HNRG - NASDAQ

Good afternoon, and thank you for attending Hallador Energy Company's fourth quarter and full-year 2025 earnings conference call. At this time, participants are in a listen-only mode. Instructions will follow at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to Sean Mansouri, the company's Investor Relations Advisor for Elevate IR. Please go ahead, Sean.

Thank you, and good afternoon, everyone. We appreciate you joining us to discuss our fourth quarter and full-year 2025 results. With me today are President and CEO, Brent Bilsland, and CFO, Todd Telesz. This afternoon, we released our fourth quarter and full-year 2025 financial and operating results in a press release that is now on the Hallador Energy Company 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 Energy Company has no obligation to publicly update or revise any forward-looking statements whether as a result of new information.

Everyone, for joining us this afternoon. Hallador Energy Company delivered strong financial performance in 2025, as we continued advancing our transformation into a vertically integrated independent power producer. For the full year, total revenue increased 16% year over year to $469,500,000. Net income improved materially to $41,900,000. Adjusted EBITDA increased approximately threefold to $56,000,000. And operating cash flow increased 23% to $81,100,000. These results reflect both improving power market conditions and the operating leverage embedded in our business model. Electric sales were the primary driver of revenue growth during the year, increasing approximately 19% to $310,700,000 compared to 2024. Coal sales also increased 8% year over year to $148,700,000 as Sunrise Coal continued to support both internal fuel needs at Merum and third-party customers. Together, these segments highlight the advantages of our integrated platform where our coal operations provide a secure, price-certain fuel supply for our generation assets while also allowing us to participate opportunistically in third-party coal markets. Operationally, our Merum power plant performed well through most of the year. In the fourth quarter, however, we experienced operational challenges which continued into Q1 and reduced availability of the units. Due to this availability issue, we now expect consolidated 2026 results to be similar to 2025. Maintaining high levels of reliability remains a top priority for our team, particularly as MISO increasingly depends on dispatchable resources during periods of peak demand, which is highest in the summer. As such, the generating units in question will receive a major maintenance outage beginning in May, which once complete, should significantly improve performance. Sunrise Coal also delivered consistent performance throughout the year. Production optimization initiatives and disciplined cost management helped improve the operating performance across the mining complex. As part of our vertically integrated platform, Sunrise Coal provides a reliable fuel foundation for our generation assets while helping optimize our overall cost structure. Across the broader marketing environment, we continue to see strong demand for reliable dispatchable generation across the MISO region. Electricity demand growth combined with the prior retirement of dispatchable assets is tightening supply conditions across the system, increasing the value of accredited capacity as utilities and load-serving entities attempt to secure reliable resources throughout the Midwest. Against that backdrop, we have made progress towards selling energy and capacity at elevated prices. We have also recently received additional competitive offers to acquire our accredited capacity for over a decade in length. We are excited by what we are seeing in the market. The company is in a strong, long accredited capacity position, which appears to be getting better with time. We hope to make more announcements on this topic very soon. These robust market conditions led us to file an application in MISO's expedited resource adequacy study, or ERAs, program. During the month of December, we were awarded one of the coveted 50 ERA slots. In conjunction with our application's acceptance, we funded approximately $14,000,000 of required refundable deposits to support the potential addition of up to 515 megawatts of natural gas generation. The ERAs program was designed to accelerate the development of new generation resources that can help address reliability needs across the MISO system. Currently, we expect MISO to complete the study of our application in the third quarter of this year. Additionally, we are in negotiations with multiple counterparties for equipment for the project. As the project develops, we plan to share more details around the cost and potential economics of the project. If successful in our development plans, we would target the plant coming online around 2029. This expansion will significantly increase our accredited generating capacity at the company, leveraging infrastructure that is already in place at our Merum site. Compared with greenfield developments, the Merum interconnection offers both speed-to-market and certain cost advantages. Turning briefly to capital allocation, we maintained a disciplined approach throughout 2025. Capital expenditures were focused primarily on planned maintenance at the Miriam facility, and operational improvements across our mining operations, along with early-stage work supporting potential generation expansion at the Merum site under the ERAs program. We currently expect capital expenditures in 2026 to increase modestly compared to 2025 levels, excluding potential ARRIS development. Looking ahead, we will continue to focus on operational reliability at Merrell, executing efficiently across our coal operations, and advancing the strategic initiatives that we believe can drive long-term growth for Hallador Energy Company. At the same time, we remain disciplined in how we approach new opportunities and will continue to focus on projects and commercial arrangements that we believe will most meaningfully enhance shareholder value for the long term. Before handing it over to Todd, I would like to briefly highlight two recent additions to our board that strengthen our leadership during the next phase of Hallador Energy Company's growth. In January, we welcomed Barbara Sugg to our board of directors following the retirement of longtime director David Hardy, whose more than three decades of service and support to Hallador Energy Company we sincerely appreciate. Barbara previously served as President and CEO of Southwest Power Pool, where she led regional reliability and wholesale market operations across a 14-state footprint. Her industry leadership across grid operations, transmission development, and resource integration will be valuable as we continue positioning our Meron facility to support growing demand for reliable capacity. Further, last week, we appointed Daniel to the board, expanding the board to seven members. Daniel brings deep expertise in natural gas generation, capital markets, and power asset transactions, having led or advised on more than $35,000,000,000 in strategic energy investments. As we pursue opportunities to expand generation at Merum, and evaluate additional assets that can scale our power platform, we believe Daniel's background in gas-fired power development and energy infrastructure optimization will provide meaningful strategic guidance for our team. With that, I will now pass the call over to our Chief Financial Officer, Todd Telesz, to take you through our financial results.

