November 3, 2020 - NACCO Industries, Inc.® (NYSE: NC) today announced consolidated operating profit of $9.4 million and net income of $8.0 million, or $1.14 per diluted share, for the quarter ended September 30, 2020 compared with consolidated operating profit of $8.7 million and net income of $10.3 million, or $1.47 per diluted share for the quarter ended September 30, 2019. The improvement in consolidated operating profit was primarily the result of a reduction in unallocated employee-related expenses and improved earnings in the Coal Mining and North American Mining segments, partially offset by lower earnings at the Minerals Management segment. Despite the higher operating profit, a reduction in contractual settlements received associated with a prior India venture and a higher effective income tax rate resulted in the decrease in net income.
For the nine months ended September 30, 2020, the Company reported consolidated net income of $20.2 million, or $2.88 per diluted share, compared with consolidated net income of $33.3 million, or $4.76 per diluted share, for the first nine months of 2019.
The Company believes that a conservative capital structure and liquidity are important given the Company's strategic initiatives to grow and diversify, as well as changing trends in energy markets. The Company ended the third quarter of 2020 with consolidated cash on hand of $97.6 million and debt of $23.1 million. At September 30, 2020, the Company had availability of $138.0 million under its $150.0 million revolving credit facility.
Detailed Discussion of Results
Coal Mining revenues increased in the third quarter of 2020 over the third quarter of 2019 due to higher reimbursable costs at Mississippi Lignite Mining Company.
Improved earnings at Mississippi Lignite Mining Company and lower operating expenses in the Coal Mining segment contributed to a moderate improvement in operating profit in the third quarter of 2020 compared with the third quarter of 2019. These improvements were partially offset by reduced earnings of unconsolidated operations. The increase in Mississippi Lignite Mining Company's earnings was primarily the result of an increase in the profit per ton delivered. Operating expenses decreased mainly due to lower employee-related costs.
The decrease in earnings of unconsolidated operations was primarily attributable to lower customer demand at the unconsolidated coal mining operations and the termination of the Camino Real Fuels contract mining agreement effective July 1, 2020. Camino Real delivered 0.3 million tons in the first six months of 2020 and 1.6 million tons in full-year 2019.
Coal Mining Outlook - 2020
Coal deliveries for the fourth quarter of 2020 are expected to be comparable to the fourth quarter of 2019. Despite comparable deliveries, fourth-quarter 2020 operating profit is expected to decrease compared with the 2019 fourth quarter. The decrease in operating profit is mainly due to an anticipated reduction in results at Mississippi Lignite Mining Company and a reduction in earnings at the unconsolidated mining operations.
Results at Mississippi Lignite Mining Company are expected to decline significantly from the fourth quarter of 2019 primarily due to an increase in the cost per ton delivered.
Overall, full-year 2020 coal deliveries and operating profit are expected to be lower than 2019, mainly as a result of a decrease in earnings at the unconsolidated mining operations due to reduced customer requirements and the termination of the Camino Real Fuels contract mining agreement. As mentioned above, the contract between Camino Real Fuels and its customer, Dos Republicas Coal Partnership was unexpectedly terminated effective July 1, 2020 and the mine was closed.
During the third quarter of 2020, Sabine's customer, American Electric Power, reduced its annual lignite coal requirements to be between 1.4 million and 1.7 million tons compared with 2.6 million tons delivered in 2019. The customer reduced its expected future requirements because the plant served by the Sabine Mine was dispatched at a much lower rate in 2020 than in 2019, and that trend is expected to continue.
On September 30, 2020, the Company's Caddo Creek Resources' customer entered into an agreement for the sale of their activated carbon manufacturing business, including its Marshall Mine operated by Caddo Creek, to a subsidiary of Advanced Emissions Solutions ("AES"). AES announced its intent to close the mine, which delivered 0.2 million tons in 2019. Caddo Creek has entered into a contract to perform the required mine reclamation.
Changes in customer power plant dispatch, including changes due to historically low natural gas prices and the continued increase in renewable generation, particularly wind, could reduce customer demand below anticipated levels, which could further unfavorably affect the Company's fourth quarter and full-year 2020 results, as well as its 2021 outlook.
Coal Mining Outlook - 2021
In 2021, the Company expects coal deliveries to be comparable to 2020 based on current expectations of customer requirements.
Coal Mining operating profit in 2021 is expected to decrease compared with 2020, mainly in the first half of the year. This decrease is primarily the result of an expected increase in operating expenses and an anticipated reduction in earnings at the unconsolidated Coal Mining operations primarily due to a contractually agreed reduction in fee-based earnings at the Liberty Mine as the scope of final mine reclamation activities is reduced.
Results at the consolidated mining operations are expected to be comparable between years, as a decrease in earnings at Mississippi Lignite Mining Company is expected to be offset by a lower operating loss at Centennial Natural Resources. At Mississippi Lignite Mining Company, results are expected to be lower due to an increase in the cost per ton of coal delivered in 2021 compared with 2020. 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.
On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer and the Company's second largest customer, announced its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas. GRE is willing to consider opportunities to sell Coal Creek Station, and NACCO is actively engaged in the exploration of options that could, if successful, allow for transfer of ownership of the power plant to one or more third parties, which would preserve jobs at both Coal Creek Station and the Falkirk Mine.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract under which Falkirk also supplies a moderate amount of lignite coal annually to Spiritwood Station. In 2019, Falkirk contributed approximately $16 million to NACCO's Earnings from Unconsolidated Operations. The closure of Coal Creek Station will have a material adverse effect on the long-term earnings of NACCO Industries. The terms of the contract between the Company and GRE specify that GRE is responsible for all costs related to mine closure, including but not limited to, final mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.
Capital expenditures are expected to be approximately $12 million in the fourth quarter of 2020 and approximately $20 million for the 2020 full year, and approximately $24 million in 2021. The Company expects high levels of capital expenditures in the remainder of 2020 and in 2021 primarily related to Mississippi Lignite Mining Company's development of a new mine area. These capital expenditures will result in an increase in depreciation that will unfavorably affect operating profit in future periods.
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