Hallador Energy Company (HNRG) Earnings Call Transcript

Good afternoon. Thank you for attending Hallador Energy's Second Quarter 2026 earnings conference call. [Operator Instructions] As a reminder, this call is being recorded. Now I'd like to turn the call over to Sean Mansouri, the company's Investor Relations Advisor with Elevate IR. Please go ahead, Sean.

Good afternoon, everyone. We appreciate you joining us to discuss our second quarter 2026 results. With me today are Chairman and CEO, Brent Bilsland; and CFO, Todd Telesz. This afternoon, we released our second quarter 2026 financial and operating results in a press release that is now on the Hallador Investor Relations website. Today, we will discuss those results, as well as our perspective on current market conditions and our outlook. Following prepared remarks, we will open the call to answer your questions. Before we begin, a reminder that some of our remarks today may include forward-looking statements subject to a variety of risks, uncertainties, and assumptions contained in our filings from time to time with the SEC and are also reflected in today's press release. 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. In providing these remarks, Hallador has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law to do so. And with the preliminaries out of the way, I'll turn the call over to Chairman and CEO, Brent Bilsland.

Thank you, Sean, and thank you, everyone, for joining us this afternoon. We are now halfway through 2026, and I would describe our year so far as two stories running side by side. The first is operational. We spent the second quarter putting money and downtime into Merom. Most of it planned, some of it not, and the results show it. The second story, and in our view, by far the more important one, is the continued transformation of the company into a multi-fuel independent power producer. I want to start there because we have made real progress on our natural gas generation project at Merom. We have now formally named that project Turtle Creek Gas, or Turtle Creek for short. Turtle Creek is a proposed 460-megawatt simple cycle natural gas-fired plant project that would meaningfully expand and diversify our dispatchable generation platform. Let me walk you through where things stand. First, the equipment. I, along with other members of our management team, recently inspected the turbine equipment and disassembly process with the owners and engineer personnel from Siemens. We were pleased with what we saw. The equipment is in good condition, and disassembly and packing are well underway with a substantial Siemens workforce on-site. We continue to expect shipment of the equipment in September. Second, the interconnection. Turtle Creek's interconnection application entered MISO's Expedited Resource Addition Study, known as ERAS, on June 2. We expect to receive the results of that process, including the required system upgrade costs, in mid-August, and indications to date from the study have been constructive. Following our review, we are targeting a final investment decision and execution of a generator interconnection agreement in September. Third, project economics and financing. In our experience, project budgets tend to move in one direction as scopes firm up higher. Ours is moved the other way. As the equipment, restoration and construction scopes have become better defined, we now expect total project costs to be below $800 million, or in the $1,700 per kW range. We have moved our targeted commercial operations timeframe forward to the second half of 2028. In construction, low cost and fast rarely travel together. We believe Turtle Creek offers a credible pathway to both. One of the lowest capital cost peaking plants currently being developed on a timeline years ahead of many comparable projects. In parallel, we are finalizing the construction scope and advancing financing discussions as we evaluate the appropriate capital structure, with the objective of financing the project with little to no equity dilution. Interconnection, construction, and financing are the principal remaining steps to get us there. None of this progress is an accident. It is the product of the same patient step-by-step approach that has carried our transformation from the beginning. Six years ago, we were an underground coal mining company. We acquired a 1-gigawatt interconnection, then the plant that utilizes it. We began marketing its long-term output. This year, our patience paid off in two landmark capacity agreements. First, the three-year agreement we executed in March with an investment-grade counterparty at approximately 2x our historical contracted capacity pricing. Second, the 12-year agreement behind it that together total approximately $1.1 billion of contracted revenue. These agreements increased our forward sales position, which now sits at $2.4 billion, placing Hallador in a substantially sold forward position on accredited capacity for approximately the next 14 consecutive years with commitments extending through 2040. Turtle Creek is the next step in that transformation, and it is advancing on schedule. I also want to remind everyone how we think about this market because it explains how we have built