Q4 2023 Core Scientific Inc Earnings Call

Participants

Joe Flynn; Analyst; Compass Point Research & Trading, LLC.

Jon Tower; Analyst; Needham & Company

Lucas Pipes; Analyst; B. Riley Securities, Inc.

Rosemary Sisson; Analyst; Odeon Capital Group

Joseph Vafi; Analyst; Canaccord Genuity

Kevin Dede; Analyst; H.C. Wainwright

Jack Chan; Analyst; Imperial Capital, LLC

Gregory Lewis; Analyst; BTIG

Darren Aftahi; Analyst; Roth Capital Partners LLC

Joshua Siegel; Analyst; Cantor Fitzgerald

Presentation

Operator

Hello, and welcome to the core Scientific Inc. Fiscal Fourth Quarter and Full Year 2023 earnings conference call. My name is Harry, and I'll be coordinating your call today. If you'd like to ask a question during Q&A, you may do so by pressing star one on your telephone keypad. I'll now hand you over to Stephen Catlin, Senior Vice President, Investor Relations and Marketing at core scientific. To begin, please go ahead.

Good afternoon, ladies and gentlemen, and welcome to core scientific fiscal year 2023 earnings conference call. This is Steven Catlin, Senior Vice President of Investor Relations for CoreSite. At this time, all participants are in a listen only mode. We will conduct a question and answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes. And before we begin, please note that on this call, certain information presented contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statements other than historical or current facts that predict or indicate future events or trends, forecast, performance or achievements and may contain words such as believe, anticipate, expect estimate, intend, project, plan or words or phrases with similar meaning. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that may cause actual results to differ materially. For further information on these risks and uncertainties, we encourage you to review the risk factors discussed in the Company's annual report on Form 10-K filed with the Securities Exchange Commission and the special note regarding forward-looking statements contained in the company's current report on Form eight K filed today and the earnings release and slide presentation contained therein.
Today's presentation is available on our website at core scientific.com in the Events and Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, March 12, 2024 the Company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after today.
Joining me today from core scientific, our CEO, Mr. Adam Sullivan, and Chief Financial Officer, and Ms. Denise sterling. We will now begin with remarks from Adam.
So Adam.