Great. Thank you, Brent, and good afternoon, everyone. I will add my thanks for joining us today. Jumping right into our fourth quarter results, electric sales for the fourth quarter increased 3% to $71,600,000 compared to $69,700,000 in the prior-year period, while coal sales increased 24% to $29,100,000 for the fourth quarter compared to $23,400,000 in the prior-year period. Electric sales in the fourth quarter reflect a continued electricity demand across the MISO market and stable realized pricing, partially offset by lower generation during the period due to the previously mentioned operational challenges, unit availability impacts in Q4 2025 and Q1 2026. While the unit outages reduced dispatch for part of the fourth quarter, the plant continued to operate and serve market demand as conditions allowed. The increase in coal sales during the fourth quarter was driven primarily by higher third-party shipments to customers, reflecting continued production optimization at Sunrise Coal and our ability to supply both internal fuel requirements at Merame external market demand. On a consolidated basis, total operating revenue increased 8% to $102,400,000 for the fourth quarter compared to $94,700,000 in the prior-year period. Net loss for the fourth quarter was $200,000 compared to a net loss of $215,800,000 in the prior-year period. It is worth noting that the year-ago period loss includes an approximate $215,000,000 non-cash write-down associated with the value of our mining operations. Operating cash flow for the fourth quarter was $8,100,000 compared to $32,500,000 in the prior-year period, with the decrease primarily reflecting the cash receipt from a large prepaid energy forward sales contract that was received in Q4 2024. Adjusted EBITDA, a non-GAAP measure, is reconciled in our earnings press release issued earlier today, increased 35% to $8,400,000 for the fourth quarter compared to $6,200,000 in the prior-year period. We invested $24,900,000 in capital expenditures during 2025, compared to $13,800,000 in the year-ago period, bringing our full-year 2025 CapEx to a total of $69,200,000. This includes the approximately $14,000,000 of refundable deposits made in support of the Era's gas generation project. As Brent mentioned earlier, we expect our 2026 capital expenditures to modestly increase compared to 2025, excluding any impacts of the ARRIS project. As of 12/31/2025, our forward energy and capacity sales position was $540,000,000 compared to $571,700,000 at the end of Q3 and $685,700,000 at 12/31/2024. When combined with our third-party forward coal sales of 3 and $23,500,000 as well as intercompany sales to Merum, our total forward sales book as of 12/31/2025 was approximately $1,300,000,000. Now turning to the balance sheet. We had several material updates. In 2025, we completed a $25,000,000 prepaid energy forward sales contract with a longstanding counterparty and raised approximately $14,000,000 through our ATM, the issuance of just over 697,000 shares. In January 2026, we further strengthened our capital position through a public offering of approximately 3,200,000 shares of common stock priced at approximately $18 per share, generating roughly $57,500,000 of gross proceeds. These proceeds are expected to support general corporate purposes including potential deposits required for preserving key equipment necessary for our proposed natural gas generation expansion at Merrell. Additionally, late last week, we closed on a new credit facility led by Texas Capital Bank, who is a new relationship for us, and Old National Bank and First Financial Bank have been longstanding financial partners of Hallador Energy Company. The $120,000,000 three-year senior secured credit facilities include a $75,000,000 revolving credit facility and a $45,000,000 delayed draw term loan. The credit facilities also include a $25,000,000 accordion feature. Overall, our results reflect continued progress across the business as we strengthen our financial profile while investing in the long-term growth opportunities Brent discussed earlier. With a solidified liquidity position, a meaningful forward sales book, and a disciplined capital allocation approach, we believe Hallador Energy Company remains well positioned to support the continued development of our power platform and the strategic initiatives underway at Merrell. With that, operator, we can now open the line for questions.

Thank you so much. And as a reminder, if you do have a question, simply press 11 to get in the queue and wait for your name to be announced. To remove yourself, press 11 again. One moment for our first question. It comes from the line of Jeffrey Scott Grampp with Northland Capital Markets. Please proceed.

