Indiana coal producer Hallador Energy Co. earned more from its electricity operations than its coal division in the first quarter, a milestone in its transition from mining company to independent power producer.
Several US coal companies have mixed up their traditional business focus in recent years as a transition to renewables and other forms of energy has pushed thermal coal producers to lean less on domestic power production and more on metallurgical coal for steelmaking, oil and gas, electricity production and brand new business lines. In 2022, Hallador acquired the Merom Generating Station, a two-unit coal-fired power plant in Indiana, with a power purchase agreement extending through 2025 in exchange for assuming costs to eventually decommission the plant, which its previous owners had planned to retire in 2023. Ultimately, Hallador hopes to pivot from coal-fired generation to renewable energy at the Merom facility.
In the first quarter, the company generated revenue of $49.6 million from coal sales compared to $58.8 million from electricity sales. Already, the company's electric segment will account for $657.0 million of its $1.5 billion forward energy and sales book through 2029.
"We believe future forward sales from our electric operations will soon eclipse our forward sales from our coal operations," Brent Bilsland, Hallador's president and CEO, said on a May 7 earnings call. "Since January, we have evaluated and continue to evaluate several major power and capacity sales opportunities, including one proposal made to us that, if contracted, will result in more than $1 billion worth of potential forward power sales."
Coming change in classification
Based on expectations to continue to focus on power over coal sales, Hallador disclosed in its earnings release that it soon expects to change its Standard Industrial Classification code, used by the Securities Exchange Commission to classify companies, to "electric services" instead of "bituminous coal producer."
"We believe that this transition provides significant opportunity to capture the increased margins of the energy markets, to take advantage of the increasing demand for electricity and to step up the value chain in a more sustainable and future-proofed industry than that which we have traditionally operated in," Hallador wrote in its most recent annual report to the SEC.
As it pivots to a focus on power, the company is reducing its focus on mining coal. For example, the company idled production at its highest-cost surface mines and reduced capital expenditures at its coal division from about $35 million per year to approximately $25 million. Historically, Hallador's Sunrise Coal LLC subsidiary produced about 6.0 million short tons of coal annually, but that is expected to fall to 4.5 million tons annually following a restructuring of its coal operations in the first quarter, Bilsland said on the call.
On the other hand, since Jan. 1, Hallador reported it has secured approximately $138.0 million in new long-term capacity and energy contracts.
The company has also said it is working to develop up to 1,000 MW of renewable resources to replace the Merom plant, which has an operating capacity of 989 MW, according to S&P Global Market Intelligence data, through a joint venture with Hoosier Energy Rural Electric Cooperative Inc. As part of that deal, announced in 2021, Hallador is developing and selling to Hoosier 200 MW of energy from solar and battery storage in 2025. The transaction is intended to position Hoosier as the anchor tenant in replacing the Merom coal plant with renewable power. Hallador recently launched a targeted request for proposals — responses are due in mid-May — seeking new industrial power users, with a focus on datacenters, AI services and power-dense manufacturers.
However, the road to becoming a power producer has not always been smooth, particularly for a company starting with a power plant where both units came online more than 40 years ago. In its annual report, Hallador disclosed a transformer failure at Merom coupled with scheduled maintenance that "took half of the plant offline for nearly the entire" fourth quarter of 2023. Low natural gas prices and mild weather have also pressured power prices. Merom's spot prices for electricity averaged $69/MWh in 2022 but fell to $31/MWh in 2023.
Still, Bilsland is optimistic about the company's future.
"On the electric side of the business, indicators for future power pricing appear much healthier than we have seen in recent months. We believe these indicators are supported by both our forward power sales book, pricing and third-party future power curves," Bilsland said.
Overall, Hallador reported a net loss of $1.7 million in the first quarter, down from a profit of $22 million in the same period a year ago, when the company was benefiting from high-priced coal contracts and its first full quarter of operations at Merom.