Thank you, Steve, and good afternoon. I'd like to begin by highlighting a few key points that help frame QUARTER scientific leading position in our industry. As illustrated on slide 3, core scientific is one of the largest bitcoin miners in North America, earning more bitcoin than any other listed company in 2021, 2022 and 2023.
Moving now to slide 4, we generated $502 million in revenue in 2023, more than any other listed minor North America. We own our 724 megawatts of infrastructure. That translates into 23.2 Exa Hashes as of December 31 and 25.2 Exa Hashes as of February 29, we are diversifying our hosting customer base beyond bitcoin mining into high-performance computing. With our recently announced contract to host for weeks, we are well positioned for having continuously improving our fleet efficiency with a pathway to delever our balance sheet, a plan to add more than 20 times half of self mining tax rate over the coming years. And I believe we have the best team in our industry. This being my first earnings conference call. Since taking the role as CEO, I'd like to express my gratitude to our Board members and our leadership team for their support.
I'd also like to acknowledge the hard work and dedication of every member of the scientific team stayed focused during the restructuring process. You maintained our market leadership position and you bring our values to life every single day. The restructuring lasted for the entirety of 2023 was not an easy period for the company, but we persevered learn from the experience, and it's built what I believe to be the best company in our industry.
One of the main reasons I joined core scientific in 2023 was the quality of the team and its ability to scale its own infrastructure rapidly and efficiently. It was the first company to energize 100, 250 and 500 megawatts for Bitcoin mining North America at a time when very few came anywhere close to that scale and even fewer met their growth targets.
If I meet our own infrastructure, we can deliver financial operational and strategic advantages that I will address later. It's a privilege for me to lead this company, and I'm incredibly grateful and excited about this opportunity at building on strong momentum from 2023 core scientific and entered an exciting new chapter in our history.
On today's call, I will speak to three key elements of this new chapter. The strength of our fundamental business, our preparations for the happen and the opportunities ahead of us. Denise Sterling will then share some key financial and operational metrics before I return for closing comments, and then we'll take your questions.
Now let's talk about the strength of our business highlighted on our earnings presentation. A total of 19,274 bitcoin were mined in our data centers, 13,762 by itself, mining for our account for the any other public listed miner North America, we operated the largest infrastructure for Bitcoin mining North America with 724 energized megawatts. We ended 2023 with 15.9 times the Ashes self mining tax rate and 6.3 at the half of hosting hash rate for a total of 23.2 times. We demonstrate superior productivity running higher than average Bitcoin for Energisa has we have a disciplined manner and we develop and operate data centers less known is that we create technology solutions that support large fleets of computers. But I testified on slide 5, what we really do, 24, seven three 65 is transform energy into high value compute with superior efficiency at scale. We do this by designing, building and operating high-power digital infrastructure in which hundreds of thousands of computers operate with high uptime and high-productivity. The high-value compute we focus on today is bitcoin mining in our positions. Market is strong, owning our 724 megawatts and infrastructure shown in more detail on Slide 6, result in a lower cost to mine than if we relied on others to host our miners because we don't have to pay anyone in margin at both their hosting costs, the inorganic growth plan for completing another 372 contracted megawatt, partially built infrastructure at our Texas sites and incremental cost per megawatt of only about $200,000 or less than half of the cost of greenfield infrastructure. We plan to fund that growth from operating cash flow, a lesson we learned from our experience prior to our restructuring. This new infrastructure represents more than 20 EH/s of new half rate plan for the coming years. In addition, to our strong operational results in 2023. We also delivered strong financial results, starting with revenue of $502 million. While we experienced a net loss for the year of $247 million was mostly driven by $190 million in reorganization items associated with our restructuring, which are now mostly behind us in 2023, we generated strong adjusted EBITDA of $170 million, up from negative $10.7 million in the prior year. We generate cash flow by earning and selling bitcoin efficiently beyond our financial performance in 2023, which Denise will review in more detail. We also took the opportunity to evaluate our business carefully during our restructuring and made a number of changes that have strengthened our organization highlighted on slide 7. We emerge with a stronger balance sheet and a pathway to de-lever further based on convertible debt conversion and warrant exercises. We instill rigor and discipline in capital allocation, crafting an organic growth plan, funded out of operate operating cash flow. We reduced our spending and implemented a hedging strategy and power to manage our downside risks. We rationalized our hosting business, reducing the number of customers to a smaller set of financially strong companies in implementing new contracts designed to create more value for our shareholders and proceeds share. And we also paid off our debt financing utilizing free cash flow well and reorganization. And we completed a successful oversubscribed equity rights offering prior to our merger.
Lastly, we strengthened our self mining business in a number of important ways, and I will detail shortly across these and other areas. We made tremendous progress over the past year and now having relisted on NASDAQ are excited at the opportunity to remain at the forefront of picoplatin mining North America.
Now let's discuss the upcoming happenings in our business scale is important, but it's insufficient. We must deploy our resources and operate the superior efficiency to address the inherent volatility of our industry and the upcoming have any predictive publicly reported data shows that our hash rate realization based on the number of bitcoin We earned per average energized at the half. It has exceeded the average for our peer group in the last 12 months, as shown on slide 8, is much easier to operate efficiently with a small operation in much more difficult than scale. We continue to deliver superior efficiency at scale efficiency is critical to any business to prepare our business better for the volatility we expect during the having we've accomplished the following shown on slide 9, we continue to deploy new bitcoin miners to expand our hash rate and replace older less-efficient machines. By doing so, we improved fleet energy efficiency to 27.94 tools per Carecast by December 31, 2023 and at the end of February 2024 to 26.79 per terawatt hours. We've accelerated delivery and deployment of our 2.5 times half of new S21 through the first half of the year, which will improve our fleet efficiency. Even further leveraging our strong software development capabilities, we deployed our own proprietary firmware to our miners to generate greater profitability and create greater flexibility. We are able to optimize the machine performance based on power price changes as well as weather the facility level variables such as temperature, wind and pressure. This result in greater profitability at varying levels of economics, creating greater profitability at both lower and higher gas prices. We have optimized our fleet by reallocating miners to different locations based on their energy efficiency, aligning them with individual data center environmental conditions.
In Colorado, we implemented a power hedging strategy for the first time to minimize the impact of energy price volatility on our financial performance. And we've conducted rigorous scenario planning to determine what responses deliver the best result based on a variety of having driven cash price assumptions, our focus on efficiency has delivered positive financial results in 2023. We've reduced cash operating expenses by 27% year over year. We will continue to manage expenses carefully where to improve efficiency and continue preparing for the expected house price volatility around the happened. The strength of our business, combined with our focus on efficiency in preparation for the having positioned us very well to remain a leader in the bitcoin mining industry, the fact that we own our own infrastructure and possess unique capabilities and talent position us very well for emerging opportunities in other areas of high value compute, Onika infrastructure provides financial operational and strategic advantages. First, owning our infrastructure lowers our cost mine, producing self mining gross profit of 25% in 2023. It also gives us the flexibility to quickly and easily refresher miners to generate higher cap rates and the same operating power, increasing our productivity and profits. Second, because of our infrastructure, we can develop and deploy the new technology solutions that I mentioned earlier that help us boost productivity and operating efficiency This includes firmware, power management software and fleet management software. These solutions enable us to participate in programs offered by the utilities in different locations that can generate value for us. There there's so much more we can do with our deep technical capability that would be difficult or impossible to do if we did not own our own infrastructure. And third, we believe that the value of our themed infrastructure will only increase over time as the demand for available high-power term generation sites grows with the rapid growth of the HPC and AI cloud market. We believe that more opportunities will emerge to host clients such as corporate. To that point, our new multi-year hosting contract with core, we're an industry leader in GPU, accelerated workloads is valued at more than $100 million over the term of the contract. This new contract diversifies our hosting customer portfolio and enhances our potential to increase shareholder value by expanding our financing business to customers engage in important growing segments of the compute market. As a reminder, we hosted GPUs inter-data center for several years and even built a Tier three data center within one of our sites. Also, the majority of our data center operations team and IT leaders come from the data center industry, providing us with a deep understanding of the requirements in operating mechanics of infrastructure to service high-performance computing. In fact, our Head of Data Center Operations built and ran the very data center we have leased to his core we when he worked for HP., let me make it clear. We are fully focused on Bitcoin mining at scale. At the same time, we are uniquely positioned to address these emerging high value compute hosting opportunities as they evolve, representing strategic optionality for us and for you our shareholders.
With that as an overview of the state of the business, I'd like to invite Denise early to provide some context for the key financial and operating results in 2023 is Thank you, and it's good to be here today.