our contract book. In our view, capacity and energy run on different clocks. For large load customers, particularly data centers, access to accredited capacity is the gating factor. Without it, projects cannot move forward. That is why capacity markets have tightened and repriced ahead of the physical around-the-clock energy demand these developments will ultimately bring. As these projects are built and begin drawing power from the grid, we believe energy demand will accelerate, and energy pricing will follow. We have constructed our portfolio to participate in both phases. Our long-dated commitments are anchored in accredited capacity where repricing has already arrived and where we have contracted through 2040. Our energy commitments by design are shorter dated. Beyond the next few years, our energy position is largely open. Preserved for the repricing we believe is beginning now. As it arrives, we intend to monetize that open position with the same discipline and patience we brought to capacity, and a 460-megawatt peaking asset at Turtle Creek would give us even more dispatchable capacity and energy to bring to the market. At the same time, the market keeps confirming our thesis. We are seeing robust demand for accredited capacity and energy from a growing and increasingly diverse set of counterparties and are working towards making additional forward sales before the end of the year. With $2.4 billion of revenue already contracted at the segment level and more sales on the way, we believe Hallador offers investors a degree of revenue visibility that is among the strongest in the sector. We are speaking with meaningfully more counterparties today than we were in the past, and the demand signals are increasingly visible right outside our windows. A large data center project has broken ground adjacent to our property, and another project is in the early stages of development on the other side of the plant. You do not need a consultant's report to see where power demand in our region is headed. You can see it from the parking lot. Now, turning to the second quarter, operationally the second quarter is traditionally our lightest period of the year, as we take 1 of Merom's two units offline each spring for an approximately 60-day scheduled maintenance outage. This year's outage at Unit 1, we completed major reliability upgrades designed to address the unplanned downtime the unit had experienced in recent quarters. Unit 2 performed well over the course of the quarter, however, the limited unplanned downtime it did experience coincided with periods of elevated market prices, which magnify the financial impact by requiring us to purchase power at high prices to meet our delivery obligations. Together, these factors weighed on our second quarter results, but do not, in our view, reflect the earnings power of the plant. With the scheduled outage behind us and the reliability investments in place, we believe Merom is positioned to run more reliably going forward. We expect generation volumes to improve sequentially in the third quarter. I want to be clear about what the planned maintenance expenditures will bring. We invested substantially in the plant during the outage, and the condition of the plant is better for it. We expect that improved conditions to show up where it counts in reliability, availability, and operating performance over time. Money spent keeping a productive asset sound is not money lost. It earns us a return every hour the plant runs when the grid needs it most. Reliability at Merom matters more than ever, both because MISO increasingly depends on dispatchable resources during peak demand, and because Merom sits at the center of our vertically integrated platform. When the plant runs efficiently, it supports electric sales, creates consistent internal demand for coal, improves mine productivity at Sunrise, and enhances operating efficiency across the business. When performance at Merom falls below planned levels, those effects extend throughout the platform. With the outage behind us and both units running more effectively, we expect generation volumes to improve sequentially in the third quarter. I would note that power pricing remains uncertain, and the third quarter of last year benefited from particularly favorable power market conditions, creating a more challenging year-over-year comparison. So we are focused on sequential operational improvement and on carrying that improved availability into the balance of the year beyond. In summary, quarters like this one are the price of owning and improving a durable asset. Q2 reflected the important reliability and efficiency work we completed at Merom, along with the temporary challenges that came from it. The more important story is the progress we are making on selling out the remainder of Merom's capacity and energy, the advancement of our Turtle Creek Gas Project, its improving economics, and the accelerating demand we are seeing from an expanding set of counterparties. The fundamental signals across our market remain constructive, and we believe Hallador is well positioned to compound shareholder value over a multi-year horizon. With that, I'll turn the call over to Todd to take you through our financial results.

