gas shipments to Mexico increased L&G exports and heighten industrial demand for natural gas have all worked to increase the natural gas pricing.
Pricing which is anticipating to be in excess of $3 this year versus a 2016 average price of $2.49. All of this is a long way of saying, we expect our customers to burn more coal in 2016 -- excuse me, in 2017 than in 2016.
Our customers approach for purchasing their fuel needs has changed due to the natural gas pricing being so tightly interlinked with coal pricing in the past couple of years. Several of our customers are implementing a strategy of purchasing 80% of their needs at the beginning of the year and relying on spot purchases to fill the balance of their needs.
We currently have six million tons sold of our 2.6 million to 2.5 million -- excuse me, of our 6.2 million to 6.5 million ton 2017 forecast. Looking at the fourth quarter of 2016 we are very pleased with Oaktown's cash cost of $26.61.
This is well below our forecast for the $28 to $30 that we had forecasted in prior quarters. We attribute the decline in cost to the uptick in production in the fourth quarter and our continued investments in the mines.
For 2017 our CapEx budget is $30 million that includes $17 million for maintenance CapEx. For the remainder of 2017 we continue to forecast an Oaktown cash cost of $28 to $30 a ton.
Going forward we expect our SG&A to be $11 million annually and costs associated with Prosperity and Carlisle should drop to $7 million annually. While on the subject of Carlisle, the deterioration of the north end of the Carlisle mine coupled with lower coal pricing led us to determine that the northern end of the Carlisle mine no longer could safely and be profitably mined.
Thus the decision was made to seal off the northern end of the mine. Sealing it will be completed in the first quarter of 2017.
As a function of this process we identified specific assets that needed to be written off, leading to a non-cash charge of $16.6 million in the fourth quarter. After the impairment we conducted a review of the Carlisle mine asset and determined that no further impairment charges were necessary.
Further reductions in cost associated with Carlisle are due to sealing the north end of the mine. Prior to idling the mine in 2015 Carlisle maintained 88,000 feet of mains.
Post idling 35% of those mains were sealed, we'll be sealing off an additional 45% of those mains in the first quarter. When Carlisle reopens it will be much lower cost with only 20% of the outlining maintenance it had prior to idling the mine in 2015.
Carlisle will remain in hot idle status with 2.5 million tons of annual capacity, well positioned to respond to the market demands. Looking at our balance sheet, at the end of 2016 we had healthy liquidity of $82 million, our debt to EBITDA ratio of less than three times was well within our loan covenant and despite purchasing $22 million with competitor assets in 2016 we were able to reduce our bank debt by $11 million.
From an administrative point of view we are encouraged by the early progress of the Trump administration on improving the regulatory environment for coal. We're hoping that coal will become one of the cornerstones for this administration's desire to create jobs.
Long term we believe this administration's policy will stop the closure of coal fired power plants and create an environment that will be very beneficial to Hallador and its shareholders. We continue to be pleased with the financial results of Hallador, as we continue to generate positive cash flow allowing us to further reduce our bank debt, pay dividend, make investments in our business and fund our capital expenditures.
This is our prepared remarks and I will turn it back over to Becky Palumbo
Operator
Pardon me this is the operator, are you ready for questions at this time.
Brent Bilsland
Yes, we are.
Operator
Thank you. [Operator Instructions] The first question comes from Lucas Pipes of FBR & Company.
Please go ahead.
Lucas Pipes
So Brent, I wanted to ask a little bit more about the markets. Obviously it’s been a very mild February, good to see the snow today.
But when I look at the Illinois Basin, co-price indices a lot of them show the product changing hands somewhere in the low 30s. And I'm wondering if you could maybe give us a sense of where do you see the market for 2018 coal, how liquid is that market and then even further out are you contracting for 2019 at this point?
If you could give me and investors a sense on the pricing and then also the depths of the market especially those different terms that I mentioned, I would appreciate that. Thank you.
Brent Bilsland
Yeah, well you know we touched briefly on utilities that are trying to stay on the short side. In the past couple of years gas has definitely been interlinked with co-pricing and has displaced coal at times.
We’re going to be -- the utilities are still I think playing this from the short side. And the that we see is -- that there is a lot less coal -- excuse me, a lot less gas to compete against than in years past.
And the rate, like I said we expect gas inventories to be half of what they were of half above the norm of what there were last year. And this is going to create a lot more coal to be burnt.
But in general utilities we are taking a wait and see approach and I think as the summer go they’re going to wait now and see what the summer heat brings and layer in stock purchases as they get there. This is lead to ours and everybody else's openbook to be -- our contract for this shorter than historically of what they’ve been.
You asked about '18 you asked about '19, I don't think there is any utilities out there that are currently that focused in buying coal in those markets, they're focused on '17. And later this fall I think those start turning their attention on '18.
The short approach has worked because we've had two of the warmest December-January-February timeframes back-to-back, coming out of '15 going into '16 that was the warmest on record. This year December was cool, but if you add up December, January and February it was the warmest -- going back 30 years it was the warmest one on records.
And if you look historically going back 30 years, we typically have two to three warm weather winters followed by two to three cold weather winters. We think that a lot of capacity to produce coal has come out of our market in fact, we know it has because last 30 months we have been involved in either multiple mines that have closed, idled or we've brought the majority of their assets.
