Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based upon
management’s current expectations and are subject to various uncertainties and
changes in circumstances. Important factors that could cause actual results to
differ materially from those described in these forward-looking statements are
set forth below under the heading “Forward-Looking Statements.”
Management’s Discussion and Analysis of Financial Condition and Results of
Operations include NACCO Industries, Inc.® (“NACCO”) and its wholly owned
subsidiaries (collectively, the “Company”). NACCO brings natural resources to
life by delivering aggregates, minerals, reliable fuels and environmental
solutions through its robust portfolio of NACCO Natural Resources businesses.
The Company operates under three business segments: Coal Mining, North American
Mining (“NAMining”) and Minerals Management. The Coal Mining segment operates
surface coal mines for power generation companies. The NAMining segment is a
trusted mining partner for producers of aggregates, coal, lithium and other
industrial minerals. The Minerals Management segment, which includes the
Catapult Mineral Partners (“Catapult”) business, acquires and promotes the
development of mineral interests. Mitigation Resources of North America®
(“Mitigation Resources”) provides stream and wetland mitigation solutions.
The Company has items not directly attributable to a reportable segment that are
not included as part of the measurement of segment operating profit, which
primarily includes administrative costs related to public company reporting
requirements at the parent company and the financial results of Mitigation
Resources and Bellaire Corporation (“Bellaire”). Bellaire manages the Company’s
long-term liabilities related to former Eastern U.S. underground mining
activities.
Effective January 1, 2022, the Company changed the composition of its reportable
segments. As a result, the Company retrospectively changed its computation of
segment operating profit to reclassify the results of Caddo Creek Resources
Company, LLC (“Caddo Creek”) and Demery Resources Company, LLC (“Demery”) from
the Coal Mining segment into the NAMining segment as these operations provide
mining solutions for producers of industrial minerals, rather than for power
generation. The Coal Mining segment now includes only mines that deliver coal
for power generation. This segment reporting change has no impact on
consolidated operating results. All prior period segment information has been
reclassified to conform to the new presentation.
All financial statement line items below operating profit (other income,
including interest expense and interest income, the provision for income taxes
and net income) are presented and discussed within this Form 10-Q on a
consolidated basis.
The Company’s operating segments are further described below:
Coal Mining Segment
The Coal Mining segment, operating as The North American Coal Corporation®
(“NACoal”), operates surface coal mines under long-term contracts with power
generation companies pursuant to a service-based business model. Lignite coal is
surface mined in North Dakota, Texas and Mississippi. Each mine is fully
integrated with its customer’s operations and is the exclusive supplier of coal
to its customers’ facilities.
During the three months ended March 31, 2022, the Coal Mining segment’s
operating coal mines were: The Coteau Properties Company (“Coteau”), Coyote
Creek Mining Company, LLC (“Coyote Creek”), The Falkirk Mining Company
(“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining
Company (“Sabine”). Each of these mines deliver their coal production to
adjacent power plants or synfuels plants under long-term supply contracts.
MLMC’s coal supply contract contains a take or pay provision; all other coal
supply contracts are requirements contracts under which earnings can fluctuate.
Certain coal supply contracts can be terminated early, which would result in a
reduction to future earnings.
During the three months ended March 31, 2021, the Coal Mining segment’s
operating coal mines also included Bisti Fuels Company, LLC (“Bisti”). Effective
September 30, 2021, the contract mining agreement between Bisti and its
customer, Navajo Transitional Energy Company (“NTEC”), was terminated.
Coteau operates the Freedom Mine in North Dakota. All coal production from the
Freedom Mine is delivered to Basin Electric Power Cooperative (“Basin
Electric”). Basin Electric utilizes the coal at the Great Plains Synfuels Plant
(the “Synfuels Plant”), Antelope Valley Station and Leland Olds Station. The
Synfuels Plant is a coal gasification plant, owned by Dakota Gasification
Company (“Dakota Gas’), a subsidiary of Basin Electric, that manufactures
synthetic natural gas and produces fertilizers,
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solvents, phenol, carbon dioxide, and other chemical products for sale. During
2020, Basin Electric informed Coteau that it is considering changes that may
result in modifications to its Synfuels Plant that could potentially reduce or
eliminate coal requirements at the Synfuels Plant. During 2021, Bakken Energy
(“Bakken”) and Basin Electric signed a non-binding term sheet to transfer
ownership of the assets of Dakota Gas to Bakken. Bakken stated the closing date
is expected to be April 1, 2023. The closing is subject to the satisfaction of
specified conditions. As part of the term sheet between Basin Electric and
Bakken, Basin Electric indicated that the Synfuels Plant will continue existing
operations through 2026. Basin Electric is also considering other options for
the Synfuels Plant if the transaction with Bakken does not close. Basin Electric
indicated that if it decides to proceed with any changes that could reduce or
eliminate the use of coal, the feedstock change is not expected to occur before
2027.
Falkirk operates the Falkirk Mine in North Dakota. Falkirk is the sole supplier
of lignite coal to the Coal Creek Station power plant pursuant to a contract
under which Falkirk also supplies approximately 0.3 million tons of lignite coal
per year to Spiritwood Station power plant. Coal Creek Station and Spiritwood
Station are owned by Great River Energy (“GRE”). In 2020, GRE announced its
intent to sell or retire Coal Creek Station and modify Spiritwood Station to be
fueled by natural gas. During 2021, GRE entered into an agreement to sell Coal
Creek Station and the adjacent high-voltage direct current transmission line to
Bismarck, North Dakota-based Rainbow Energy Center, LLC (“Rainbow Energy”) and
its affiliates. On May 2, 2022, GRE completed the sale of the Coal Creek Station
power plant and the adjacent high-voltage direct current transmission line to
Rainbow Energy. See Note 9 for further discussion of the transactions.