Thank you, Brent, and good afternoon, everyone. Jumping into our second quarter results. Electric sales for the second quarter were $59.5 million compared to $60 million in the prior year period, while third-party coal sales increased to $40.6 million compared to $38.1 million in the prior year period. Electric sales in the second quarter benefited from higher accredited capacity revenue, which increased 70% year-over-year to $18.6 million. Total energy sales volume increased 17% compared to the prior year period, while the average price per megawatt hour for delivered energy declined to $41.69 from $52.66. The increase in third-party coal sales during the second quarter was driven primarily by improved pricing, as a 9% increase in our average third-party price per ton more than offset a 2% decrease in tons sold to third parties. Sunrise also sold 59,000 incremental tons to Merom during the quarter as the plant prepared for summer demand. On a consolidated basis, total operating revenue decreased to $101.5 million for the second quarter of 2026, compared to $102.8 million in the prior year period. Net loss for Q2 2026 was $15.2 million compared to net income of $8.2 million in the prior year period. Cash flow used in operations in the second quarter of 2026 was $23.9 million, compared to cash flow provided from operations of $11.4 million in the prior year period, with the decrease primarily reflecting the outage-related decline in profitability, higher purchase power costs, and working capital investment, including cash invested in inventory and parts and supplies. Adjusted EBITDA, a non-GAAP measure that is reconciled under earnings press release issued earlier today, was negative $2.9 million for Q2 2026 compared to $3.4 million in the prior year period. We invested $26.3 million in capital expenditures in the second quarter of 2026 compared to $13.1 million in the year-ago period, primarily reflecting the reliability upgrades completed during the planned outage at Merom, as well as development spending associated with Turtle Creek. With the planned outage complete, we expect the pace of maintenance capital spending to moderate through the balance of the year with full-year 2026 capital expenditures expected to remain consistent with 2025 levels, excluding investments related to Turtle Creek. As of June 30, 2026, our forward energy and capacity sales position was approximately $1.6 billion, compared to $571.2 million at March 31, 2026, and $619.7 million at June 30, 2025. When combined with our third-party forward coal sales of $236.5 million, total contracted revenue on a consolidated basis was approximately $1.8 billion. Including intercompany sales to Merom, our total forward sales book on a segment basis was approximately $2.4 billion. These figures now include the 12-year capacity agreement signed in May 2026. During the quarter, we took additional steps to maintain flexibility under our capital structure. On May 15, we drew the $45 million available under our delayed draw term loan and used a portion of the proceeds to repay $8 million outstanding under our revolving credit facility. Hallador had $45 million of total bank debt at June 30, 2026, compared to no outstanding bank debt at March 31, 2026, and $30 million at December 31, 2025. Total liquidity at June 30, 2026, was $84.2 million compared to $97.5 million at March 31, 2026, and $42 million at June 30, 2025. The sequential decrease reflects cash deployed during the planned outage, capital investment, and the associated working capital build. At quarter end, total liquidity consisted of $29 million of unrestricted cash and cash equivalents and $55.2 million of additional borrowing capacity under our revolving credit facility. We believe our credit facility, together with our current liquidity position, provides the flexibility to manage working capital and fund our ongoing operations and investments at Merom. As we mentioned in June, our financing strategy for Turtle Creek is considering a combination of project level and structural alternatives, including equipment financing, structured debt, and similar instruments designed deliberately to preserve flexibility with low to no equity dilution while retaining our focus on balance sheet integrity. We are well underway in financial planning and look forward to providing updates as we make progress in the third quarter. With that, operator, we can now open the line for questions.

[Operator Instructions] Our first question comes from the line of Julien Dumoulin-Smith from Jefferies. Your question, please.

It's [ Kutz Arthur ] on for Julien. Congrats on the quarter. Just wanted to ask you a little bit more on the gas project. Seems like you're making a lot of progress there, costs coming in below expectations. One, could you give us some color on what's driving costs to be a little bit below expectations? Is it mostly interconnection costs like you guys had thought of, or are there other factors? And then separately, could you share more color on how the off-take agreements and conversations are trending? What kind of customer interest are you seeing for the gas project?

