Executive Summary / Key Takeaways

• Hallador Energy is undergoing a significant transformation from a coal-focused producer to a vertically integrated independent power producer (IPP), strategically leveraging its dispatchable Merom Power Plant to capitalize on the growing demand for reliable electricity.
• The company is in advanced discussions for long-term power purchase agreements (PPAs) with data center developers and load-serving entities, anticipating premium pricing and substantial volume commitments that could materially enhance future revenue and profitability.
• Hallador is actively pursuing organic growth through an application to MISO's ERAS program to add 525 MW of gas generation at Merom by late 2028, potentially increasing its generation capacity by 50%, alongside evaluating dual-fuel capabilities and strategic acquisitions of other dispatchable assets.
• Recent financial performance, particularly in Q3 2025, demonstrates strong operational leverage with a 40% year-over-year revenue increase and a fourteen-fold rise in net income, driven by favorable energy markets and coal operational efficiencies.
• Key risks include the successful refinancing of upcoming debt maturities, the capital-intensive nature and regulatory hurdles of new generation projects, and the inherent volatility of energy markets, though management expresses confidence in its strategic direction and market positioning.

The Energy Grid's New Imperative: Reliability in a Volatile Landscape

Hallador Energy Company, founded in 1949, is strategically redefining its identity, shifting from a traditional coal producer to a vertically integrated independent power producer (IPP). This transformation is not merely an evolution but a calculated response to a rapidly changing energy landscape, where the retirement of dispatchable generation in favor of intermittent renewables has created a critical imbalance in supply and demand for reliable power. The company's core business now revolves around its Electric Operations, centered on the 1080-megawatt Merom Power Plant in Sullivan County, Indiana, complemented by its Coal Operations through Sunrise Coal, LLC.

The broader energy industry is experiencing a profound shift. The prevailing trend of retiring dispatchable generators, such as coal-fired plants, in favor of non-dispatchable resources like wind and solar, has led to an unbalanced supply and demand equation. This has resulted in reduced availability and increased prices for accredited capacity, a critical attribute for grid stability. In this environment, Hallador's Merom Power Plant, with its inherent "on-switch" reliability, stands out as a valuable asset. The company's strategic pivot aims to leverage this reliability, capturing expanding margins in the power markets and meeting the rising demand for dependable electricity.

In the competitive landscape, Hallador operates as a regional specialist, primarily serving the Midwest. While larger, more diversified competitors like Peabody Energy (BTU), Arch Resources (ARCH), and CONSOL Energy (CEIX) boast broader geographic footprints and diversified portfolios, Hallador's strength lies in its localized efficiency and established mine operations in Indiana. This regional focus can translate into superior margins through efficient local operations and stronger customer loyalty among Midwest utilities. For instance, the scarcity of accredited capacity in MISO Zone 6, which covers Indiana and parts of Kentucky, provides Hallador with a significant competitive advantage. MISO and other grid operators have substantially reduced the accredited capacity assigned to renewables, making dispatchable generation from coal and gas the most practical options for new capacity in the region. This dynamic positions Hallador favorably against rivals who may have less direct access to this critical market.

Hallador's "technology" is fundamentally its dispatchable generation capability. Unlike intermittent renewables, Merom offers consistent, on-demand power, a feature increasingly valued as the grid integrates more variable sources. This inherent reliability provides a tangible benefit: a stable and predictable power supply that commands a premium in a volatile market. The company is not resting on its existing assets, however. It is actively pursuing technological enhancements and growth initiatives. On November 3, 2025, Hallador Power submitted an application to MISO's Expedited Resource Addition Study (ERAS) program to add an additional 525 MW of gas generation at the Merom site, targeting online operation by late 2028. This initiative aims to increase the company's generation capacity by approximately 50%, representing a significant organic growth opportunity. Furthermore, Hallador is evaluating the potential to incorporate natural gas co-firing capabilities at Merom, creating a dual-fuel configuration. This strategic move is designed to enhance reliability, resiliency, and flexibility, allowing the company to take advantage of economic fluctuations in fuel costs and provide increased resiliency during periods of limited gas availability. The ability to co-fire with natural gas and coal would also allow Hallador to retain the economic advantages of operating its Sunrise Coal subsidiary, leveraging its own fuel supply to ensure competitively priced offerings.

Operational Momentum and Financial Strength

The company's strategic transformation is visibly reflected in its recent financial performance. For the third quarter ended September 30, 2025, Hallador reported a robust 40% year-over-year increase in total operating revenue, reaching $146.8 million. Net income surged to $23.9 million, a fourteen-fold increase from the prior year period. This strong performance contributed to a nine-month year-to-date revenue of $367.5 million and net income of $42.1 million, both materially exceeding prior year figures.

Operating cash flow for Q3 2025 also saw a significant increase to $23.2 million, driven by favorable energy pricing and improved coal production efficiencies. For the nine months ended September 30, 2025, cash provided by operations was $73 million, a substantial increase from $27 million in the prior year period.

The Electric Operations segment was a primary driver of this growth. Total Electric Sales in Q3 2025 rose by 29.3% year-over-year to $93.2 million, or $59.09 per MWh sold. This was fueled by a 33.4% increase in delivered energy (0.4 million more MWh sold), the commencement of two new Power Purchase Agreement (PPA) contracts, and higher MISO pricing. The segment's EBITDA margin increased by 7.6% to $25.9 million for Q3 2025, and by 22.1% to $67.7 million for the nine months ended September 30, 2025.

