The timing and amount of any repurchases under the 2019 Stock Repurchase Program are determined at the discretion of the Company's management based on a number of factors, including the availability of capital, other capital allocation alternatives, market conditions for the Company's Class A Common Stock and other legal and contractual restrictions. The 2019 Stock
Repurchase Program does not require the Company to acquire any specific number of shares and may be modified, suspended, extended or terminated by the Company without prior notice and may be executed through open market purchases, privately negotiated transactions or otherwise. All or part of the repurchases under the 2019 Stock Repurchase Program may be implemented under a Rule 10b5-1 trading plan, which would allow repurchases under pre-set terms at times when the Company might otherwise be restricted from doing so under applicable securities laws.
Bellaire Corporation (“Bellaire”) is a non-operating subsidiary of the Company with legacy liabilities relating to closed mining operations, primarily former Eastern U.S. underground coal mining operations. Prior to 2019, Bellaire established a $5.0 million mine water treatment trust (the "Mine Water Treatment Trust") to provide a financial assurance mechanism to assure the long-term treatment of post-mining discharge. Bellaire's Mine Water Treatment Trust invests in equity securities that are reported at fair value based upon quoted market prices in active markets for identical assets; therefore, they are classified as Level 1 within the fair value hierarchy. The Company recognized a gain of $1.1$0.3 million and a loss of $0.1$1.2 million induring the three and six months ended June 30,March 31, 2021 and 2020, respectively, and a gain of $0.3 million and $1.0 million in the three and six months ended June 30, 2019, respectively, related to the Mine Water Treatment Trust.
During the second quarter of 2020, the Company invested $2.0 million in equity securities of a public company with a diversified portfolio of royalty producing mineral interests. The investment is reported at fair value based upon quoted market prices in active markets for identical assets; therefore, it is classified as Level 1 within the fair value hierarchy. The Company recognized a gain of $0.4$0.5 million in bothduring the three and six months ended June 30, 2020March 31, 2021, related to the investment in these equity securities.
The Investment in the unconsolidated subsidiaries and related tax positions totaled $25.3$29.8 million and $24.6$29.0 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $5.3$5.9 million and $5.0$6.5 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Earnings of unconsolidated operations were $15.3 million and $16.0 million during the three months ended March 31, 2021 and 2020, respectively.
NACoal is a party to certain guarantees related to Coyote Creek. Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), NACoal would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, NACoal is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. To date, no payments have been required from NACoal since the inception of these guarantees. The Company believes that the likelihood NACoal would be required to perform under the guarantees is remote, and no amounts related to these guarantees have been recorded.
Various legal and regulatory proceedings and claims have been or may be asserted against NACCO and certain subsidiaries relating to the conduct of their businesses. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.
These matters are subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.
The Company determines its reportable segments by first identifying its operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. The Company’s Chief Operating Decision Maker utilizes operating profit to evaluate segment performance and allocate resources.
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. Included within other income on the line Income from other unconsolidated affiliates within the Unaudited Condensed Consolidated Statements
See Note 1 for additional discussion of the Company's reportable segments. The following tables present revenue, operating profit, depreciation expense and capital expenditures:
NOTE 10—Income Taxes
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. The quarterly income tax provision is generally comprised of tax expense on income or a benefit on a loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The 2020 estimated annual effective tax rate includes the benefit of utilizing the current year forecasted tax basis net operating loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in years that were taxed at a 35% rate. The Company expects to generate a net operating loss in 2020 primarily due to the realization of certain deferred tax assets. The Company is currently assessing aspects of the CARES Act, including the Company’s ability to utilize the extended carryback provisions.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(DollarsAmounts in thousands, except as noted and per share data)
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, is the public holding company for The North American Coal Corporation®. The North American Coal Corporation and its affiliated companies (collectively, “NACoal”) operate in thethrough a portfolio of mining and natural resources industries throughbusinesses, operates under three operatingbusiness segments: Coal Mining, North American Mining ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and an activated carbon producersproducer pursuant to a service-based business model. The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals. The Minerals Management segment acquires and promotes the development of the Company’soil, gas oil and coal reserves,mineral interests, generating income primarily from royalty-based lease payments from third parties. In addition, the Company has a business providing stream and wetland mitigation solutions.