I'll begin by highlighting key income statement items. On a year-over-year basis, 2023 revenue of $502.4 million declined by $138 million or 22% from $640.3 million in 2022. $130 million of that decline was due to reducing the number of customers in our hosting business to improve its margin profile and sustainability and exiting the equipment sales business in 2023, which had contributed meaningfully to revenue in 2022.
Cost of revenue decreased by $253 million, down 40% to $378.9 million from $631.9 million for the fiscal year 2022. The decrease in cost of revenue was primarily attributable to $128.1 million of decreased depreciation, driven by a fiscal 2022 non-cash impairment adjustment to the depreciable base for our deployed self mining units, $67.1 million of lower equipment sales costs due to our exit from the equipment sales business in 2022, $41.8 million of lower power costs and lower stock-based compensation of $20.7 million as prior year included accelerated vesting of awards as well as a decrease in equity awards granted during fiscal year 2023 as a result of our focus on efficiency. As Adam indicated, we reduced our cash operating expenses by 27%. This improvement was mainly the result of a significant reduction of professional fees and a decrease in headcount and related personnel costs. As we streamlined our organizational design to increase our operating efficiency.
Our net loss decreased by $1.9 billion or 89% from $2.1 billion in 2022 to approximately $246.5 million in 2023. This decrease was driven mainly by a decline in noncash impairments of $1.9 billion, an improvement in gross margin of $115.1 million, lower operating expenses of $144.9 million, partially offset by bankruptcy related reorganization expenses of $191.1 million in 2023. 2023 adjusted EBITDA of $170 million increased by $180.7 million from a negative $10.7 million in 2022. As a percentage of revenue, 2023, adjusted EBITDA grew to 34% of revenue versus a negative 1.7% in 2022 because power is our single largest component of our cost of revenue.
I'd like to provide some additional background. We have power contracts with grid operators for each of our data centers. These contracts vary in price in terms of fleet by power cost averaged $0.044 in 2023. We project power costs in 2024 of between $0.045 and $0.047 times. We currently operate in both regulated and unregulated markets in regulated market. We are limited in our ability to manage the risk of power prices.
In Texas, we implemented a hedging strategy for the first time on 50 megawatts of power to our pickup data center while stable winter power prices did not result in significant savings from this strategy. In 2023, we protected ourselves against downside risks stand. We established the processes necessary to engage in hedging at a larger scale and at other locations today, we operate two segments, self mining and hosting, as shown on slide 12, in 2023, our self mining to hosting mix was 76% to 24%. We plan to expand our self mining fleet as we add infrastructure capacity as well as refresh our less-efficient miners to increase efficiency and productivity. As we expand our self mining fleet, we expect the mix to change over time. Our 2020 through stuff, mining and hosting gross margins were 25% and 22% respectively, as compared to 1% and 2% in 2022. The significant improvement in year-over-year self mining gross margin was due to decreases in depreciation and stock-based compensation and an increase in our self mining hash rates. The significant improvement in our hosting gross margin was due to the rationalization of our hosting business that Adam addressed earlier, a critical driver to our operating efficiency and the preparation for the heading is the composition of our self mining fleet. As Adam indicated, our fleet-wide average energy efficiency was 26.79 for Terra hash as of February 29, 2024. And we expect continued improvement as we deploy new ES 21 miners this year as of the year-end 2023, we operated approximately 158,000 miners in our self mining fleet. The model mix shown on slide 13 was 13% S19, 71%. That's 19 Pro and F19J Pro and 16% S19JXP.
Now I'd like to discuss the strength of our balance sheet and cash commitments. As illustrated on slide 14, we reduced our debt by approximately $400 million at emergence to $608 million as compared to just over $1 billion at the end of 2023, $260 million of our debt at Emergent consisted of secured convertible notes and the remaining $348 million included several non-convertible instruments. We have summarized the terms of these debt instruments on slide 15, including facility site, interest rate maturity and conversion of applicable.
Slide 16 illustrates our pathway to reducing and potentially eliminating our debt. First, a stock price of $5.83 will put the convertible notes in the money and the price of $7.79 will trigger their mandatory conversion. Full conversion of these notes will result in an issuance of an additional 45 million shares and a $260 million reduction in debt to $348 million, assuming no other changes. Next, the exercise price of Tranche one warrants is $6.81 because these are cash warrants their full exercise would result in approximately $670 million in cash to core scientific, half of which we are required to use to pay down our debt as our net debt following the equitization of our secured convertible note amounts to $348 million. The receipt of $670 million would be more than sufficient to clear the balance sheet. Assuming no other changes, the full exercise of Tranche one warrants would also result in the issuance of an additional 98 million shares.
As summarized on slide 16, the pathway to completely delevering our balance sheet based on the performance of our company and company stock is within RV, we have structured our 2024 plan to fund our operations and growth out of operating cash flow, including debt service, which is summarized on slide 17, we expect to pay a total of $71 million, $31 million in principal and $40 million in interest and debt amortization in 2020 for the majority of our existing debt matures in 2028 and 2029.
Please refer to slide 15 for the terms associated with our debt instruments. Adam previously discussed our infrastructure expansion plans over the coming years. In 2024, we plan to spend approximately $20 million to complete 72 megawatts of infrastructure in Texas, which we will fund out of operating cash flow. Operating cash flow will also fund the cost of new miners to be deployed and energized from that 72 megawatt.
Moving now from CapEx, let's review our mining economics summarized on slide 18. Our total cash cost to South mine in 2023 was $14,982, which represents our direct cash expenses of power of $12,528, and facilities operations costs at $2,454 allocated based on the percentage of our fleet dedicated to self mining divided by total bitcoin self mined in 2023 at 13,762.
Another way to look at this is by calculating the cash based cash cost, which represents the cash expenses of power and facilities operations, costs divided by ourself mining fleet cash and interaction. Our cash, the cash costs in 2023 was $0.0398 per test. Again, we expect our operating cash flow to be sufficient to support operating expenses, debt service and CapEx associated with our organic growth plan in 2024, we are modeling a statutory effective tax rate of approximately 23% for 2024. We also have more than $300 million in net operating loss carryforwards, which will reduce future cash taxes.
Now I'll turn the call back to Adam to discuss our expectations for 2024.

