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Hallador has 77% of coal sales hedged through 2022, few customers retiring units

Hallador Energy Co.'s CEO touted the company's contracted tonnage over the next few years and the stability of its customer base on an Aug. 6 earnings call.

CEO Brent Bilsland said the coal producer has 77% of its sales contracted for the next 3.5 years at an annualized pace of 8 million tons because subsidiary Sunrise Coal LLC increased its customers from nine in three states to 17 in eight states. That positioning gives investors "unparalleled free cash flow visibility," he said. The company sold 1.8 million tons in the quarter, compared with 1.5 million tons in the year-ago period.

"To date, only 5% of our current customer demand has announced a retirement date within the next decade," Bilsland said. "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."

Hallador shipped 15% less volume in the second quarter than the first, which the company expected due to the season, Bilsland said. The producer is still on schedule to reach its annualized target of 8 million tons for the year.

Exports are expected to continue to take an increasingly larger share of Illinois Basin coal, Bilsland said.

"We too believe the downturn of the export market is cyclical in nature and not structural," the CEO said. "There are still more megawatts of coal-fired power plants being constructed in the world than are closing."

Though coal exports are taking a hit due to lower seaborne prices, the company expects the export market to come back stronger. Growth in markets, including India and Eastern Europe, will take more Illinois Basin coal over the longer-term, Bilsland said.

Referring to the recent wave of coal bankruptcies and the Powder River Basin joint venture proposed by Peabody Energy Corp. and Arch Coal Inc., the CEO said he expects to see the low-cost producers, such as Hallador, take on more contracts while higher-cost producers curtail production as contracts roll off. Indiana utilities also invested in environmental controls for coal power plants, so those customers are less likely to come offline in the near-term than utilities that did not make similar investments, Bilsland said.

"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," the CEO said.

The company reported a net loss of $3.3 million, or a loss of 11 cents per share, for the second quarter, the majority of which was due to a $1.8 million noncash adjustment in the fair market value of its interest rate swaps resulting from its quarterly mark to market, according to an earnings release.