The Company also has unallocated items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, which are primarily administrative costs related to public company reporting requirements at the parent company and the financial results of the Company’s mitigation banking business, Mitigation Resources of North America® (“MRNA”Mitigation Resources”), and Bellaire Corporation (“Bellaire”("Bellaire."). MRNA Mitigation Resources generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities.
As of January 1, 2020, the Company retrospectively changed its computation of segment operating profit to reclassify certain expenses, primarily related to executive and board compensation. These expenses are now included in unallocated items. The change in segment reporting reflected a decision to evaluate the financial performance of the Company’s segments excluding executive and board compensation. All prior period segment information has been reclassified to conform to the new presentation. This segment reporting change has no impact on consolidated operating results.
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 has continued to operate as an essential business during the COVID-19 pandemic because it supports critical infrastructure industries. The Company has procedures to limit the exposure of employees to the spread of COVID-19. The extent to which COVID-19 impacts the Company going forward will depend on numerous factors and future developments that remain uncertain.
The Company’s operating segments are further described below:
Coal Mining Segment
The Coal Mining segment, operating as North American Coal Corporation® ("NACoal"), operates surface coal mines under
long-term contracts with power generation companies and an activated carbon producersproducer pursuant to a service-based business
model. Coal is surface-mined in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico. Each
mine is fully integrated with its customercustomer's operations.
During the sixthree months ended June 30, 2020,March 31, 2021, the Company's operating coal mines were: Bisti Fuels LLC ("Bisti"), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”Bisti”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”).
TheBisti supplies the Four Corners Power Plant through its contract mining agreement between Camino Realwith the Navajo Transitional Energy Company. On March 12, 2021, the Arizona Public Service Co., an owner and its customer, Dos Republicas Coal Partnership (“DRCP”), terminated effective July 1, 2020 as a resultoperator of the unexpected termination by Comisión Federal de Electricidad (“CFE”)Four Corners Power Plant, announced plans to begin operating the plant seasonally starting in the fall of its coal supply contract2023, with an affiliateone of DRCP. The terminationthe plant’s two remaining units operating year-round and the other operating only during June through October. Under seasonal operation of the power plant, future deliveries are expected to be in the range of 3.3 million to 3.5 million tons annually, beginning in 2024 through the end of the term of the contract between CFEmining agreement in 2031. Bisti delivered 4.2 million and DRCP eliminated DRCP’s need for coal5.0 million tons in 2020 and 2019, respectively.
Sabine operates the Sabine Mine in Texas. All production from Camino Real's Eagle Pass Mine, and will resultSabine is delivered to Southwestern Electric Power Company's (“SWEPCO”) Henry W. Pirkey Plant (the “Pirkey Plant”). SWEPCO is an American Electric Power (“AEP”) company. During 2020, AEP announced it intends to retire the Pirkey Plant in mine closure.
Camino Real issued a Notice of Payment Default on June 17, 2020. During2023 in order to comply with the thirdU.S. Environmental Protection Agency’s Coal Combustion Residuals rule. SWEPCO expects deliveries from Sabine to continue until the first quarter of 2020, the Company received certain inventory as well as a securitized note in settlement of the outstanding receivable balance as of June 30, 2020 and
additional costs incurred through the July 9, 2020 mine closure date.2023 at which time Sabine expects to begin final reclamation. Mine reclamation is the responsibility of DRCP. Camino Real has no legal obligationSWEPCO.
Coteau operates the Freedom Mine in North Dakota. All coal production from the Freedom Mine is delivered to perform mine reclamation butBasin 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 that manufactures synthetic natural gas and produces fertilizers, solvents, phenol, carbon dioxide, and other chemical products for sale. During 2020, Basin Electric informed its employees and Coteau that it is considering changes that may result in negotiationsmodifications to its Synfuels Plant that could potentially reduce or eliminate coal requirements at the Synfuels Plant beginning in 2026. Basin Electric indicated that if it decides to proceed with DRCPany changes that could reduce or eliminate the use of coal, the feedstock change is not expected to potentially perform mine reclamation activities underoccur before 2026. As a new contractual arrangement. Closureresult, coal deliveries to the Synfuels Plant are expected to continue until at least 2026. Deliveries to Antelope Valley Station and Leland Olds Station are expected to continue through the end of the mine does not materially impact NACCO’s outlook for 2020. The contract miningexisting coal sales agreement, between Camino Real and DRCP was previously expected to terminate in 2021.