Atates produce has previously indicated in the business plan filed with the Board. We expect the following results in 2024. We plan to complete 17 megawatts with partially built infrastructure at our Denton, Texas data center for a total of 796 megawatts by the end of 2024 and Tokmanni half rate was 21 point the extra half.
To summarize, core scientific remains a leader in bitcoin mining with a strong business, significant progress preparing for the having potentially significant opportunities in other forms of high-value compute hosting. We took the opportunity during our restructuring to improve our company, and our team is engaged, aligned and laser-focused on operating effectively in achieving our growth plan. We are excited about how well our scientific is performing in positions, and we look forward to updating you on our progress against our goals over the course of this year.
I am confident in the ability of our outstanding team to achieve superior results that earn your trust.
Thank you for your time today. Now we will take your questions.

Question and Answer Session

Operator

We will now begin the question and answer session of today's call. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press star then two. If you are speaking using a speakerphone, you may need to pick up your handset first before pressing the numbers and we respectfully ask that you limit your questions to two and then please reenter the queue to ask further questions. Once again to ask a question, please press star then one on your touchtone phone. Our first question today is from the line of Joe Flynn of Compass Point. Joe, your line is now open.

Joe Flynn

I sort of look into the first quarter with the stronger Bitcoin prices and hash rate. And given the you guys have the benefit of having scale already and high attach rate utilization on you guys should be able to build a pretty strong cash cash position here. So my question is on just near term plans going forward with that cash, what's balance between investing in growth, holding cash for a rainy day into the having and also as it relates to your decision to pay cash interest or packages?

Thanks, Joe. No priority number one for us is execute on the business plan. We've laid out the next year, the growth for the next 72 megawatts to add on to our base of somewhere around 24 megawatts. And we believe that by executing on that business plan will provide a pathway to deleveraging for us. Priority two is paying down debt. That's hopefully something that we've been eyeing as we've been looking for over the course of 2024 but really our top priority right now execute on the business plan, continue operating with the best efficiency across the market, and we believe that will create a pathway for us to delever our balance sheet over the course of 2024.

Joe Flynn

Great. And then kind of question on the power prices. Looks like you guys saw a benefit there with that $0.044 per kilowatt hour is probably on lower natural gas prices. But I guess one more color maybe your existing power agreements and whether those are present stone. Are there further opportunities to get fixed price PPAs.
And then also, if you could just.
Yes, Ben, on your hedging strategy, if you can hedge it additional megawatts.

Yes, yes. Of course, I mean, let's take a look at the power markets more broadly. First and empower right now in the United States is a very competitive game. Bitcoin miners are competing against well-funded technology companies that are less sensitive to pricing. We view that as a big opportunity for us as a business which we can talk about later. But going back to Bitcoin mining and the our power prices over the course of 2023 were $0.044. We have a split between regulated and unregulated markets inside of our portfolio. We're operating in five different states. The unregulated market is Texas. And so a lot of our power prices are fixed and some of them have components that can fluctuate with different pricing like natural gas. And so we definitely have an eye towards further hedging programs like like the one that we did at our peak US locations. But you're right now what we're really focused on is not necessarily only achieving lower cost per bitcoin, but it's also really focusing on areas where we can have high utilization. It's something that we really pride ourselves on and believe provides a better return on capital for the investments that we've made, not only in our infrastructure, but also our miners. So the power programs that we're participating across regulated markets right now, it's some intermittency in exchange for lower power prices in Texas, in particular, looking at more short dated and fixed price PPAs that give us the opportunity to capitalize on different market environments. And that's what we're seeing across across the state of Texas. Power prices are changing rapidly, and that's something that we want to be able to have a flexibility to execute on those types of opportunities. And so you saw the first one that we executed on over the course of the winter. I'm in Texas.

Operator

Thank you.
Our next question today comes from the line of Jon Tower of Needham & Company. Your line is now open.

Jon Tower

Great.
Thanks for taking my question, guys, and I'm a little bit newer to the story, but would love to get a little bit more color on the core we contract and any additional details you can drill down into their on such as kind of the operating margin profile we should be thinking about? And then you have to think longer term, is this a business you would like to get more into? And then just kind of expected CapEx, if you were to get in the business, maybe a larger scale, kind of what is the cost per megawatt as you would be thinking about?