Sabine operates the Sabine Mine in Texas. All production from Sabine is
delivered to Southwestern Electric Power Company’s (“SWEPCO”) Henry W. Pirkey
Plant (the “Pirkey Plant”). SWEPCO is an American Electric Power (“AEP”)
company. AEP intends to retire the Pirkey Plant in 2023. Sabine expects
deliveries to cease during the first quarter of 2023 at which time it expects to
begin final reclamation. Funding for mine reclamation is the responsibility of
SWEPCO.
At Coteau, Coyote Creek, Falkirk and Sabine, the Company is paid a management
fee per ton of coal or heating unit (MMBtu) delivered. Each contract specifies
the indices and mechanics by which fees change over time, generally in line with
broad measures of U.S. inflation. The customers are responsible for funding all
mine operating costs, including final mine reclamation, and directly or
indirectly provide all of the capital required to build and operate the mine.
This contract structure eliminates exposure to spot coal market price
fluctuations while providing income and cash flow with minimal capital
investment. Other than at Coyote Creek, debt financing provided by or supported
by the customers is without recourse to NACCO and NACoal. See Note 6 for further
discussion of Coyote Creek’s guarantees.
Coteau, Coyote Creek, Falkirk and Sabine each meet the definition of a VIE. In
each case, NACCO is not the primary beneficiary of the VIE as it does not
exercise financial control; therefore, NACCO does not consolidate the results of
these operations within its financial statements. Instead, these contracts are
accounted for as equity method investments. The income before income taxes
associated with these VIEs is reported as Earnings of unconsolidated operations
on the Unaudited Condensed Consolidated Statements of Operations and the
Company’s investment is reported on the line Investments in unconsolidated
subsidiaries in the Unaudited Condensed Consolidated Balance Sheets. The mines
that meet the definition of a VIE are referred to collectively as the
“Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries
are included within the NACCO consolidated U.S. tax return; therefore, the
income tax expense line on the Unaudited Condensed Consolidated Statements of
Operations includes income taxes related to these entities. See Note 6 for
further information on the Unconsolidated Subsidiaries.
The Company performs contemporaneous reclamation activities at each mine in the
normal course of operations. Under all of the Unconsolidated Subsidiaries’
contracts, the customer has the obligation to fund final mine reclamation
activities. Under certain contracts, the Unconsolidated Subsidiary holds the
mine permit and is therefore responsible for final mine reclamation activities.
To the extent the Unconsolidated Subsidiary performs such final reclamation, it
is compensated for providing those services in addition to receiving
reimbursement from customers for costs incurred.
The MLMC contract is the only operating coal contract in which the Company is
responsible for all operating costs, capital requirements and final mine
reclamation; therefore, MLMC is consolidated within NACCO’s financial
statements. MLMC sells coal to its customer at a contractually agreed-upon price
which adjusts monthly, primarily based on changes in the level of established
indices which reflect general U.S. inflation rates. Profitability at MLMC is
affected by customer demand for coal and changes in the indices that determine
sales price and actual costs incurred. As diesel fuel is heavily weighted among
the indices used to determine the coal sales price, fluctuations in diesel fuel
prices can result in significant fluctuations in earnings at MLMC.
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MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The
Red Hills Power Plant supplies electricity to the Tennessee Valley Authority
(“TVA”) under a long-term Power Purchase Agreement. MLMC’s contract with its
customer runs through 2032. TVA’s power portfolio includes coal, nuclear,
hydroelectric, natural gas and renewables. The decision of which power plants to
dispatch is determined by TVA. Reduction in dispatch of the Red Hills Power
Plant will result in reduced earnings at MLMC.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for
producers of industrial minerals. The segment is a primary platform for the
Company’s growth and diversification of mining activities outside of the thermal
coal industry. NAMining provides contract mining services for independently
owned mines and quarries, creating value for its customers by performing the
mining aspects of its customers’ operations. This allows customers to focus on
their areas of expertise: materials handling and processing, product sales and
distribution. NAMining historically operated primarily at limestone quarries in
Florida, but is focused on expanding outside of Florida, mining materials other
than limestone and expanding the scope of mining operations provided to its
customers.
NAMining utilizes both fixed price and management fee contract structures.
Certain of the entities within the NAMining segment are VIEs and are accounted
for under the equity method as Unconsolidated Subsidiaries. See Note 6 for
further discussion.
Minerals Management Segment
The Minerals Management segment derives income primarily by leasing its royalty
and mineral interests to third-party exploration and production companies, and,
to a lesser extent, other mining companies, granting them the rights to explore,
develop, mine, produce, market and sell gas, oil, and coal in exchange for
royalty payments based on the lessees’ sales of those minerals.
During 2021 and 2020, the Minerals Management segment acquired mineral
interests, primarily in the Eagle Ford and Permian Basins in Texas. During the
first quarter of 2022, the Minerals Management segment had capital expenditures
of $0.8 million, primarily for mineral interests in the New Mexico portion of
the Permian Basin. The Minerals Management segment intends to make future
acquisitions of mineral and royalty interests that meet the Company’s
acquisition criteria as part of its growth strategy.