As of June 30, 2020, all of the Liberty Fuels Company, LLC mine areas have been reclaimed and final mine reclamation activities, primarily monitoring, will continue until final bond release.
Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation. Bisti supplies sub-bituminous coal for power generation. Caddo Creek and Demery supply lignite coal for the production of activated carbon. Each of these mines deliver their coal production to adjacent or nearby power plants, synfuels plants or activated carbon processing facilities under long-term supply contracts. Each operating mine is the exclusive supplier of coal to its customers' facilities.
This segment has a strong history of customer retention due to the long-term nature of its contracts and the proximity of the Company’s mines to its customers’ facilities. The operating mines' contract expiration dates range from 2022 through 2045. The contract that expires in 2022 maywhich can be extended for three additional periods of five years each, or untilthrough 2037 at the Company’s option.option of the Company.
On May 7,During 2020, Great River Energy ("GRE"), Falkirk Mine'sFalkirk'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.
As noted in the announcement, GRE is willing to consider opportunities to sell Coal Creek Station. 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 the2022. Falkirk Mine. The Company believes Coal Creek Station is an efficient, economic and attractive generation and capacity asset, and its continued long-term operation is in the best interests of the employees and the local community.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract, under which Falkirk also supplies approximately 0.3 million tons of lignite coal per year to Spiritwood Station. Falkirk has approximately 480 employees, and, in 2019, delivered a total of 7.4 million tons of lignite coal and contributed approximately $16 million to NACCO’s Earnings from Unconsolidated Operations. The closure of Coal Creek Station would have a material adverse effect on the long-term earnings of NACCO. The terms of the contract between the Company and GRE specifyspecifies that GRE is responsible for all costs related to mine closure, including but not limitedmine reclamation. GRE has announced that it is in exclusive negotiations with a third party to finalsell Coal Creek Station. If GRE's efforts to sell the power plant are successful, the Company expects to continue to operate the Falkirk Mine, however the terms of the existing mining contract could change.
Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation. Bisti supplies sub-bituminous coal for
power generation. Demery supplies lignite coal for the production of activated carbon. Each of these mines deliver their coal
production to adjacent or nearby power plants, synfuels plants or an activated carbon processing facility under long-term supply
contracts. Each mine reclamation costs, post-retirement medical benefits and pension costs with respectis the exclusive supplier of coal to Falkirk employees.its customers' facilities. MLMC’s coal supply contract contains a take
or pay provision; all other coal supply contracts are requirements contracts under which earnings can fluctuate. In addition,
certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.
At all operating coal mines other than MLMC, 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 providingprovide all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing steady 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 7 of the accompanying Unaudited Condensed Consolidated Financial Statements6 for further discussion of Coyote Creek's guarantees.
All operating coal mines other than MLMC meet the definition of a variable interest entity (“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 VIE's 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. The contractsSee Note 6 for certain of the Company's Unconsolidated Subsidiaries permit or obligate the customer under some conditions to acquire the assets or stock of the subsidiary for an amount roughly equal to book value.
Camino Real previously met the definition of a variable interest entity of which the Company was not the primary beneficiary and therefore NACCO did not consolidate Camino Real’s results of operations within its financial statements.
The Notice of Payment Default and subsequent termination of the contract mining agreement resulted in a reconsideration event, which required reassessment of the Company’s VIE conclusion. As a result of this reconsideration, Camino Real is no longer a VIE and its financial position is consolidated within NACCO’s financial statements as of June 30, 2020. The consolidation of Camino Real did not materially change the Company’s balance sheet. The results of operations for the six months ended June 30, 2020 are reported under the equity method with income before income taxes reported as Earnings of unconsolidated operationsfurther information on the Consolidated Statements of Operations. Unconsolidated Subsidiaries.
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, the persistence of low diesel fuel prices can negatively affect earnings at MLMC.
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.