Coal Operations also demonstrated positive results, with segment coal sales increasing by 42.4% year-over-year to $68.8 million in Q3 2025, primarily due to increased third-party contractual coal sales of 0.4 million tons. The segment's EBITDA margin saw a remarkable 131.3% increase to $8.8 million in Q3 2025, and a 120.1% increase to $17.2 million for the nine-month period. This improvement reflects the benefits of the organizational restructuring initiated in February 2024, which included a workforce reduction of approximately 110 employees and a focus on the lower-cost Oaktown 1 underground mining complex. This restructuring led to a decrease in labor costs by $8.6 million, or 12.9%, for the nine months ended September 30, 2025, and cash costs for coal operations were down to the low $40s per ton in Q4 2024. The strategic necessity of this transition was underscored by a $215.1 million non-cash impairment charge recorded in Q4 2024 in the Coal Operations segment, reflecting lower coal quality at the Oaktown 2 mine.

Hallador's liquidity and capital management remain a key focus. As of September 30, 2025, the company reported total bank debt of $44 million and total liquidity of $46.4 million, including an additional borrowing capacity of $33.8 million under its revolver. The company proactively amended its Credit Agreement in June 2025, deferring certain principal payments and redefining covenants to enhance operating flexibility.

A $35 million prepaid forward power sales contract in Q2 2025, and a subsequent $20 million prepaid contract in Q3 2025, provided immediate liquidity and monetized forward pricing, with proceeds supporting operations and capital investments. Capital expenditures for the nine months ended September 30, 2025, totaled $44.3 million, with $25.4 million allocated to the Merom Plant and $18.9 million to Coal Operations. For the full year 2025, projected capital expenditures are approximately $66 million, with about 20% ($14.8 million) earmarked for federally mandated EPA ELG regulations.

Outlook: Seizing the Capacity Premium

Hallador's outlook is highly optimistic, driven by the accelerating demand for reliable power and its strategic positioning. The company is in advanced discussions for long-term PPAs with both data center developers and load-serving entities, anticipating significant progress by early 2026. These agreements are expected to be long-duration, spanning a decade or more, and consume the majority of Merom's energy output and accredited capacity at favorable, premium prices. Management explicitly states they "still expect the premium to the forward curve" for these deals, noting the aggressive stance of data center developers and hyperscalers, including new entrants like OpenAI's "Stargate" project, which intensifies competition for capacity.

The application to MISO's ERAS program for an additional 525 MW of gas generation at Merom is a pivotal organic growth initiative, targeting online operation by late 2028. This expansion could increase Hallador's generation capacity by 50%, a substantial step for the company. Management is also evaluating strategic acquisitions of other dispatchable generation assets to diversify and increase its portfolio, aiming to repurpose underperforming or retiring assets to meet the rising demand from high-growth end users.

Forward-looking indicators for energy pricing are strong. For 2025, Hallador has already contracted 4.25 million MWh at an average price of $37.24 per MWh, and for 2026, 3.4 million MWh at an average price of $44.43 per MWh. Beyond 2026, the company is "optimistic that we will be able to sell energy at higher prices in support of data center development andor to traditional wholesale customers in line with the indicators of a strong forward energy pricing curve." On the coal side, the average contracted sales price in 2026 is approximately $4 per ton higher than in 2025, with an expected production of 3.8 million tons in 2025. Hallador's goal for Merom is to generate up to 6 million MWh annually, if market conditions support it, and it has already contracted 89.4% of its target capacity sales for 2025.

Risks and Strategic Resilience

Despite the compelling growth narrative, Hallador faces several pertinent risks. The company's Credit Agreement, including its revolving credit facility and term loan, matures in 2026, necessitating successful refinancing. While management believes this is probable on market terms, "Failure to refinance our Credit Agreement debt prior to maturity could adversely affect the Companys liquidity and financial condition." The ERAS program and other new generation projects are capital-intensive and subject to "operational, financial, regulatory and legal risks that could impact the projects viability andor timeline." Regulatory compliance, particularly regarding the EPA's Effluent Guidelines (ELG), poses a risk; if the proposed rule extending compliance deadlines is not finalized, Hallador could face enforcement actions.

The energy market itself presents volatility risks. The increasing share of non-dispatchable generation, coupled with the limitations of energy storage, suggests that "energy price volatility could increase over the next decade." Hallador's strategy to address this includes its vertical integration, dual-fuel evaluation, and the pursuit of long-term, unit-contingent PPAs that provide downside protection while capturing upside. The company's critical accounting estimates, particularly for coal reserves and asset retirement obligations, also carry inherent uncertainties. However, Hallador's proactive measures, such as the coal operations restructuring and the focus on high-value dispatchable assets, demonstrate a strategic resilience aimed at mitigating these challenges and capitalizing on the evolving energy landscape.

Conclusion

Hallador Energy Company is at a pivotal juncture, successfully executing a transformative shift towards becoming a vertically integrated IPP. By strategically leveraging its dispatchable Merom Power Plant and pursuing significant organic and inorganic growth initiatives, the company is positioning itself to meet the burgeoning demand for reliable power, particularly from data centers and load-serving entities. The scarcity of accredited capacity in key markets, combined with Merom's inherent reliability and the company's planned expansion into gas generation and dual-fuel capabilities, forms a compelling investment thesis. While challenges such as debt refinancing and project execution risks exist, Hallador's proactive management, strong financial performance in its Electric Operations, and clear strategic roadmap suggest a company poised to unlock substantial long-term value for its shareholders in a rapidly evolving energy sector.