The Company’s legacy royalty and mineral interests are located in Ohio (Utica
and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley
formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural
gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus
shale natural gas), Alabama (coal, coalbed methane and natural gas) and North
Dakota (coal, oil and natural gas). The majority of the Company’s legacy
reserves were acquired as part of its historical coal mining operations.
The Minerals Management segment owns royalty interests, mineral interests,
nonparticipating royalty interests, and overriding royalty interests. The
Company may own more than one type of mineral and royalty interest in the same
tract of land. For example, where the Company owns an overriding royalty
interest in a lease on the same tract of land in which it owns a mineral
interest, the overriding royalty interest in that tract will relate to the same
gross acres as the mineral interest in that tract.
The Minerals Management segment will benefit from the continued development of
its mineral properties without the need for investment of additional capital
once mineral and royalty interests have been acquired. The Minerals Management
segment does not have any investments under which it would be required to bear
the cost of exploration, production or development.
As an owner of royalty and mineral interests, the Company’s access to
information concerning activity and operations of its royalty and mineral
interests is limited. The Company does not have information that would be
available to a company with oil and natural gas operations because detailed
information is not generally available to owners of royalty and mineral
interests.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to the discussion of the Company’s Critical Accounting Policies and
Estimates as disclosed on pages 45 through 46 in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2021. The Company’s Critical
Accounting Policies and Estimates have not materially changed since December 31,
2021.
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CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three months ended
March 31:
2022 2021
Revenues:
Coal Mining $ 20,962 $ 21,942
NAMining 21,404 17,939
Minerals Management 12,754 5,500
Unallocated Items 192 143
Eliminations (289) (419)
Total revenue $ 55,023 $
45,105
Operating profit (loss):
Coal Mining $ 7,352 $ 8,157
NAMining 1,271 657
Minerals Management 11,628 4,235
Unallocated Items (5,439) (4,773)
Eliminations 132 54
Total operating profit 14,944
8,330
Interest expense 513 356
Interest income (145) (120)
Closed mine obligations 380 383
Gain on equity securities (518) (823)
Other, net (230) (130)
Other expense (income), net –
(334)
Income before income tax provision (benefit) 14,944 8,664
Income tax provision (benefit) 2,362
(297)
Net income $ 12,582 $
8,961
Effective income tax rate 15.8 %
(3.4) %
The components of the change in revenues and operating profit are discussed
below in “Segment Results.”
First Quarter of 2022 Compared with First Quarter of 2021
Other expense (income), net
Gain on equity securities represents changes in the market price of invested
assets reported at fair value. The change in the first three months of 2022
compared with the 2021 period was due to fluctuations in the market prices of
the underlying assets. See Note 5 to the Unaudited Condensed Consolidated
Financial Statements for further discussion of equity securities.
Income Taxes
The Company recorded income tax expense of $2.4 million on income before income
tax of $14.9 million, or 15.8%, for the first quarter of 2022 compared with an
income tax benefit of $0.3 million on income before income tax of $8.7 million,
or (3.4%) for the first quarter of 2021. The Company evaluates and updates its
estimated annual effective income tax rate on a quarterly basis based on current
and forecasted operating results and tax laws. Consequently, based upon the mix
and timing of actual earnings compared to projections of earnings between
entities that benefit from percentage depletion and those that do not, the
effective tax rate may vary quarterly. Changes in the estimated annual effective
tax rate result in a cumulative adjustment. The effective income tax rate for
2022 reflects the impact of a higher forecast of full-year pre-tax income in
2022 compared with the prior year.
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The enactment of tax reform legislation could adversely impact the Company’s
financial position and results of operations. Legislation or other changes in
U.S. tax law could increase the Company’s tax liability and adversely affect its
after-tax profitability. The Biden administration has proposed to increase the
U.S. corporate income tax rate to 28% from 21% and eliminate certain U.S.
federal income tax benefits currently available to coal mining and oil and gas
exploration and development companies. Such proposed changes could have a
significant impact on the Company’s effective income tax rate, cash tax expenses
and deferred taxes in future periods.
LIQUIDITY AND CAPITAL RESOURCES OF NACCO
Cash Flows
The following tables detail NACCO’s changes in cash flow for the three months
ended March 31:
2022 2021 Change
Operating activities:
Net cash used for operating activities $ (1,070)
$ (910) $ (160)
Investing activities:
Expenditures for property, plant and equipment and
acquisition of mineral interests
(4,649) (4,876) 227
Other 120 29 91
Net cash used for investing activities (4,529) (4,847) 318
Cash flow before financing activities $ (5,599)
$ (5,757) $ 158
The $0.2 million change in net cash used for operating activities was primarily
due to net unfavorable changes in non-current assets and working capital, almost
entirely offset by an increase in earnings.
2022 2021 Change
Financing activities:
Net borrowings (reductions) to long-term debt and revolving
credit agreement $ 2,659 $ (2,187) $ 4,846
Cash dividends paid (1,445) (1,374) (71)
Net cash provided by (used for) financing activities $ 1,214
$ (3,561) $ 4,775
The change in net cash provided by (used for) financing activities was primarily
due to borrowings during the first three months of 2022 compared with repayments
during the first three months of 2021.