Centennial Natural Resources (“Centennial”), located in Alabama, ceased coal production at the end of 2015. Since 2015, the Company has sold or transferred certain Centennial equipment and mineral reserves. The Company continues to evaluate strategies for the remaining mineral reserves and a dragline, which have no remaining book value. Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred. Centennial is a consolidated entity within the Coal Mining segment as the Company is responsible for carrying costs and final mine reclamation.
The coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial Natural Resources ("Centennial") are owned or controlled
by the Company. The coal reserves at all other mines are owned or controlled by the respective mine’s customer.
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.
Caddo Creek Resources Company, LLC (“Caddo Creek”) ceased all mining and delivery of lignite and commenced mine reclamation during 2020. The contracts under which certainreclamation at Caddo Creek is expected to be substantially complete in 2022. The terms of the Unconsolidated Subsidiaries operate provide that, under certain conditions, including default,contract to perform mine reclamation contain a fixed-price component and therefore, Caddo Creek no longer meets the customer(s) involved may elect or be obligated to acquireVIE criteria. As a result, Caddo Creek is consolidated within the assets (subject to the liabilities) or the capital stock of the Coal Mining subsidiary for an amount effectively equal to book value. The Company does not know of any conditions of default that currently exist.Company's financial statements.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other
minerals. The segment is a primary platform for the Company’s growth and diversification of mining activities outside of the
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 operates primarily at limestone quarries
in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. During 2019, the Company entered into a mining agreement toIn addition,
NAMining will serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada.
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 promotesderives 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 development of the Company’srights to explore, develop, mine, produce, market and sell gas, oil, and coal reserves, generating income primarily from royalty-based leasein exchange for royalty payments from third parties. based on the lessees' sales of those minerals.
During 2020, the Minerals Management segment acquired mineral interests in the Permian Basin in Texas and intends to make future acquisitions of mineral and royalty interests that meet the Company’s acquisition criteria as part of its growth strategy. The acquisition criteria includes building a blended portfolio of mineral and royalty interests (i) with new wells anticipated to come online within one to two years of investment, (ii) in areas with forecasted future development within five years after acquisition, or (iii) with existing producing wells further along the decline curve that will generate stable cash flow. In addition, acquisitions should extend the geographic footprint to diversify across multiple basins with a preliminary focus on the more oil-rich Permian and Williston basins and a secondary focus on other diversifying basins to increase regional exposure. While the current focus is on the acquisition of mineral and royalty interests, the Company would also consider investments in overriding royalty interests, non-participating royalty interests or non-operated working interests under certain circumstances.The current acquisition strategy does not contemplate any near-term working interest investments in which the Company would act as the operator.
The Company’s gas, oillegacy royalty and undeveloped coal reservesmineral 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, and coalbed methane and natural gas) and North Dakota (coal)(coal, oil and natural gas).
The majority of the Company’s existinglegacy reserves were acquired as part of its historical coal mining operations.
The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting themowns royalty interests, mineral interests, nonparticipating royalty interests, and overriding royalty interests ("ORRI"). The Company may own more than one type of mineral and royalty interest in the rights to
explore, produce and sell natural resourcessame tract of land. For example, where the Company owns an ORRI in exchange for royalty payments baseda lease on the lessees' salessame tract of natural gas and,land in which it owns a mineral interest, the ORRI in that tract will relate to a lesser extent, oil and coal. Specialized employeesthe same gross acres as the mineral interest in thethat tract.
The Minerals Management segment also provide surfacewill 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 acquisitioninterests, the Company’s access to information concerning activity and lease maintenance services relatedoperations of its royalty and mineral interests is limited. The Company does not have information that would be available to Company operations.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 3039 through 3241 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.2020. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2019.2020.
CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three and six months ended June 30:March 31:
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Revenues: | | | | | | | |
| Coal Mining | $ | 23,739 | | | $ | 20,928 | | | | | |
| NAMining | 16,142 | | | 11,624 | | | | | |
| Minerals Management | 5,500 | | | 5,241 | | | | | |
| Unallocated Items | 143 | | | 26 | | | | | |
| Eliminations | (419) | | | (175) | | | | | |
| Total revenue | $ | 45,105 | | | $ | 37,644 | | | | | |
| Operating profit (loss): | | | | | | | |
| Coal Mining | $ | 8,684 | | | $ | 7,185 | | | | | |
| NAMining | 130 | | | 731 | | | | | |
| Minerals Management | 4,235 | | | 4,267 | | | | | |
| Unallocated Items | (4,773) | | | (4,560) | | | | | |
| Eliminations | 54 | | | (43) | | | | | |
| Total operating profit | $ | 8,330 | | | $ | 7,580 | | | | | |
| Interest expense | 356 | | | 403 | | | | | |
| Interest income | (120) | | | (401) | | | | | |
| Closed mine obligations | 383 | | | 434 | | | | | |
| (Gain) loss on equity securities | (823) | | | 1,196 | | | | | |
| Other, net | (130) | | | (148) | | | | | |
| Other (income) expense, net | (334) | | | 1,484 | | | | | |
| Income before income tax benefit | 8,664 | | | 6,096 | | | | | |
| Income tax benefit | (297) | | | (70) | | | | | |
| Net income | $ | 8,961 | | | $ | 6,166 | | | | | |
| | | | | | | |
| Effective income tax rate | (3.4) | % | | (1.1) | % | | | | |
|
| | | | | | | | | | | | | | | |
| | THREE MONTHS | | SIX MONTHS |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues: | | | | | | | |
| Coal Mining | $ | 21,573 |
| | $ | 22,570 |
| | $ | 42,501 |
| | $ | 39,320 |
|
| NAMining | 12,048 |
| | 10,728 |
| | 23,672 |
| | 21,503 |
|
| Minerals Management | 1,987 |
| | 8,242 |
| | 7,228 |
| | 20,928 |
|
| Unallocated Items | 327 |
| | 131 |
| | 353 |
| | 674 |
|
| Eliminations | (580 | ) | | (319 | ) | | (755 | ) | | (976 | ) |
| Total revenue | $ | 35,355 |
| | $ | 41,352 |
| | $ | 72,999 |
| | $ | 81,449 |
|
| Operating profit (loss): | | | | | | | |
| Coal Mining | $ | 7,498 |
| | $ | 7,262 |
| | $ | 14,683 |
| | $ | 17,269 |
|
| NAMining | 544 |
| | (450 | ) | | 1,275 |
| | (385 | ) |
| Minerals Management | 510 |
| | 6,789 |
| | 4,777 |
| | 18,458 |
|
| Unallocated Items | (4,158 | ) | | (4,732 | ) | | (8,718 | ) | | (9,866 | ) |
| Eliminations | 88 |
| | 292 |
| | 45 |
| | 58 |
|
| Total operating profit | $ | 4,482 |
| | $ | 9,161 |
| | $ | 12,062 |
| | $ | 25,534 |
|
| Interest expense | 330 |
| | 222 |
| | 733 |
| | 453 |
|
| Interest income | (129 | ) | | (581 | ) | | (530 | ) | | (1,134 | ) |
| Income from other unconsolidated affiliates | (79 | ) | | (323 | ) | | (212 | ) | | (645 | ) |
| Closed mine obligations | 390 |
| | 330 |
| | 824 |
| | 696 |
|
| Gain on equity securities | (1,512 | ) | | (261 | ) | | (316 | ) | | (959 | ) |
| Other, net | (102 | ) | | 11 |
| | (117 | ) | | 22 |
|
| Other (income) expense, net | (1,102 | ) | | (602 | ) | | 382 |
| | (1,567 | ) |
| Income before income tax (benefit) provision | 5,584 |
| | 9,763 |
| | 11,680 |
| | 27,101 |
|
| Income tax (benefit) provision | (466 | ) | | 1,788 |
| | (536 | ) | | 4,108 |
|
| Net income | $ | 6,050 |
| | $ | 7,975 |
| | $ | 12,216 |
| | $ | 22,993 |
|
| | | | | | | | |
| Effective income tax rate | (8.3 | )% | | 18.3 | % | | (4.6 | )% | | 15.2 | % |
The components of the change in revenues and operating profit are discussed below in "Segment Results."