Yes, let me address the first part of the question first, we're excited about bringing Cory back to the clients. They were a client from 2019 to 2022 inquiries become a major brand in this space, but they knew our capabilities and know that we're well positioned to support them. This first deal that we signed with the Austin location. Our operations team has high familiarity with that site in many of the team members that we have actually built and operated that site when they worked for HP. to how we're thinking about this business right now, it's a natural hedge against the Bitcoin mining business. This is price how you'd see traditional data center deals, price charging a fixed per kilowatt kilowatt. The chart, regardless of whether that new capacity is utilized than a pass from things like power and utilities. We believe this deal this deal is going to be accretive to 2024, and it's going to provide a strong return on the CapEx that we spend on the upgrades and the expansion of the electrical infrastructure at that site.
The interesting part for us is how we're thinking about it going forward. And really what we're seeing in this market. There's low availability of high megawatts power are high megawatt sites with firm generation power. And right now infrastructure is a three to five-year game. And on the power side, it's at least two years out to go to any site today. We have a unique advantage where we can convert facilities that we have with a much lower timeframe. So we're looking at executing contracts with companies that have a preference for getting capacity on sooner rather than later and right now we're at a very interesting intersection between bitcoin mining and HPC. We can be extraordinarily competitive on future site development, whether that's the 372 megawatts to complete on the bitcoin mining side or whether it's on any of the existing infrastructure that we have, which is 300 megawatts within our existing footprint and have the potential to convert to HPC. like locations, given their proximity to major metropolitan areas and also access to low latency to those metropolitan areas. So for us, we're looking for to the business really from two perspectives. The first is continue to execute on the mining side with the Persian Gulf infrastructure that we have. And then part two is looking at improving our business by improving the margins of our Bitcoin mining business by shifting potentially some of our existing sites to this new HPT. business, where we have long-term fixed-price contracts it gives us the opportunity to provide greater stability and free cash flow.

Jon Tower

Okay, great. And sorry if I missed it Winnercomm, when does the revenue from the contract start kicking in we expect the revenue from the contract for this to start showing up on our income statement at some point over the next few months. And so that's what we look forward.
To over the course of the next the next few earnings calls.
Thank you.

Operator

Our next question today is from the line of Lucas Pipes with B. Riley Lucas. Your line is now open. Please go ahead.

Lucas Pipes

Thank you very much, operator, and good afternoon, everyone. Thanks for the update. Good to hear your voice on Adomite. My first question is on the on the fleet upgrade, can you remind us kind of the timing of the extra half addition side in general kind of the size of the opportunity? And then I think you mentioned the CapEx budget earlier on the call, but if you could just refresh that as well.
I would appreciate. Thank you.

Sure. The fit here for me, Lucas. Yes, so let's talk about the minor refresh more broadly first, and we'll say again. So on a minor refresh basis, what you see our existing portfolio is a consistent roll into newer generation initiatives. That's why we had machines in our average machine fleet today is about 26.79 tools for trash, but we're looking at consistent roll into newer generation machines and to do it on a more consistent basis. That's how we're thinking about this business going forward is constantly having the ability to refresh the lower CapEx cycles because if you refresh all of our machines at once you're essentially creating maturity walls for that next CapEx cycle, reactor refresher and charter fleet. So you're seeing the first few deals that we've announced, the XP. deal that was part of our emergence. And then the S21 deal that was also announced in January, the S21 deal. That was an opportunity where we actually were able to accelerate the delivery based on accelerating payments for that contract interaction point for some of those deliveries to earlier part in Q2 of this year. So as we look forward to the rest of this year, we're going to look for more consistent mission purchases and we're going to be updating the market as we go for full. We'll be looking to pay for those out of operating free cash flow, some played out in our business plan. And on the infrastructure side, you're putting up 72 megawatts of infrastructure advantage and that's going to cost us $20 million to complete that site or to complete those next 72 megawatts. And so that would be paid for over the course of 2024.

Lucas Pipes

Got it.
Thank you for that. And then, Tom, on slide 18, I have a question on how to think about the operational cost. The $0.65, our Aclara hash, and I assume that this is mostly a fixed cost. So as you kind of refresh net miners have that excess cash, it doesn't really increase linearly, but would appreciate if that's kind of how to think about that, that number going forward in a rising?
It's a harsh environment, of course, Tony,

When you look at that on page 18, you're referencing the $0.65 in cash costs. We are part of that is definitely a fixed cost of the operations team. And but then there are also parts of it that are variable as well related to facility level expenses that are outside of the cost of power. So these are direct costs that are incurred and some of it would scale as we continue to scale our infrastructure fleet. But in terms of the amount of operating costs, this is something that we would expect to achieve operating leverage on going forward as we continue to increase the size of our infrastructure.

Lucas Pipes

All right. I appreciate it. I'll turn it over for now and the best of luck it.

Operator

Our next question today is from the line of Rosemary Sisson of Odeon Capital Group versus your line is now a nice, thank you.

Rosemary Sisson

And thank you for taking the questions on our side. Curious about whether you would comment on the plan that was part of the bankruptcy filing, whether you believe that you are those numbers still kind of in line with your expectations, at least or before current year.

This is the guidance that we gave at the end of the end of the year. The call was that our guidance is in line with our business plan. So developing the next 72 megawatts of infrastructure and the 21.8 and extra hash expected our fleet by year end of 2024.
So from the perspective of the business plan. We're really focused on that from a CapEx perspective and focused on it from a growth perspective. So those are really the two key areas and that we believe will be consistent along with our business plan that was filed.

Rosemary Sisson

Okay, thank you for that. And do you and do you expect that there could be any any change in your power costs going forward? I mean, you obviously mentioned the cost that you expect coming up, but is that kind of set in stone or is that or could there be variability to that part power costs?

Yes.
And we gave guidance of $0.045 to $0.047. There's there is potential to be a bit of a range on power prices but this is something where we have high confidence in our ability to execute that range that we provided for this year.
If you go and you look back to previous years, there are events that can cause changes in natural gas pricing mechanisms, potential effects, not only in current years but future years. But right now, we have we have high confidence in our ability to execute on the existing guidance that we provide are related to power prices on one called.

Rosemary Sisson

Thank you very much.

Thanks, Robert.

Operator

Our next question today is from the line of Joseph Vafi of Canaccord Genuity. Joseph, your line is now open.

