August 4, 2022 - NACCO Industries® (NYSE: NC) today announced consolidated operating profit of $29.7 million and net income of $37.2 million, or $5.07 per diluted share, for the second quarter of 2022 compared with consolidated operating profit of $8.7 million and net income of $6.5 million, or $0.91 per diluted share, for the second quarter of 2021.
In May 2022, Great River Energy ("GRE") completed the sale of the Coal Creek Station power plant and the adjacent high-voltage direct current transmission line to Rainbow Energy Center, LLC and its affiliates. As a result of the sale, the existing agreements between GRE and the Company's subsidiary, Falkirk Mining Company, terminated and GRE paid the Company $14.0 million, transferred ownership of an office building and conveyed membership units in a private company to NACCO. The new Coal Sales Agreement between Falkirk and Rainbow Energy became effective on May 1, 2022. Improvements in the Company's consolidated operating profit, Consolidated Adjusted EBITDA and net income were due to the contract termination settlement assets received from GRE, as well as significantly higher earnings in the Minerals Management segment. These favorable items were partly offset by unfavorable changes in the fair value of exchange-traded equity securities owned by the Company and an increase in unallocated employee-related expenses. Non-GAAP financial measures are defined and reconciled on pages 9 to 11.
For the six months ended June 30, 2022, the Company reported consolidated net income of $49.8 million, or $6.79 per diluted share, compared with net income of $15.5 million, or $2.16 per diluted share, for the first six months of 2021.
At June 30, 2022, the Company had consolidated cash of $97.1 million and debt of $18.4 million with availability of $119.9 million under its $150.0 million revolving credit facility. The Company believes that maintaining a conservative capital structure and adequate liquidity are important given evolving trends in energy markets and the Company's strategic initiatives to grow and diversify, which are discussed further in the Growth and Diversification section of this release.
In the first quarter of 2022, the Company changed the composition of its reportable segments. The 2021 financial information in this release has been reclassified to conform to the new presentation.
Detailed Discussion of Results
Coal Mining Results
Coal Mining revenues increased in the second quarter of 2022 from the second quarter of 2021 due to an increase in tons delivered at Mississippi Lignite Mining Company as a result of higher customer requirements and an increase in the per ton sales price.
Excluding the $14.0 million contract termination settlement, second-quarter 2022 Coal Mining operating profit decreased moderately from the prior year quarter. The decline was primarily due to reduced earnings at Mississippi Lignite Mining Company driven by the impact of inflation, including higher diesel costs, on the cost per ton delivered. An increase in operating expenses resulting from higher employee-related costs also contributed to the reduction in operating profit. These unfavorable factors were partially offset by an increase in earnings of unconsolidated operations.
The increase in earnings of unconsolidated operations was mainly attributable to an increase in earnings at Coteau Properties Company resulting from contractual price escalation. An increase in tons delivered due to an increase in customer requirements at the Coteau and Sabine Mines also contributed to the improvement in earnings. These increases were partly offset by the termination of the Bisti Fuels contract on September 30, 2021, reduced earnings at the Falkirk and Coyote Creek Mines resulting from reduced customer requirements and a reduction in the per ton management fee at Falkirk.
Coal Mining Outlook - 2022
Coal Mining operating profit in both the second half and for the full year of 2022 is expected to decrease significantly compared with the respective 2021 periods, both including and excluding the contract termination payments received in 2022 and 2021. 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 employee-related costs, professional fees and outside services.
Results at the consolidated mining operations are expected to decrease significantly in the second half of 2022 from the comparable 2021 period and the first half of 2022. This expected decrease is primarily due to an expected substantial decline in earnings at Mississippi Lignite Mining Company driven by an anticipated reduction in customer demand from higher than average levels in the second half of the prior year. Lower customer demand, expected cost inflation in the latter half of 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 the second half of 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. As a result of the anticipated increase in cost per ton, the 2022 full-year results are expected to be substantially lower than the 2021 full year.
The anticipated reduction in earnings at the unconsolidated Coal Mining operations for the second half of and full-year 2022, compared with the respective prior year periods, is expected to be driven primarily by the reduction in the per ton management fee at Falkirk from May 1, 2022 through May 31, 2024, as well as the termination of the Bisti Fuels contract as of September 30, 2021. These decreases are expected to be partly offset by higher earnings at Coteau.
Segment Adjusted EBITDA, which excludes the contract termination settlement payments of $10.3 million from Bisti Fuels' customer in 2021 and $14.0 million 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 a higher add back of depreciation, depletion and amortization expense which is expected to increase in 2022. The increase in depreciation, depletion and amortization expense is primarily due to higher capital expenditures at Mississippi Lignite Mining Company as a result of the development of a new mine area.