Afternoon, guys. Thanks for the time. With respect to, maybe this longer-term PPA opportunity, Brent, what are the main gating items to getting a deal done at this point? I know you can only say so much, but are we in the phase where we are deciding what the best offer is for the company? Is it negotiating a final pro final parties, or what is dictating timing at this point?

Look. I do not think it is going to be just one party. We have exchanged draft contracts with multiple parties. What is encouraging for us is we continue to see pricing pressure move things higher. Quite frankly, the interest level that we are seeing has dramatically increased in the last four weeks. Multiple utilities, multiple industrial users. We kind of view it as we are playing a game of musical chairs, and we own the last seat. We just keep seeing more and more people enter into the room. I know everybody is in a hurry to get something done, including me. At the same breath, this keeps getting better. We are really encouraged by what we are seeing and the level of competition that we are able to engage the counterparties in. We think we are getting much closer and are certainly encouraged by what we are seeing. I hope that excitement resonates.

That is super helpful. I appreciate it. That is good to hear. My follow-up, I wanted to get a bit more details on the issues at Marim that you talked about. Shed a little more light on what these operational issues are, and should we be expecting this to impact performance until this planned outage in May? It sounded like there was going to be a more significant turnaround at that point to maybe address some of these issues. Thanks.

We had some equipment failures in Q4, failures in Q1, that took the plant off at different times for weeks at a time. Unfortunately, particularly in January it was during some of the better-priced weeks, so we hate to see that. The plant is running now. It has a few limitations, so it is not running at 100%, but it is running. Then we are going to roll right into an outage. This was a planned outage. It was what we call a major, so half the plant will be down for sixty days. We do that every year. There is a lot on the list for this particular unit that is going to get replaced and upgraded, and a whole lot of new parts are going on. We think that will help the reliability of the plant, and just in time for the summer season, which I would point out is the peaking season in MISO now. Summer peaks are higher than winter.

Understood. That is really helpful details. I will turn it back. Thank you for the time.

Thank you. Our next question comes from the line of Matthew Key with Texas Capital. Please proceed.

Hey. Good afternoon, everyone, and thanks for taking my questions. I wanted to talk about the target date of completion for the nat gas expansion. What are the big determining factors that dictate hitting or missing that target date? Does this come down to getting the long lead-time equipment in time, or are there more complications than that?

Right now, we are negotiating with multiple counterparties on whether we can secure the equipment in the right time frame, which we are finding equipment that the timing does work, and can we get that equipment at a price point that makes the project economic. At the same breath, we have limited PPAs to support the project. We are obviously in the market attempting to sign long-term PPAs. We like where that pricing has gone. You just have to line all that up. There are other players out there who are opposite of us. They have equipment and no place to go with it. We are also talking to those counterparties to say, does it make sense you bring your equipment, we will bring the interconnect, PPAs, water rights, gas rights, all of that. The thing that we are excited about is we feel that our site, our interconnect, has a speed-to-market advantage because of the EARS program, and because of the EARS program, it has a significant cost advantage over some of the other projects that we are hearing. We are hearing other projects that have to have $300,000,000 of system upgrade cost, and we just do not think our project is going to experience that. We think there is a significant advantage there. That said, the downside to the ARRIS program is it is a very quick process, and so you have to get all the elements of the deal lined up. We are working on that.

Mhmm. Got it. That is helpful. A quick macro one for me. It made recent news that the EPA announced the decision to ease some of the mass requirements for power plants. Could you help me quantify the impact that those changes would have on your business, if any? Or maybe the industry more broadly?

A lot of plants, including ours, are already mass compliant. That being said, there are still some ongoing costs associated with that, reporting requirements and so on. I think the Trump administration in general is trying to unwind a lot of these environmental rules one at a time. They are making their way down through the list. What is the impact of that? Overall, it makes operating a plant easier. What are the economic impacts of that? I think it probably has more to do with longevity and less to do with whether we are going to see our costs materially drop in the next quarter.

Got it. That is helpful. Really appreciate the time, and best of luck.

Our next question comes from the line of Nicholas Giles with B. Riley Securities. Please proceed.

Great. Thank you, operator. Good afternoon, guys. My first question, I think you have previously talked about the majority of capacity being taken down in any long-term deal, but you mentioned, Brent, that economics are only getting better. Given that you are talking to multiple parties, is there a scenario where you might announce the long-term PPAs in several tranches, or should we still be expecting one kind of grand slam?

I think you will see announcements in several tranches. That is our thinking today. Certainly, we could see a customer step up and take a bigger block, but today that is where our head is at—that you will see multiple bites at the apple.