So the significant production decline in our market it hasn't been felt by our customers because we've had two of the warmest most mild weather winters back-to-back. The odds of that happening in the future, we know eventually that whether it's going to flip and we're going to have starting cold winter.
When that happens we question whether there is enough supply to meet those needs? So in general I think that we're going to continue to see pricing go side way here for a while.
And then at some point in time it is going to be a weather event and we're going to see a hockey stick to a more robust pricing, because we just question whether the production is there to meet our customer's need in the full load environment.
Lucas Pipes
Yeah, I appreciate all of those comments, Brent. I would agree with that, that if there is stronger demand backdrop of course a lot of those events are positively correlated i.e.
if it's a cold winter, gas prices are probably also significantly higher than where they are today. So it's kind of -- if it goes well, it all goes well together.
Maybe just to follow up really quickly on the pricing side. It seems like utilities are mostly focused on 2017.
You have decent contract position there, but I think sometimes put to bet, what do you what would you expect for prices here in near term and any strategy around those sales? Thank you.
Brent Bilsland
Well I think that -- again, I think it's going to come down to what does the summer look like. I think the states was set coming out of the December timeframe of this year.
We saw inventory levels come more balanced, December was cool. The export market kind of surprised everyone and took some turns out of the market.
And it was really telling to see our utility, they all started getting a little panicky because they know that we're in a market that isn’t as liquid as it once was and playing it from short side works until you run out of fuel. And then I think we would have had really robust increases in pricing, but then January and February turned off just extremely warm, lot of 70 degree weather here in Indiana.
So that kind of took the winds out of the sail. We still think our customers are short, they're still selling it for short, they're just -- they're not so short that they need to panic and I think that they're going to wait and see what the weather of May and June, and July brings and then as their needs change we anticipate they'll be buying and that's why we've said we've got 6 million tons sold, but we think we're sell another 200,000 tons to 500,000 tons yet this year, because that's what our customers are telling us.
Pricing we expect -- you know it's going to be weather dependent. I think when the market moves it’s going to move very quickly.
So if buyers need to feel 10% of their needs, pricing going to be pretty flat, if buyers all of a sudden have to buy 30% of what they forecasted, 30%, on a 30% haul versus a 20% haul I think that you are going to see pricing move dramatically. Because the capacity is just not there.
The miners have been let go, a lot of the equipment has been -- just look at it from a capital reinvestment standpoint, you had so much of the industry not reinvesting in their mines and we attribute a lot of the success to our cost structure in that we have continued to buy battery cars and put elevators and things like that in our mine which help lower our cost structure.
Lucas Pipes
I have maybe one other quick question, I could probably go on, but I'll take this one for now. As it relates to costs, production costs per ton, and also sustaining capital what's your latest view on that as it relates to '17 and then maybe also longer term?
Thank you.
Brent Bilsland
I'm not sure I understand your question Lucas.
Lucas Pipes
If you could give us a sense on cost per ton on 2017 and frame that up a little bit, I know that you also have some idling costs, so kind of with and without idling cost, what is your cost guidance for 2017 and beyond. And then on the maintenance capital side what should we expect for 2017 and also longer term.
Brent Bilsland
Well I think on the cost guidance, we've stated that we expect our cash cost at Oaktown to be $28-$30 a ton. We saw on the fourth quarter that shipments rose slightly and we ran the mine a little harder and our cost structure dropped to the $26 range.
But putting more investment into the mine this year we'll have a -- sometime in the third quarter we’ll have an elevator installed at the mine. We’ve added two more sets of battery cars for the mine.
First set of battery cars, when we bought the mine it had cable cards, now we're moving to battery cars and we see a significant productivity gain. So we believe our assets are capable of running in the mid-20s, but again we are running at about 60% capacity, so when you run these mines at a slower pace, we’re trying to be conservative, but when we do that it’s higher cost.
If we run harder, it’s a lower cost, but the market's not telling us to run hard right now, so we're not
Lucas Pipes
Yeah, and Brent --.
Larry Martin
And Brent also mentioned, Lucas, that we expect the Prosperity and Carlisle to be about 7 million this year in cost and our maintenance CapEx to be about $70 million.
Lucas Pipes
Perfect.
Brent Bilsland
And the reason we're showing a lower cost at Carlisle from a maintenance CapEx is, we seal off 80% of that mine, 35% of that was done. Legally after we idled, but another 45% here, so here in the first quarter.
So a lot less mine to inspect, requires fewer people, less pumping, less power needs, less ventilation needs and the northern end of the mine was by far our highest cost portion of the mine to mine in. So we think that, when we do bring Carlisle back online, the cost structure there, it's going to look lot better, it’s going to look something more along the lines of what it was in 2013/2014 when the mine was smaller.
Lucas Pipes
That’s fantastic. I appreciate all those comments and good luck I’ll jump back into queue.
Brent Bilsland
All right. Thank you.
Operator
[Operator Instructions] This time I’m showing no further questions, so I would like to turn the conference back over to Brent Bilsland for any closing remarks.
Brent Bilsland
Well, again we’ll keep our head down here and keep implementing the plan that we discuss and we appreciate you all taking the time today to call in and take interest in Hallador, and with that we’ll wrap up the meeting. Thank you.
Operator
And thank you, sir. The conference is now concluded.
Thank you for attending today’s presentation. You may now disconnect.