(NAS:HNRG) Hallador Energy: A Diamond or Lump of Coal?

Neutral rating on Hallador Energy (NAS:HNRG) this month. Through extensive research, analyses, and speaking with IR, our initial hypothesis for a “buy” rating did not materialize. Our principle: if we don’t add it to our portfolio, no “buy” rating. Learn more about why we publish neutrals here

Thesis

Hallador Energy Company (NASDAQ: HNRG) is a U.S.-based coal producer focused on supplying coal for power generation. With the strategic acquisition of a coal power plant in 2022, Hallador became a vertically integrated power provider, with nearly 50% of its 2024 revenue derived from electricity sales. While coal was expected to be phased out, a shift in power demand—driven by AI—and a more favorable EPA stance have created new opportunities. Its location is particularly advantageous; Indiana faces a supply-demand imbalance in the power grid and offers substantial incentives to data centers relocating to the state. Although the initial conditions appeared favorable, after extensive due diligence and discussions with industry participants, we came away less optimistic as Hallador’s upside seems constrained by infrastructure and regulatory uncertainties.

Company Background

US Energy Demands

U.S. load forecasts project an increase of 80 gigawatts from data centers alone by 2030, equivalent to approximately 584 terawatt-hours (~10% of total U.S. energy demand). This surge is primarily driven by AI, where the prevailing rule is that more compute power equates to greater intelligence. However, these loads will not be evenly distributed across the country but will instead concentrate in regions conducive to new data center development.

Texas has experienced the most significant surge in demand, with generation companies like Vistra seeing a 400% increase as energy prices have soared. Indiana, home to Hallador, is emerging as a strong contender for new data center builds.

Indiana offers several advantages for data center development, including low natural disaster risk, abundant land and labor, extensive fiber infrastructure, access to water, and proximity to major cities. Equally important, Indiana is a pro-business state with robust incentives for data center investment. The state provides a sales and use tax exemption on data center equipment purchases. For instance, the Indiana Economic Development Corporation granted Meta a 35-year sales tax exemption for a minimum $800 million in eligible capital investment. For each additional $800 million invested within that period, the company qualifies for an additional five-year tax exemption, extending up to a total of 50 years.

Regional Transmission Organizations

Understanding power supply dynamics requires a basic understanding of the grid. The various electricity grids, or Regional Transmission Organizations (RTOs), function as independent governing bodies. Texas operates within the ERCOT RTO, which functions as an “islanded” market without federal oversight. In contrast, regions like MISO are regulated by FERC and interconnected with other grids.

Two key regulatory bodies oversee electricity markets: FERC and EPA. The Federal Energy Regulatory Commission (FERC) regulates wholesale electricity markets, interstate transmission, grid reliability, and transmission rates but does not oversee retail electricity prices or power generation directly. Meanwhile, the EPA regulates the environmental impact of power generation under laws such as the Clean Air Act, setting emissions standards for power plants. The EPA has played a primary role in the closure of coal plants, as the cost of meeting emissions regulations has made continued operation economically unfeasible.

Below is a map of all U.S. RTOs and their remaining power capacity

Mid Continent System Operator (MISO)

MISO oversees electricity flow across 15 states, managing peak loads exceeding 120 gigawatts. Over the past decade, as shown in the graph below, net additions and retirements of electricity capacity have remained nearly balanced.

MISO’s recent energy additions have been predominantly renewable sources, while most retirements have come from coal. Although nameplate capacities appear equivalent, their actual energy production—measured by capacity factor—varies significantly. This is because solar and wind generation depend on weather conditions and cannot operate 24/7. This challenge is not unique to MISO but affects the entire U.S. power grid.

As a result, power outages have increased fivefold since 2000, reaching approximately 500 per year, as renewables have grown from 0% to 15% of total power generation. MISO currently faces a 15-gigawatt shortfall in accredited capacity, which provides a more realistic measure of a generation source’s ability to reliably produce energy. If scheduled coal and natural gas plant retirements proceed as planned, this shortfall is projected to expand to 40 gigawatts by 2030, about 30% of current loads. Coal currently accounts for roughly 28% of electricity generation in the MISO region.

Expanding capacity is not a simple process. First, studies must assess the capability of transmission lines—a multi-year process. Even after completion, new generation facilities must be constructed. Generation equipment supply chain issues only make about 40% of the reason for generation delays. The other 60% are due to regulatory or transmission related issues.

Hallador Operations

With the strategic acquisition of a coal power plant in 2022, Hallador became a vertically integrated power provider, with nearly 50% of its 2024 revenue generated from electricity sales. In hindsight, this acquisition appears well-timed given the growing demand from data centers. The Merom Power Plant has a 1-gigawatt capacity.