Got it. Very helpful. In terms of pricing, you said upward pressure. In the past, you have used the forward curve as an anchor and noted that pricing could come in above that. Any rough guardrails that you could point us to from a price perspective? Should we be still thinking of something above the forward curve? And if so, where do you see the forward curve today?

The forward curve is typically energy. Where we are really seeing the price improvement is for accredited capacity, and that is the revenue stream that is going, in our opinion, dramatically higher. That really is the pinch point in the industry. The reason for that is you can get energy from renewables. It is challenging to get accredited capacity from renewables. Solar panels are only rated 5% of nameplate. Windmills are only rated at 15% of nameplate, whereas coal, gas, and nukes are all rated 75% to 90% of nameplate, typically what accreditation they are awarded. What has changed: the MISO auction is roughly two weeks from today. It is going to be on the 26th. Some of the pricing outlooks that we are seeing in that are dramatically higher. We will see what that auction brings. We think that we will probably have some sales that might happen before then as well. As we get those deals across the finish line and inked, we will report it. You will get a good look at what that price is. Got it. Also, I want to correct something. I had submitted this incorrectly. Our unit is going to go on outage for sixty days, not six months, like I said. I just wanted to correct my statement.

Maybe just one more if I could. I think you mentioned that CapEx could be modestly higher excluding ARRIS developments. I just wanted to clarify. Are you saying that CapEx will be modestly above the $70,000,000 level, which included the $14,000,000, or should we exclude the $14,000,000 and start at a base of $55,000,000? I think you see what I am getting at. I am just trying to make sure it is apples to apples here.

Yes, Nick. It is Todd. How are you today? I think we are looking at modestly higher than what we incurred in 2025, driven by some CapEx that was pushed out of 2025 into 2026, as well as continued investment in the ELG project. Those are probably the key drivers, and those obviously would not be excluding any incremental investments in the ARRIS project.

Got it. And what would those—last quarter the emphasis was really around the application, and now that has been accepted, deposit has been paid—what are the next developments that we should be looking out for in the context of Eris?

MISO will pick up our application and begin reviewing that soon. They have not done that just yet. Once they pick it up, I believe they will do a public notification saying that they have picked that up, and then they have ninety days to complete that study. At the end of that study, they come to us and say, this is what we think it is going to cost. We then have a certain period of time to negotiate a couple items on that list. Ultimately, it comes down to whether you are signing a generator interconnect agreement with MISO and committing to your project—we think that happens sometime later in Q3—or are you saying, no, I am going to pass because the project, we are just not going to go forward with the project. Then your options: we would probably step into the traditional queue at that point going forward. Those are the options on the table and what we think that timing looks like.

Got it. Okay. Well, Brent and Todd, I really appreciate all the detail, and best of luck.

Thank you, Nick.

Thank you. And we have a question from the line of Jacob G. Sekelsky with Alliance Global Partners. Please proceed.

Hey, Brent and Todd. Thanks for taking the questions.

Good to see you, Todd Jake.

With the gas expansion coming into focus, I am wondering how you are thinking about Sunrise Coal and that operation’s position in the broader portfolio going forward.

Sunrise results have been good. They got their cost structure down last year. It performed really well. So far so good this year as well. We are happy with the Sunrise Coal division. We are looking to contract a meaningful amount of output at the Merum power plant in the near future, and that is going to require fuel. I do not see any material changes at Sunrise in the near future. We still plan to take coal at the plant. The gas plant—if you look at Merum, why is it such a good site for an expansion? Merum was originally designed to be three 500-megawatt coal-fired units, but they only built two. A lot of the power infrastructure that is necessary already exists at the site. The line takeaway capacity from that substation is like 1.2 to 1.6 gigawatts. We are only using a thousand, or one gigawatt. All we are really proposing to do is, instead of building a third coal-fired unit, the third unit will be gas units. Right now, we are proposing CTs. That is what it is in a nutshell: there is space on the line. We have property control. We have the easements in place for the gas pipeline. It is only five miles away. We have water rights. There is good gas availability, we are told, at that location. We think we have one of the better sites in the country to do such a development. That said, we still have to line up equipment, more PPAs, and such to make that project viable. That is something we negotiate every day to see if we can make all those numbers line up.

Got it. That is helpful. Building off that a bit, if I may. Are you still evaluating things on the M&A front, or do you feel your plate is full with the ARRIS project coming into focus over the next few quarters?

We always look at things. We have bid on an asset here recently. I do not think we are going to be selected for that asset. We are active. We will have to take the opportunities as they come.

That is helpful. That is all for me. Thanks again, guys.

Thank you. Thank you. This concludes our Q&A session.

I will pass it back to Brent Bilsland for closing comments.

I just want to thank everybody for their continued interest in Hallador Energy Company, and stay tuned. I think, hopefully, we have exciting things to announce in the future. Thank you again.