Financing Activities
Financing arrangements are obtained and maintained at the NACoal level. NACoal
has a secured revolving line of credit of up to $150.0 million (the “NACoal
Facility”) that expires in November 2025. Borrowings outstanding under the
NACoal Facility were $6.0 million at March 31, 2022. At March 31, 2022, the
excess availability under the NACoal Facility was $113.9 million, which reflects
a reduction for outstanding letters of credit of $30.1 million.
NACCO has not guaranteed any borrowings of NACoal. The borrowing agreements at
NACoal allow for the payment to NACCO of dividends and advances under certain
circumstances. Dividends (to the extent permitted by NACoal’s borrowing
agreement) and management fees are the primary sources of cash for NACCO and
enable the Company to pay dividends to stockholders.
The NACoal Facility has performance-based pricing, which sets interest rates
based upon NACoal achieving various levels of debt to EBITDA ratios, as defined
in the NACoal Facility. Borrowings bear interest at a floating rate plus a
margin based on the level of debt to EBITDA ratio achieved. The applicable
margins, effective March 31, 2022, for base rate and LIBOR loans were 1.25% and
2.25%, respectively. The NACoal Facility has a commitment fee which is based
upon achieving various levels of debt to EBITDA ratios. The commitment fee was
0.35% on the unused commitment at March 31, 2022. During the three months ended
March 31, 2022, the average borrowing under the NACoal Facility was $5.6 million
and the weighted-average annual interest rate was 2.6%.
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The NACoal Facility contains restrictive covenants, which require, among other
things, NACoal to maintain a maximum net debt to EBITDA ratio of 2.75 to 1.00
and an interest coverage ratio of not less than 4.00 to 1.00. The NACoal
Facility provides the ability to make loans, dividends and advances to NACCO,
with some restrictions based on maintaining a maximum debt to
EBITDA ratio of 1.50 to 1.00, or if greater than 1.50 to 1.00, a Fixed Charge
Coverage Ratio of 1.10 to 1.00, in conjunction with maintaining unused
availability thresholds of borrowing capacity, as defined in the NACoal
Facility, of $15.0 million. At March 31, 2022, NACoal was in compliance with all
financial covenants in the NACoal Facility.
The obligations under the NACoal Facility are guaranteed by certain of NACoal’s
direct and indirect, existing and future
domestic subsidiaries, and is secured by certain assets of NACoal and the
guarantors, subject to customary exceptions and
limitations.
The Company believes funds available from cash on hand, the NACoal Facility and
operating cash flows will provide sufficient liquidity to meet its operating
needs and commitments arising during the next twelve months and until the
expiration of the NACoal Facility in November 2025.
Expenditures for property, plant and equipment and mineral interests
Expenditures for property, plant and equipment and mineral interests were $4.6
million during the first three months of 2022. Planned expenditures for the
remainder of 2022 are expected to be approximately $19 million in the Coal
Mining segment, $26 million in the NAMining segment, $9 million in the Minerals
Management segment and $8 million at Mitigation Resources.
In the Coal Mining segment, elevated levels of expected capital expenditures
through 2022 are primarily related to spending at MLMC as it develops a new mine
area. In the NAMining segment, expected capital expenditures through 2022 are
primarily for the acquisition, relocation and refurbishment of draglines as well
as the acquisition of other mining equipment to support the expansion of
contract mining services beyond NAMining’s historical dragline-oriented model,
including the acquisition of equipment to support the Thacker Pass lithium
project.
Expenditures are expected to be funded from internally generated funds and/or
bank borrowings.
Capital Structure
NACCO’s consolidated capital structure is presented below:
MARCH 31 DECEMBER 31
2022 2021 Change
Cash and cash equivalents $ 81,620 $ 86,005 $ (4,385)
Other net tangible assets 299,281 276,733 22,548
Intangible assets, net 30,927 31,774 (847)
Net assets 411,828 394,512 17,316
Total debt (25,538) (20,710) (4,828)
Bellaire closed mine obligations (21,796) (21,686) (110)
Total equity $ 364,494 $ 352,116 $ 12,378
Debt to total capitalization 7% 6% 1%
The increase in other net tangible assets at March 31, 2022 compared with
December 31, 2021 was primarily due to:
•An increase in Prepaid insurance due to timing;
•A decrease in Accrued payroll for payments made during the first quarter of
2022 under incentive compensation plans; and
•An increase in Property, plant and equipment.
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Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2021, there have been no significant changes in the total
amount of NACCO’s contractual obligations, contingent liabilities or commercial
commitments, or the timing of cash flows in accordance with those obligations as
reported on pages 50 through 51 in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2021. See Note 6 to the Unaudited Condensed
Consolidated Financial Statements for a discussion of certain guarantees related
to Coyote Creek.
SEGMENT RESULTS
COAL MINING SEGMENT
FINANCIAL REVIEW
Tons of coal delivered by the Coal Mining segment were as follows for the three
months ended March 31:
2022 2021
Unconsolidated operations 6,317 7,510
Consolidated operations 732 835
Total tons delivered 7,049 8,345
The results of operations for the Coal Mining segment were as follows for the
three months ended March 31:
2022 2021
Revenues $ 20,962 $ 21,942
Cost of sales 18,850 20,090
Gross profit 2,112 1,852
Earnings of unconsolidated operations(a) 13,326 14,162
Selling, general and administrative expenses 7,239 6,914
Amortization of intangible assets 847
982
Gain on sale of assets – (39)
Operating profit $ 7,352 $ 8,157
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for
a discussion of the Company’s unconsolidated subsidiaries, including summarized
financial information.