Capital expenditures are expected to be approximately $15 million in the second half of 2022 and approximately $23 million for the full year. The elevated levels of capital expenditures from 2019 through 2022 relate to the necessary development of a new mine area at Mississippi Lignite Mining Company, 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 Mississippi Lignite Mining Company 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.
North American Mining Results
Revenues at North American Mining increased in the second quarter of 2022 over the prior year primarily as a result of an increase in tons delivered at the consolidated operations driven by increased customer requirements and higher reimbursed costs. Reimbursed costs have an offsetting amount in cost of goods sold and have no impact on operating profit.
The lower operating profit was mainly attributable to an increase in operating expenses primarily due to higher employee-related costs.
North American Mining's second-quarter 2022 Segment Adjusted EBITDA was comparable to the prior year quarter. Lower operating profit was fully offset by the add back of substantially higher depreciation expense resulting from equipment acquired to support newer contracts that are expected to contribute to increased income in future periods.
North American Mining Outlook
North American Mining expects operating profit to increase in both the second half of 2022 and for the full year over the respective 2021 periods. The increase in the second half is primarily due to improved fourth quarter results, principally from a shift in mix of tons delivered to operations with higher-margin contracts, partially offset by an anticipated increase in operating expenses. Segment Adjusted EBITDA for 2022 is expected to increase significantly compared with the prior year as a result of the improvement in operating profit from higher reclamation income at Caddo Creek in the first half of 2022 and the add back of higher depreciation expense.
During the first quarter of 2022, North American Mining agreed to commission a new dragline at an existing quarry in Florida to secure a contract extension through 2027. This dragline will supplement an existing dragline, resulting in an expected increase in deliveries and income over the next five years at this quarry. North American Mining 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, 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 July 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 feasibility study results are expected in the second half of 2022. At maturity, this management fee contract is expected to deliver fee income similar to a mid-sized management fee coal mine.
North American Mining previously forecasted capital expenditures of $28 million for 2022. North American Mining now expects full-year capital expenditures to be $13 million, with approximately $5 million expended in the second half of 2022 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. The reduction in capital expenditures from the previous forecast is due to a change in the timing of the acquisition of equipment to support the Thacker Pass lithium project from 2022 to 2023.
Minerals Management Results
For the second quarter of 2022, Minerals Management revenue, operating profit and Segment Adjusted EBITDA increased significantly over the second quarter of 2021 primarily due to higher royalty income driven by significantly higher natural gas and oil prices. A $2.4 million gain on sale of land related to legacy operations also contributed to the increase in operating profit and Segment Adjusted EBITDA.
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.
Excluding settlement income of $3.3 million recognized in the 2021 third quarter, operating profit and Segment Adjusted EBITDA in the second half of 2022 are expected to be comparable to the second half of 2021 but decrease significantly compared with the first half of 2022 primarily driven by current expectations for natural gas and oil prices and an anticipated reduction in production volumes. As a result of the substantial earnings in the first half of 2022, the Company expects a significant increase in full-year 2022 operating profit over 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 $12 million in the second half 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.
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 and net income to decline moderately from 2021. Lower operating profit in the Coal Mining segment is expected to be partially offset by a significant increase in earnings at the Minerals Management segment primarily from the substantial increase in Minerals Management's earnings in the first half of 2022. In addition, income realized in 2021 on exchange-traded equity securities held by the Company is not expected to reoccur due to a deterioration in public equity markets during 2022. The effective income tax rate, including the settlements associated with the GRE/Rainbow Energy transaction is expected to be between 15% and 17%. In 2022, Consolidated Adjusted EBITDA, which excludes the termination and settlement payments, is expected to be comparable to 2021.
Consolidated capital expenditures are expected to be approximately $61 million in 2022 and include approximately $12 million for expenditures at Mitigation Resources of North America®. In 2022, cash flow before financing activities is expected to be significantly lower than in 2021 as a result of the anticipated increase in capital expenditures in 2022.
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 North American Mining and Minerals Management segments and in the Company's Mitigation Resources of North America business. Each of these businesses continues to expand its pipeline of potential new projects with opportunities for growth and diversification.
North American Mining 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. North American Mining continues to pursue additional opportunities to provide comprehensive mining services to operate entire mines, as it expects to do at the lithium project in Nevada. The goal is to build North American Mining into a leading provider of contract mining services for customers that produce a wide variety of minerals and materials. The Company believes North American Mining 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 high-quality diversified portfolio of 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 of North America 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. During the first half of 2022, Mitigation Resources purchased property to establish a new mitigation bank north of Dallas/Fort Worth and established a joint venture to provide mitigation services for the Lake Ralph Hall project in Northern Texas. With these new 2022 projects, Mitigation Resources is involved in over 10 mitigation banks and permittee-responsible mitigation projects in Tennessee, Alabama, Mississippi and Texas and is making strong progress toward its goal to be a top ten U.S. provider of stream and wetland mitigation services. 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 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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