Hallador is led by a decent management team that has successfully maintained profitability in its coal operations as shown in the graph below. Revenues saw a significant jump in 2023, driven by electricity sales for the first time.

Hallador is now positioning itself exclusively as a power provider, exiting third-party coal sales and shutting down its highest-cost coal operations while retaining the more profitable ones for its own electricity generation.

Overall, each megawatt-hour of power produced will cost Hallador in the low $40s. With forward power curves projecting electricity prices in the mid-$50s, the company stands to achieve a 20–30% net margin on the low end if it secures a long-term contract. These cash flows would total $95 million per year (Merom Power Plant can produce roughly 8mm MWhrs per year) representing an approximately 25% yield.

Prospects of a Data Center Customer?

Numerous data center projects are underway in Indiana, with NIPSCO reporting six active projects in its territory, expecting peak demand to reach nearly 9 gigawatts by 2035. Similarly, American Electric Power has stated that it is contracted to bring nearly a gigawatt of data processing load online by 2025.

It is more likely that a co-location provider, rather than a hyperscaler, would be Hallador’s potential customer due to ESG mandates. Co-locators include companies like Equinix and Digital Realty.

Although Hallador owns the interconnection rights—the ability to tap into the grid—it operates as an independent power producer (IPP), meaning it needs a transmission partner with the right to sell power. Transmission and distribution costs account for roughly 30% of the total power cost to the customer. In early 2024, Hallador partnered with WIN Energy REMC, which serves Southern Indiana, and Hoosier Energy to market the Merom Generating Station. This suggested that potential data center customers would be in Southern Indiana, where these partners had the authority to operate. However, this strategy did not materialize, and in November 2024, Hallador signed a new non-binding agreement with a global data center developer. As part of this agreement, the developer paid $5 million in June for a due diligence period. While this appears promising, we do not expect it to yield a concrete outcome.

Shortly before signing this agreement, Hallador entered into a 19-month, $60 million prepaid physically delivered power contract, set to begin in June 2025. Under this contract, Hallador will supply nearly 2 million megawatt-hours—roughly 30% of its capacity—at $31 per megawatt-hour. If data center customers were actively pursuing power, this pricing decision would seem misaligned with strong demand.

We believe data center developments are concentrated in northern Indiana, and to deliver power there—approximately 200 miles away—Hallador would need to partner with transmission providers like NIPSCO and undergo a full transmission review, given likely congestion on existing lines. This process alone could take two to three years. The bottleneck is not just power generation but also transmission capacity. MISO is working on this with approved upgrades to key transmission lines in this corridor. For example, one project is to rebuild the Sullivan–Casey West 345 kV line, connecting southern Indiana to Illinois, with higher-capacity conductors rated for 3,000 amps.

Additionally, with a new EPA administration taking a more favorable stance toward coal, it is likely that many coal plants currently scheduled for retirement will postpone their shutdowns. Duke Energy has already indicated this. This postponement will significantly help alleviate the power crunch in MISO.

Opportunities

Changing Hallador’s SIC code from 1220 (bituminous coal producer) to 4911 (electric services).

This could increase fund inflows due to index inclusion. Some indices and sector-based ETFs track SIC codes, meaning this shift could place Hallador in utilities-focused funds rather than energy or materials funds. Utility stocks typically trade at higher earnings multiples than coal producers, which could attract growth and income-focused investors.

Risks

Increasing Environmental Costs

Hallador has already allocated $45 million for effluent control costs in 2025 and 2026, but these expenses could continue to rise. If costs become too high, the company may need to convert its facility to a natural gas or renewable energy plant, requiring a significant capital expenditure.

Coal power plants may not be well-suited for AI data center workloads

Due to their limited ability to respond to rapid load variations on a millisecond scale, solid fuels face challenges in providing the necessary flexibility. In contrast, natural gas, with its faster response time, is better suited to handle these fluctuations.

Conclusion

Hallador’s pivot to power generation initially appeared promising, benefiting from rising energy demand driven by AI and Indiana’s pro-business policies. However, challenges remain—data centers are clustering in Northern Indiana, complicating transmission logistics. The company’s recent low-priced power contract suggests weak immediate demand. Regulatory shifts could extend coal’s lifespan, increasing supply and obviating the need for Hallador. Overall, Hallador’s upside seems constrained by infrastructure and regulatory uncertainties.

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Past performance is not necessarily indicative of future results. All investments carry significant risk, and it’s important to note that we are not in the business of providing investment advice. All investment decisions of an individual remain the specific responsibility of that individual. There is no guarantee that our research, analysis, and forward-looking price targets will result in profits or that they will not result in a full loss or losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do.