Revenues decreased 4.5% in the first quarter of 2022 compared with the first
quarter of 2021 primarily due to a reduction in tons delivered at MLMC that was
only partially offset by an increase in the per ton sales price at MLMC.
The following table identifies the components of change in operating profit for
the first quarter of 2022 compared with the first quarter of 2021:
Operating Profit
2021 $ 8,157
Increase (decrease) from:
Earnings of unconsolidated operations (836)
Selling, general and administrative expenses (325)
Gain on sale of assets (39)
Gross profit 260
Amortization of intangibles 135
2022 $ 7,352
Operating profit decreased $0.8 million in the first quarter of 2022 compared
with the first quarter of 2021 primarily due to a decrease in earnings of
unconsolidated operations and an increase in selling, general and administrative
expenses, partially offset by an increase in gross profit.
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The decrease in earnings of unconsolidated operations was primarily due to the
Bisti contract termination as of September 30, 2021, the reduction in fees
earned at Liberty Fuels Company, LLC as the scope of final reclamation
activities declined and a decrease in customer demand at Sabine. These decreases
were partially offset by contractual price escalation at Coteau.
The increase in selling, general and administrative expenses was primarily due
to higher professional service expenses partially offset by a decrease in
employee-related costs.
Gross profit increased in the first quarter of 2022 compared with the first
quarter of 2021 as the 2022 period included a refund of certain costs associated
with the termination of the Camino Real Fuels, LLC contract mining agreement.
NORTH AMERICAN MINING (“NAMining”) SEGMENT
FINANCIAL REVIEW
Tons delivered by the NAMining segment were as follows for the three months
ended March 31:
2022 2021
Total tons delivered 13,962 12,675
The results of operations for the NAMining segment were as follows for the three
months ended March 31:
2022 2021
Total revenues $ 21,404 $ 17,939
Reimbursable costs 12,016
12,500
Revenues excluding reimbursable costs $ 9,388 $ 5,439
Total revenues $ 21,404 $ 17,939
Cost of sales 19,650 16,977
Gross profit 1,754 962
Earnings of unconsolidated operations(a) 1,266 1,180
Selling, general and administrative expenses 1,754 1,487
Gain on sale of assets (5) (2)
Operating profit $ 1,271 $ 657
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for
a discussion of the Company’s unconsolidated subsidiaries, including summarized
financial information.
Total revenues increased 19.3% in the first quarter of 2022 compared with the
first quarter of 2021 primarily due to an increase in customer demand and tons
delivered as well as an increase in revenue related to reclamation at Caddo
Creek.
The following table identifies the components of change in operating profit for
the first quarter of 2022 compared with the first quarter of 2021:
Operating Profit
2021 $ 657
Increase (decrease) from:
Gross profit 792
Earnings of unconsolidated operations 86
Gain on sale of assets 3
Selling, general and administrative expenses (267)
2022 $ 1,271
Operating profit increased $0.6 million in the first quarter of 2022 compared
with the first quarter of 2021 primarily due to an increase in gross profit,
partially offset by an increase in selling, general and administrative expenses.
The increase in gross profit was primarily attributable to the earnings
associated with the reclamation contract at Caddo Creek, partially offset by a
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decrease in gross profit from the active operations primarily due to an increase
in employee-related costs. The increase in selling, general and administrative
expenses was mainly due to higher employee-related costs.
MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
The results of operations for the Minerals Management segment were as follows
for the three months ended March 31:
2022 2021
Revenues $ 12,754 $ 5,500
Cost of sales 748 687
Gross profit 12,006 4,813
Selling, general and administrative expenses 509 578
Gain on sale of assets (131) –
Operating profit $ 11,628 $ 4,235
Revenues and operating profit increased significantly in the first quarter of
2022 compared with the first quarter of 2021 primarily due to favorable changes
in natural gas and oil prices, as well as $2.1 million of settlement income
recognized during the first quarter of 2022. The settlement relates to the
Company’s ownership interest in certain mineral rights.
During the first quarter of 2022, the oil and natural gas industry experienced
continued improvement in commodity prices compared to the first quarter of 2021,
primarily due to:
•Higher demand as the impact from COVID-19 abates;
•Changes in domestic supply and demand dynamics as well as increased discipline
around production and capital investments by oil and gas companies; and
•Instability and constraints on global supply, particularly with respect to
instability in Russia and Ukraine.
Oil and natural gas prices have been historically volatile and may continue to
be volatile in the future. The table below demonstrates such volatility with the
average price as reported by the United States Energy Information Administration
for the three months ended March 31:
2022 2021
West Texas Intermediate Average Crude Oil Price $ 94.45 $ 57.79
Henry Hub Average Natural Gas Price $ 4.66 $ 3.56
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Unallocated Items and Eliminations were as follows for the three months ended
March 31:
2022 2021
Operating loss $ (5,307) $ (4,719)
The operating loss increased $0.6 million in the first quarter of 2022 compared
with the first quarter of 2021 primarily due to higher employee-related costs
and business development activities.