Joseph Vafi

Everyone, a good afternoon, and thank you for taking a couple of my questions. Maybe we'll just kind of focus a little bit more on the upcoming having I know you mentioned in your prepared remarks your operating cost per bitcoin. Clearly at these spot prices, you're going to remain profitable on on on a halving of that. Just wanted to drill down a little bit into some of your thoughts or how you're planning your operations for the year, maybe your expectations on perhaps where network difficulties may go post having? I know that's pretty hard to kind of forecast, but Tom, and then if you looked at your mining fleet, I guess would you be unplugging any of your miners post having versus where you are now? Thanks a lot.

Appreciate that, Joe. So let's cover our preparations of having first. We think about it really three distinct buckets, operations, software and energy.
On the operation side, obviously, we're looking first at a minor refresh. We have the two previous announcements as we look to refresh and lower our average fuels per tire ash in the second part is that we've actually been relocating our machines based on their efficiency within our portfolio of facilities based on the power price and other economic earned other environmental conditions to allow us to maximize profitability. That's really one of the operation side.
On the software side, we've rolled out new modes to adapt to changing economic conditions. So that's both over clocking and under clocking and providing us the opportunity to rapidly move. Our average tools for care has even lower based on changing economic conditions which can extend the life and improve the profitability of our machines based on different cash price assumptions.
Lastly, we talked a little bit about this earlier, but on the energy side, we've been working with all of our power providers to develop more advanced strategies that potentially increase intermittency in exchange for lower power prices. And so that's something that we've been working on, given our experience working with some of the largest utilities in the United States to be able to introduce new types of programs and work collaboratively with our energy providers to be able to lower our average power. So that's really 0.1 weeks. We definitely completed significant and rigorous scenario planning around many different cash price assumptions. And so we feel we're very prepared for this upcoming half.
Now point to as a It definitely is interesting question related to our expectations around the how the bitcoin price will influence, how much hash rate stays online. Post that Bitcoin prices were to stay flat to where they are today. You'd expect to see less hash rate come off-line for this specific point was at 50,000. So as the starters, I believe based on what we're seeing from the data in previous generation units that are on the network, let's call it 38 tools for tariffs for later, which represents probably somewhere between 10% to 15% of the hash rate comes offline as they're not profitable anymore.
Given next step is to understand the efficiency mix versus power prices to really provide what the next step of machines that are going to come offline around the halving.
What I mean by that, are you how are older generation units and newer generation units allocated amongst the various power prices on the bitcoin network. So that's really been the next steps to understand how much more hash rate may come offline and then the last question here is how long the unprofitable I understand why the answer could be some of them shut off immediately. But the truth is many of them may stay online in hopes that network difficulty drops in minor margins improve. So for us, the way we're thinking about this upcoming having at the minimum, we're expecting somewhere in the range was about a 10% to 15% difficulty drop. And we believe based on the shift that we made across our portfolio and we would have our existing miner fleet be profitable across our portfolio, and that's something that we've worked really hard to achieve.

Joseph Vafi

But so that's really helpful. Thank you, Adam. And then just one more question on the having I know you're focused on larger hosting customers. How does how are you looking at having having positive or negative effects on your hosting business and your strategy there? Thank you very much.

Yes, so it's interesting, right. We're going to we're having with high house prices. It's really yet to be known what the house price will be post having. But if house prices stay high and older generation units stay online infrastructure. And this industry has become a point to be extraordinarily constrained. This is something that we like to capitalize on the business, and we always say that our hosting business is really optionality that we have inside of our infrastructure portfolio to capitalize on moments in time with infrastructure trades at a premium. And so there are different outcomes that could potentially occur post having. But we're in constant dialogue with potentially large hosting clients to host the newest generation of machines that provide us either strategic opportunities for instance, like our hosting agreement with Pitney or different types of financial opportunities like the proceeds sharing arrangements that we announced last year that provide us economic benefits similar to self mining and we like those types of opportunities going forward. And we're going to continue to be very opportunistic on the hosting side as we evaluate new and larger hosting clients that we could take inside of our portfolio.

Joseph Vafi

Great. Thank you very much.
Yes.

Operator

Our next question today is from the line of Kevin Dede of H.C. Wainwright.
Kevin, your line is now open. Please go ahead.

Kevin Dede

Thanks. Thanks for having me, Adam and Denise, appreciate it. I guess I would piggyback on Joe's question. How know your competitors maligned the hosting business? I think you tried to get to this, but can you withstand as a hosting arrangement to that same sort of $0.04 cash cost level at what at what point or what hedge price, would you have to make some drastic changes to the arrangements that you have with your existing customers?

We've been really cognizant of this over the course of 2023 and so one of the main focuses we had over the course of 2023 was ensuring that the hosting clients that we took on were financially strong companies. And we're providing us with the newest generation mission. So as we moved into 2024, obviously, with having coming up next month, we wanted to be we wanted to ensure that we are in a position where we felt comfortable with not only our hosting counterparties, but also the mix that we are hosting for them. So where we stand today, we have a very strong hosting portfolio. We're evaluating new opportunities in the hosting mix to potentially add to our base. And going forward, we're always going to use hosting as an opportunistic business and if economics change dramatically, like we've seen in the course of 2022, we would be able to replace hosting clients with newer generation equipment and new hosting clients to be able to refit those existing and open slots be have to increase the profitability of that business once again.

Kevin Dede

Could you just sort of dig in a little bit, Adam, on the infrastructure costs associated with the HPC. business, given your excitement and work with core, we've again, I you mention and I totally agree that your infrastructure has great value, but the machine or the buildings you have at Denton aren't necessarily amenable to running HPC machine. So could you kind of give us an outline on how you would convert existing infrastructure build out future infrastructure to address that?