Yes, certainly. You know, I think as we think about the gas project, Turtle Creek, what's changed to lower that budget? I think last quarter we said it would be less than $900 million. Now we're saying it's less than $800 million. Then coupled with that, we've accelerated the COD to the second half of 2028. When we announced this in June, I mean, we had ranges for what things would cost. Now, you know, those scopes are more defined. You know, it's, the owner's engineer and I were over looking at the equipment. It's in excellent condition. We were happy with what we saw. Disassembly is underway. There's a substantial Siemens workforce on site. Shipments still remains on schedule for September. As the equipment, the restoration, the construction scopes have firmed up, the numbers have come in better than we initially assumed. The other driver is this is not a greenfield project. We're building at Merom. We already own the site, the water, the infrastructure. That's how, this project gets down to roughly $1,700 a kW when we're seeing other projects price well above that and coming in a year or two behind us. I think that's just what makes this project special in our mind is that we have a cost advantage. We have a speed to market advantage. In AI, it's all about speed to market. When you talk about marketing, of course, we point to -- and on our sales table we've added more definition there as to some of the work that we've done earlier in the year so that speaks to pricing. I think that will perhaps be at numbers higher than what some of the analysts in the market thought. We just continue to see more and more interest. As we alluded to in our prepared remarks, we really think that we will add to the contracts that we've already put in place this year before the year is out. That is our goal. I think we, today we feel really good about that. If you look at what we've been doing, we've been pricing a coal asset, and a list of buyers who are interested in buying output from a coal assets output is smaller than that of gas. We think the market, from what we're experiencing, there's a much greater Rolodex that you can call up to talk to about the gas plant, and we're seeing that interest level, particularly as other states are putting more and more restrictions on new data center builds, we think that's funneling more of that capex spend towards the state of Indiana. We're seeing that in our backyard. You know, we said in our prepared remarks we've got a pretty significant project that's broken ground. Anybody who gets Google Earth Live can see photos of that. It's pretty impressive to see a 1,000-acre development contiguous to our property, pouring foundations and moving right along. We've had a second project developer buy property on the other side of our plant contiguous to us. That said, we sell in front of the meter, we can sell to any place in MISO Zone 6, which is the state of Indiana, the northern third of Kentucky. We feel really good about the demand perspective at this time. We look forward to delivering on that before the year is out, particularly on Merom. It'll probably take a little longer to market Turtle Creek just because, we've been working on Merom a little bit longer, but we're excited about what we see. I hope that resonates. I think this plant, we're excited about it. We think it's a big deal for our company and expect to make more announcements before the year's out.

Thank you. And our next question comes from the line of Nick Giles from B. Riley Securities. Your question, please.

Good afternoon, everyone. This is Henry Hearle on for Nick. So in your prepared remarks you mentioned the turbine disassembly is underway and there's a substantial workforce on that site there. Do you guys have any contingencies if the disassembly or logistics slip and the shipment is pushed to September? Just any color there would be helpful, or pushed out from September, sorry.

Yes, look, we're not too concerned about the timing of the shipment. We've got plenty of wiggle room there. Always like to get the asset sooner rather than later. Always like to get it online sooner rather than later. We're pushing to get that done as quickly as possible. That said, I don't think that getting the equipment to ship is the long pole of the tent. We're on a pretty short timeframe, right? Or we're saying COD roughly two years, right? Last half of 2028. We think that's a very marketable time for that project, and today as we look about where we're at, I think we're excited about the potential success of that project. So, not too concerned about the shipping date.

Got it. That's helpful, thank you. And then just on financing, obviously the goal is to minimize equity dilution. You kind of went through a couple different financing structure in the prepared remarks, what are you leaning most towards at this time and when do you expect to disclose that?

Thanks, Henry. It's Todd Telesz. I think as Brent alluded to during the course of the call, I think, Turtle Creek has three primary advantages when you're talking to financing counterparties. One is the capital cost. Two is the speed to market. Ultimately, those drive long-term affordability, which makes it a very attractive asset to contract with. As the former, as [ Kutra's ] question was really around the offtake agreements. I think when you look at those three factors combined with what we view as a very robust financing market, in particular for equipment financings. That's extremely helpful for us. As you know, we also have the benefit of having the Merom coal-fired asset that has substantial contracts put in place and working hard at contracting even further on the Merom assets. I think those are very financeable contracts. A couple different pockets of debt capital. Those -- between those things, I think then when you look out into the future, you look at where we think the financial performance of the business is in the latter part of this decade, all those should be supportive of bringing on leverage onto this project and minimizing the amount of dilution for our current shareholders.

Thank you, Todd. That's very helpful. And then just on that same point, is there any possibility for government support from the DOE and the likes in financing the Turtle Creek project? Is that something that you're exploring currently?

Our DOE financing has really been focused on some of the things we're doing at Merom. We don't see any DOE financing for the Turtle Creek Gas asset at this point in time.

And our next question comes from the line of Matthew Key from Texas Capital. Your question, please.

In regarding the DOE, in June, you announced the $27 million in DOE funding to help modernize Merom. I was just wondering, when would you want to complete those upgrades? I'm just trying to get a sense of timing for that specific project.