NACCO Industries, Inc. Outlook
Coal Mining Outlook – 2022
On May 2, 2022, GRE completed the sale of the Coal Creek Station power plant and
the adjacent high-voltage direct current transmission line to Rainbow Energy and
its affiliates. As a result of the sale, the existing agreements between GRE and
Falkirk terminated and GRE paid the Company $14.0 million, transferred ownership
of an office building and conveyed membership units in Midwest AgEnergy to
NACCO. The new CSA between Falkirk and Rainbow Energy became effective on May 1,
2022. Falkirk will continue supplying all coal requirements of Coal Creek
Station and will be paid a management fee per ton of coal delivered for
operating the mine. Rainbow Energy is responsible for funding all mine operating
costs and directly or indirectly
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providing all of the capital required to operate the mine. The CSA specifies
that Falkirk will perform final mine reclamation, which will be funded in its
entirety by Rainbow Energy. The initial production period is expected to run ten
years from the effective date of the CSA, but the CSA may be extended or
terminated early under certain circumstances.
Coal Mining operating profit in 2022 is expected to decrease significantly
compared with 2021, both including and excluding the contract termination fees.
The expected reduction in operating profit is primarily the result of reduced
earnings at both consolidated and unconsolidated Coal Mining operations as well
as an anticipated increase in operating expenses. The increase in operating
expenses is primarily due to expected higher outside services and professional
fees.
Results at the consolidated mining operations are expected to decrease
significantly in 2022 from 2021 primarily due to expected substantially lower
earnings at MLMC driven by an anticipated reduction in customer demand,
predominantly in the second half of 2022, from higher than average levels in
2021. Lower customer demand, expected cost inflation in 2022 on diesel fuel,
repairs and supplies, and higher depreciation expense related to recent capital
expenditures to develop a new mine area are expected to contribute to an
increase in the cost per ton in 2022. In general, cost per ton delivered is
lowest when the power plant requires a consistently high level of coal
deliveries, primarily because costs are spread over more tons.
The reduction in earnings at the unconsolidated Coal Mining operations is
expected to be driven by the termination of the Bisti contract as of September
30, 2021 and lower earnings at Falkirk, primarily in the second half of 2022
compared with the second half of 2021. Falkirk has agreed to a reduction in the
current per ton management fee from May 1, 2022 through May 31, 2024. After May
31, 2024, Falkirk’s per ton management fee increases to a higher base in line
with current fee levels, and thereafter adjusts annually according to an index
which tracks a broad measure of U.S. inflation.
Segment EBITDA, which excludes the termination payments of $10.3 million from
Bisti’s customer in 2021 and the $14 million contract termination fee from GRE
in 2022, is expected to decrease significantly in 2022 from 2021 primarily as a
result of the forecasted reduction in operating profit partially offset by an
increase in depreciation, depletion and amortization expense. The increase in
depreciation, depletion and amortization expense is primarily due to higher
capital expenditures at MLMC as a result of the development of a new mine area.
Capital expenditures are expected to be approximately $21 million in 2022. The
elevated levels of capital expenditures from 2019 through 2022 relate to the
necessary development of a new mine area at MLMC, which will allow continued
coal deliveries through the end of the contract. The increase in capital
expenditures associated with mine development will result in higher depreciation
expense in future periods that will unfavorably affect future operating profit.
Capital expenditures for MLMC are expected to decline significantly beginning in
2023.
The Company’s contract structure at each of its coal mining operations
eliminates exposure to spot coal market price fluctuations. However,
fluctuations in natural gas prices and the availability of renewable power
generation, particularly wind, can contribute to changes in power plant dispatch
and customer demand for coal. Sustained higher natural gas prices could continue
to result in increased demand for coal. Changes to expectations for customer
power plant dispatch could affect the Company’s outlook for 2022 and over the
longer term.
The owner of the power plant served by the Company’s Sabine Mine in Texas
intends to retire the power plant in the first quarter of 2023, at which time
Sabine expects to begin final reclamation. Funding for mine reclamation is the
responsibility of the customer. Coteau operates the Freedom Mine in North
Dakota. All coal production from the Freedom Mine is delivered to Basin
Electric. Basin Electric utilizes the coal at the Great Plains Synfuels Plant,
Antelope Valley Station and Leland Olds Station. The Synfuels Plant is a coal
gasification plant owned by Dakota Gas that manufactures synthetic natural gas
and produces fertilizers, solvents, phenol, carbon dioxide and other chemical
products for sale. In August 2021, Basin Electric announced that it signed a
non-binding term sheet which contemplates the sale of the assets of Dakota Gas.
The closing is subject to the satisfaction of specified conditions. As part of
the announcement, Basin Electric indicated that the Synfuels Plant will continue
existing operations through 2026. Basin Electric is also considering other
options for the Synfuels Plant if the transaction with the potential buyer does
not close.
NAMining Outlook
In 2022, NAMining expects full-year operating profit to increase over 2021,
primarily in the fourth quarter of 2022, due to an expected increase in customer
requirements and contributions from contracts executed during 2021. Segment
EBITDA for 2022 is expected to increase significantly compared with the prior
year as a result of the improvement in operating profit and an increase in
depreciation expense.
During 2021, NAMining expanded its footprint, including into new geographies, by
entering into new contract mining services agreements at quarries in Florida,
Indiana, Texas and Arkansas. During the first quarter of 2022, NAMining agreed
to
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commission a new dragline at an existing quarry in Florida to secure a contract
extension through 2027. This dragline will supplement an existing dragline at
this operation, resulting in an expected increase in deliveries and income over
the next five years at the quarry. NAMining continues to have a substantial
pipeline of potential new projects and is pursuing a number of growth
initiatives that, if successful, would be accretive to future earnings.