Yes. So we I mean, we've been in contact with some of the largest providers of cards in the industry, have to be able to work on how to retrofit existing facilities. This is something that's not uncommon in the data center industry. You see brownfield infrastructure being converted to data centers. And if you take a look at our designs for our facilities, they're actually just pared back data centers that have been developed over the course of the data center industry many years ago to we believe our infrastructure base. And we completely agree that it would be additional costs related to converting some of our existing facilities. But we believe with the counterparties that we're in discussions with that there will be opportunities for CapEx to be partially covered as part of the contractual arrangements with our clients, given the fact that there's such a high time preference right now, to get infrastructure online more quickly. These companies have to prove that they can scale. They have to prove that they can bring machines online, and that's something that we can provide given our advantage of owning our own infrastructure today. So this is something that we've been in deep discussions with a number of different companies, and we're really excited about the opportunities that exist and over the course of not only 2024. But beyond that, I touched on infrastructures that three to five-year game. The power right now at bare minimum is two plus years away for these data center companies. So this is a this is a big opportunity for us to be able to execute on to be able to bring down the time to market for a number of these companies. And there are a number of opportunities on the infrastructure side that can be brought in to help bringing that existing infrastructure that we have really up to the needs of the clients that we've been speaking to.

Kevin Dede

Just a real quick one for Denise. How are you how are you thinking about implementing the new FASB. on mark-to-market in your bitcoin holdings?

Yes, Eric, it's a great question, Kevin. And as you know me, we actually stopped holding bitcoin on our balance sheet in 2022, we actually will adopt as of one one, 25 or 24. I apologize, but it really doesn't have a significant impact on us. We did see a significant improvement in our adjusted EBITDA as we talked in our prepared remarks. And that was really based on the fact that we saw the the change year over year in the impairments. So while our our competitors are actually seeing a significant improvement as they are taking into consideration the actual ability to write up their asset base, as you can see by our financial results, there really wasn't a significant difference between and where we are today and the application of the new standard.

Kevin Dede

Thank you.

Operator

Our next question today is from the line of Jack Chan of Imperial Capital. Jack, your line is now open. Please go ahead.

Jack Chan

Could you guys see any opportunities for JVs or partnerships, perhaps too accelerate the self mining growth plan or perhaps to also accelerate the growth of the high compute?

Thanks, Jack. I mean, right now, what we're focused on is focused on executing this plan our business plan laid out our continued growth via funding out of operating free cash flow. There may be opportunities going forward that we may evaluate on the HPC side related to joint ventures, but this is something that we believe the team we've put together over the course of the past few years. If you think about the team that we developed in house, right? We built a team that scales and develop the largest infrastructure base in North America for Bitcoin mining. And this team is coming from the traditional data center industry to have an opportunity to execute on a very unique opportunity that will exist over the course of the next three to five years. And so right now, we're really just focused on building this out organically, finding good partners and good and clients that will work with us given our ability to execute more quickly. And so that's really our focus today on the HPC side.
And on the bitcoin mining side, this is something where the largest mine in North America. I mean something that you need to remember is we've been setting the pace in 2021, 2022, 2023, we mined more bitcoin than any minor North America, and it appears we're setting the pace again in 2024.

Jack Chan

Appreciate that on the interest rate for your converts, how you're thinking about the cash pay versus the toggle option? Or will there be an announcement on such?

This is something that we evaluate and we can evaluate on a quarterly basis. And so that's something that we're still evaluating today for the first half, rounded in at the end of Q2.
So you will be able to provide more updates to the market as we make decisions around whether we're choosing the 6% cash, 6% tech or the 10% cash.

And the only other thing to add is, you know, as we've actually detailed out our debt service on Slide 17, just to make sure that it says that it's clear that we do actually anticipate in the projections that we have included on slide 17 that we are looking at the option of the 6% cash and 6% pick that I'm suggesting that it is going to be a quarterly decision going forward.

Operator

Our next question today is from the line of Greg Lewis of BTIG. group. Your line is now open. Please go ahead.

Gregory Lewis

Yes. Thank you, everybody, and thanks for taking my question. I had I was hoping you could talk a little bit about how you're thinking about allocating capital. And I mean, clearly, you've been upgrading the rig fleet on 20 at 27 Joe's tire Azure. But as you think about deploying those incremental dollars, how are you weighing the benefits of just using getting better efficiency out of your existing infrastructure and executing that long term infrastructure expansion, which you kind of laid out in the presentation?

Yes. Right now we are we're hyper-focused on executing our business plan right now executing that business plan is definitely putting additional cash on balance sheet given where mining economics are today. And so we're having that opportunity prior to this upcoming having to put additional cash on balance sheet for us to feel more comfortable around playing through different types of house price scenarios.
As I mentioned earlier, priority to paying down debt. But the plans the path to deleveraging that is embedded in our capital structure today is an opportunity for us to be able to fully delever based on strong execution of our company. And so what that really looks like we have $600 million in debt of just over $600 million. We have a $260 million convert. That has a mandatory conversion feature. And so that leaves about $340 million in regular way debt. We have $670 million upon full exercise that tranche one warrant. And so right now, all of those, the Tranche one warrant, the conversion, the mandatory conversion of the convertible note, those are all things that are within reach if we just start trading somewhat closer to the mean of our peer group in our industry. So we believe upon strong execution of our business plan, continuing to outperform while the opportunity to pay down the debt through that pathway and an optionality that's embedded in our in our capital structure. And so really, that's our focus right now execute, put cash on balance sheet and work towards a pathway to deleveraging and moving to a positive net cash position.