In 2019, NAMining’s subsidiary, Sawtooth Mining, LLC, entered into a mining
services agreement to serve as the exclusive contract miner for the Thacker Pass
lithium project in northern Nevada, owned by Lithium Nevada Corp., a subsidiary
of Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Lithium Americas owns the
lithium reserves at Thacker Pass and will be responsible for the processing and
sale of the lithium produced. In April 2022, Lithium Americas provided an update
on the Thacker Pass project, which noted that all key state-level permits had
been issued for Thacker Pass and early-works construction, which includes site
access and preparation, is expected to commence in 2022. At maturity, this
management fee contract is expected to deliver fee income similar to a mid-sized
management fee coal mine.
In 2022, capital expenditures are expected to be approximately $28 million
primarily for the acquisition, relocation and refurbishment of draglines, as
well as the acquisition of other mining equipment to support the continued
expansion of contract-mining services, including the acquisition of equipment to
support the Thacker Pass lithium project. The cost of mining equipment related
to Thacker Pass will be reimbursed by the customer over a seven-year period from
the equipment acquisition date.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under
which lessees make payments to the Company based on their sale of natural gas,
oil, natural gas liquids and coal, extracted primarily by third parties.
Operating profit and Segment EBITDA in 2022 are expected to increase
significantly over 2021 primarily driven by current expectations for natural gas
and oil prices for the remainder of 2022, partly offset by an anticipated
reduction in production. As a result of substantially higher oil and natural gas
prices in the first half of 2022 compared with the respective prior year period,
the Company expects a significant increase in operating profit in the first half
of 2022. This increase is anticipated to be partly offset by a modest decrease
in the second half of 2022 as increases in oil and gas prices are expected to
moderate and as a result of the absence of $3.3 million of settlement income
recognized in the third quarter of 2021.
Commodity prices are inherently volatile and as an owner of royalty and mineral
interests, the Company’s access to information concerning activity and
operations with respect to its interests is limited. The Company’s expectations
are based on the best information currently available and could vary positively
or negatively as a result of adjustments made by operators and/or changes to
commodity prices.
In the first quarter of 2022, Minerals Management completed a small acquisition
of mineral interests in the New Mexico portion of the Permian basin for $0.7
million. Minerals Management is targeting additional investments in mineral and
royalty interests of approximately $9 million in the remainder of 2022. These
investments are expected to be accretive, but each investment’s contribution to
earnings is dependent on the details of that investment, including the size and
type of interests acquired and the stage and timing of mineral development. The
contribution of each investment could also vary due to commodity price changes.
These acquired interests are expected to align with the Company’s strategy of
selectively acquiring mineral and royalty interests with a balance of near-term
cash-flow yields and long-term growth potential, in high-quality reservoirs
offering diversification from the Company’s legacy mineral interests.
Consolidated 2022 Outlook
Overall for the 2022 full year, excluding the settlements associated with the
GRE/Rainbow Energy transaction and the Bisti termination fee recognized in 2021,
NACCO expects consolidated operating profit, net income and Consolidated EBITDA
to decrease from 2021. Lower operating profit in the Coal Mining segment is
expected to be partially offset by an anticipated significant increase in
earnings at the Minerals Management segment and higher operating profit at
NAMining. In addition, the Company recognized $3.4 million of gains associated
with equity securities in 2021 that are not expected to recur. The effective
income tax rate, including the settlements associated with the GRE/Rainbow
Energy transaction is expected to be between 14% and 16%.
The Company will recognize the value of the North Dakota office building and the
membership units in Midwest AgEnergy received as part of the settlement with GRE
as a component of other income.
Consolidated capital expenditures are expected to be approximately $67 million
in 2022 and include approximately $8 million for expenditures at Mitigation
Resources. In 2022, cash flow before financing activities is expected to be
significantly lower than in 2021 as a result of the anticipated capital
expenditures.
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Growth and Diversification
The Company is pursuing growth and diversification by strategically leveraging
its core mining and natural resources management skills to build a strong
portfolio of affiliated businesses. Management continues to be optimistic about
the long-term outlook for growth in the NAMining and Minerals Management
segments and in the Company’s Mitigation Resources business. Each of these
businesses continues to expand its pipeline of potential new projects with
opportunities for growth and diversification.
NAMining is pursuing growth and diversification by expanding the scope of its
business development activities to include potential customers who require a
broad range of minerals and materials and by leveraging the Company’s core
mining skills to expand the range of contract mining services it provides.
NAMining continues to pursue additional opportunities to provide comprehensive
mining services to operate entire mines, as it expects to do at the new lithium
project in Nevada. The goal is to build NAMining into a leading provider of
contract mining services for customers that produce a wide variety of minerals
and materials. The Company believes NAMining can grow to be a substantial
contributor to operating profit, delivering unlevered after-tax returns on
invested capital in the mid-teens as this business model matures and achieves
significant scale, but the pace of growth will be dependent on the mix and scale
of new projects.