Gregory Lewis

Super helpful. Thanks, Adam.

Operator

And our next question today is from the line of Darren Aftahi of Roth MKM DOWN. Please go ahead.

Darren Aftahi

Hey, guys. Thanks for taking my questions. I had was the live call. So excuse me, if any this document asset.
Adam, I'm curious, two things on your agreement with core even in the broader strategy there. So first, have you expanded your megawatts into HHPC.? What does this call. We have out there on that, but the ore is about progress.

Any future developments that we make. And we mentioned the 300 megawatts of opportunity within our existing infrastructure base that's up for grabs from the perspective of we have a great relationship with core. We've been in discussions with a number of other counterparties. And for us, it comes down to decision of working with given the contracts are longer dated or seven years as an eternity for most likely mining companies. But the data center industry battle, that's really the standard. And so we're going to be working with these clients over a number of years. We wanted to diversify our customer base over time. And so we're evaluating a number of different opportunities. And you have to remember right now, there's a high time preference in this industry to get capacity online more quickly into opportunities that allow for our clients still to bring capacity online more quickly and the type of contract that we'd be looking to execute on.

Darren Aftahi

And then when you look at return on invested capital and you talked about retrofitting some of these buildings, like how does that calculus work in looking at IHPCIAIRML. client with a longer-term time horizon relative to going down the DTCPAP.?
Thanks.

Yes, I mean, the way we're thinking about it right now is there's there's refresh cycles on machines as well on Bitcoin mining machines. And so there's always additional dollars that need to be spent over the course of time, even to maintain a profitable mining business in any given site. So we're definitely evaluating different types of contracts with potential clients that allow for them to pay for some or a majority of that CapEx. And so it provides us an opportunity to get strong return on the invested capital that we will be making. And so that's really something that we've been evaluating. There's obviously something that we evaluated the first deal that we signed with Corley who we believe will have a return on that invested capital inside it inside of a year.

Operator

Our next question today is from the line of Josh Siegel of Cantor Fitzgerald.
Josh, your line is now.

Joshua Siegel

Yes, hi, guys. Thanks for taking my questions today. Look, I'd love to get a little more color on how you're thinking about energy, especially as you expand into Texas, how are you thinking about navigating the Texas energy market?

Thanks, Josh. I mean, we've been in Texas for a number of years and we have two sites in Texas so we have our Denton facility and our Bakers locations. So the way we're thinking about power and we say in Texas over the course of the past few years, you've seen long term fixed price PPAs increase over the course of time, even renewable PPAs have increased over the course of the past few years. And so the opportunities to go longer dated today aren't as opportunistic for us as looking at shorter dated PPAs. Those also provide greater flexibility around collateral and margin. And so we've been looking at executing the shorter dated fixed price PPAs that provide us the coverage to that any potential downside risk as power prices could move in either direction. But it also provides us the opportunity to be able to be much more planful around the types of machines that we put at those sites. The power prices are constantly changing over the course of time that influences the efficiency of the machines that you're putting there. And so we're very well versed. It's in real and allocating machines based on site level profitability based on changing economic conditions. And one of the things that we're really proud of. We've built our own energy management software in house. This qualifies us for even the highest program inside of Texas, which are some of the most stringent requirements across the United States, and we've been able to qualify for office. And so that's something that we believe is unique to us. All of that capability is in house. It's not we're not relying on third party software provider to that. So not only do we feel we have a good strategy on the power hedging side, but also our internal capabilities our accept are exceptional in this industry.

Joshua Siegel

Great. Appreciate it. That's very helpful. Color on switching gears a little bit the HPC side of things. I was wondering if you guys have considered cloud compute? And if so, what made you expect with the direction of sufficient footprint?

If you think about what we're really good at, right, we're really great at building infrastructure at scale rapidly and better than anyone else. And that's something that we've proven over the course of the past few years in the bitcoin mining side, building infrastructure that's better than the rest of the industry and faster than the rest of the industry. That's what we're really good at our design and development team on the infrastructure side comes out of the traditional data center industry. And so we need we're thinking about our core competencies here in our core competencies, our designing, developing and operating digital infrastructure at scale with great efficiency and that's something that we really pride ourselves on that we've been able to execute on better than anyone else in bitcoin mining. And we're expecting similar results on the digital infrastructure side as well.

Operator

Our next question today is from the line of Lucas Pipes of B. Riley Dukes. Your line is open. Please go ahead.

Lucas Pipes

Thank you very much for taking my follow-up questions. I first first, Adam, sorry if I missed it, but what's the what's the CapEx budget for the miners In '24.

But the pure computing we have that's something that we haven't announced yet. That's something that we're currently working through, and we're going to be opportunistic over the course of 2024 related to how miners are priced for the founding what I can say right now is the X P's, any S1 ones that reported so far for this year that have been announced, we've made all the payments required in 2024 on both of those deals. So we're very comfortable from where we're at today.
The only planned CapEx on the infrastructure side is our is the $20 million relates to the Denton expansion, and we'll continue to evaluate future minor purchases as we go through as we go through that happens.

Operator

Thank you.
This will conclude the question-and-answer session for today.
So I would like to hand back to Steve Gilman for any closing remarks.

Thank you very much, Gary, and thank you all for your attention and your interest in core scientific An archived version of this call. All SEC filings and relevant Company and industry news can be found on our website, core scientific.com. We wish you a good day and we look forward to speaking with you again following next quarter's results.

Operator

This concludes today's call and thank you all for joining. You may now disconnect your lines.