The Minerals Management segment continues to grow and diversify by pursuing
acquisitions of mineral and royalty interests in the United States. The Minerals
Management segment will benefit from the continued development of its mineral
properties without additional capital investment, as all further development
costs are borne entirely by third-party producers who lease the minerals. This
business model can deliver higher average operating margins over the life of a
reserve than traditional oil and gas companies that bear the cost of
exploration, production and/or development. Catapult Mineral Partners, the
Company’s business unit focused on managing and expanding the Company’s
portfolio of oil and gas mineral and royalty interests, has developed a strong
network to source and secure new acquisitions, and has several potential
acquisitions under review. The goal is to construct a diversified portfolio of
high-quality oil and gas mineral and royalty interests in the United States that
deliver near-term cash flow yields and long-term projected growth. The Company
believes this business will provide unlevered after-tax returns on invested
capital in the low-to-mid-teens as the portfolio of reserves and mineral
interests grows and this business model matures.
Mitigation Resources continues to expand its business, which creates and sells
stream and wetland mitigation credits and provides services to those engaged in
permittee-responsible mitigation. This business offers an opportunity for growth
and diversification in an industry where the Company has substantial knowledge
and expertise and a strong reputation. The Mitigation Resources business has
achieved several early successes and is positioned for additional growth. The
Company’s goal is to grow Mitigation Resources into one of the ten largest U.S.
providers of mitigation solutions, largely focused on streams and wetlands,
initially in the southeast United States. While this business is in the early
stages of development, it is currently focused on expanding and has established
mitigation projects in Alabama, Mississippi, Texas and Tennessee. The Company
believes that Mitigation Resources can provide solid rates of return as this
business matures.
The Company also continues to pursue activities which can strengthen the
resiliency of its existing coal mining operations. The Company remains focused
on managing coal production costs and maximizing efficiencies and operating
capacity at mine locations to help customers with management fee contracts be
more competitive. These activities benefit both customers and the Company’s Coal
Mining segment, as fuel cost is a significant driver for power plant dispatch.
Increased power plant dispatch results in increased demand for coal by the Coal
Mining segment’s customers. Fluctuating natural gas prices and availability of
renewable energy sources, such as wind and solar, could affect the amount of
electricity dispatched from coal-fired power plants.
The Company continues to look for opportunities to expand its coal mining
business where it can apply its management fee business model to assume
operation of existing surface coal mining operations in the United States.
However, opportunities are very limited in the current environment. In addition,
the political and regulatory environment is not receptive to development of new
coal-fired power generation projects which would create opportunities to build
and operate new coal mines.
The Company is committed to maintaining a conservative capital structure as it
continues to grow and diversify, while avoiding unnecessary risk. Strategic
diversification will generate cash that can be re-invested to strengthen and
expand the businesses. The Company also continues to maintain the highest levels
of customer service and operational excellence with an unwavering focus on
safety and environmental stewardship.
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FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are made subject to certain risks and uncertainties,
which could cause actual results to differ materially from those presented.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Among the factors that could
cause plans, actions and results to differ materially from current expectations
are, without limitation: (1) changes to or termination of customer or other
third-party contracts, or a customer or other third party default under a
contract, (2) any customer’s premature facility closure, (3) a significant
reduction in purchases by the Company’s customers, including as a result of
changes in coal consumption patterns of U.S. electric power generators, or
changes in the power industry that would affect demand for the Company’s coal
and other mineral reserves, (4) changes in the prices of hydrocarbons,
particularly diesel fuel, natural gas and oil, (5) failure or delays by the
Company’s lessees in achieving expected production of natural gas and other
hydrocarbons; the availability and cost of transportation and processing
services in the areas where the Company’s oil and gas reserves are located;
federal and state legislative and regulatory initiatives relating to hydraulic
fracturing; and the ability of lessees to obtain capital or financing needed for
well-development operations and leasing and development of oil and gas reserves
on federal lands, (6) failure to obtain adequate insurance coverages at
reasonable rates, (7) supply chain disruptions, including price increases and
shortages of parts and materials, (8) the impact of the COVID-19 pandemic,
including any impact on suppliers, customers and employees, (9) changes in tax
laws or regulatory requirements, including the elimination of, or reduction in,
the percentage depletion tax deduction, changes in mining or power plant
emission regulations and health, safety or environmental legislation, (10) the
ability of the Company to access credit in the current economic environment, or
obtain financing at reasonable rates, or at all, and to maintain surety bonds
for mine reclamation as a result of current market sentiment for fossil fuels,
(11) the effects of investors’ and other stakeholders’ increasing attention to
environmental, social and governance (“ESG”) matters, (12) changes in costs
related to geological and geotechnical conditions, repairs and maintenance, new
equipment and replacement parts, fuel or other similar items, (13) regulatory
actions, changes in mining permit requirements or delays in obtaining mining
permits that could affect deliveries to customers, (14) weather conditions,
extended power plant outages, liquidity events or other events that would change
the level of customers’ coal or aggregates requirements, (15) weather or
equipment problems that could affect deliveries to customers, (16) changes in
the costs to reclaim mining areas, (17) costs to pursue and develop new mining,
mitigation and oil and gas opportunities and other value-added service
opportunities, (18) delays or reductions in coal or aggregates deliveries, (19)
the ability to successfully evaluate investments and achieve intended financial
results in new business and growth initiatives, (20) disruptions from natural or
human causes, including severe weather, accidents, fires, earthquakes and
terrorist acts, any of which could result in suspension of operations or harm to
people or the environment, and (21) the ability to attract, retain, and replace
workforce and administrative employees.
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