SecondFirst Quarter of 2020 Compared with Second Quarter of 2019 and First Six Months of 20202021 Compared with First Six MonthsQuarter of 20192020
Other (income) expense, (income), net
Interest expense increased in the second quarter and the first six months of 2020 compared with the 2019 periods by $0.1 million and $0.3 million, respectively, due to higher average borrowings under NACoal's revolving credit facility.
Interest income decreased by $0.3 million in the second quarter and the first sixthree months of 20202021 compared with the 2019 periods by $0.5 million and $0.6 million, respectively,2020 period primarily due to lower interest rates despiteand a higherlower average invested cash balance.
Income from other unconsolidated affiliates represents the financial results of NoDak. NoDak operated and maintained a coal drying system at a customer’s power plant. The NoDak contract expired on January 31, 2020, resulting in decreases of $0.2 million and $0.4 million, respectively, in Income from other unconsolidated affiliates during the second quarter and the first six months of 2020 compared with the 2019 periods. Income from NoDak was $1.3 million for the year ended December 31, 2019.
Gain(Gain) loss on equity securities represents changes in the market price of invested assets reported at fair value. The change resulted from an increase in the gains during the second quartermarket value of 2020 and the first six months of 2020 compared with the gains during the 2019 periods was due to higher returns on invested assets during the second quarter of 2020 but lower returns on invested assetsequity securities in the first quarterthree months of 2021 compared with a decrease in the first three months of 2020. See Note 65 to the Unaudited Condensed Consolidated Financial Statements for further discussion of equity securities.
Income Taxes
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. The estimated annual effective income tax rate differs from the U.S. federal statutory rate due to the benefit from percentage depletion. The quarterly income tax provision is generally comprised of tax expense on income or a benefit on a loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The 2020 estimated annual effective tax rate includes the benefit of utilizing the current year forecasted tax basis net operating loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in years that were taxed at a 35% rate. The Company expects to generate a net operating loss in 2020 primarily due to the realization of certain deferred tax assets. The Company is currently assessing aspects of the CARES Act, including the Company’s ability to utilize the extended carryback provisions.
LIQUIDITY AND CAPITAL RESOURCES OF NACCO
Cash Flows
The following tables detail NACCO's changes in cash flow for the sixthree months endedJune 30: March 31:
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
| Operating activities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net cash used for operating activities | $ | (910) | | | $ | (31,122) | | | $ | 30,212 | |
| | | | | |
| Investing activities: | | | | | |
| Expenditures for property, plant and equipment and acquisition of mineral interests | (4,876) | | | (5,358) | | | 482 | |
| Other | 29 | | | 16 | | | 13 | |
| Net cash used for investing activities | (4,847) | | | (5,342) | | | 495 | |
| Cash flow before financing activities | $ | (5,757) | | | $ | (36,464) | | | $ | 30,707 | |
|
| | | | | | | | | | | |
| | 2020 | | 2019 | | Change |
| Operating activities: | | | | | |
| Net cash (used for) provided by operating activities | $ | (12,489 | ) | | $ | 22,088 |
| | $ | (34,577 | ) |
| | | | | | |
| Investing activities: | | | | | |
| Expenditures for property, plant and equipment | (12,799 | ) | | (5,967 | ) | | (6,832 | ) |
| Other | (1,845 | ) | | 15 |
| | (1,860 | ) |
| Net cash used for investing activities | (14,644 | ) | | (5,952 | ) | | (8,692 | ) |
| Cash flow before financing activities | $ | (27,133 | ) | | $ | 16,136 |
| | $ | (43,269 | ) |
The $34.6$30.2 million change in net cash (used for) provided byused for operating activities was primarily due to a net favorable change in working capital, including:
•Decreased payments made forunder deferred compensation and long-term incentive compensationplans in the first quarter of 2021 compared with the first quarter of 2020, and lower net
•A reduction in refundable federal income taxes in the first quarter of 2021 compared with an increase in the first quarter of 2020.
These favorable changes were partially offset by an increase in prepaid insurance during the first six monthsquarter of 2020. In addition, an increase in accounts receivable in the first six months of 2020 compared to a decrease in the first six months of 2019 was partially offset by a reduction in inventory in the first six months of 20202021 compared with the 2019 period, both primarilyfirst quarter of 2020 due to higher sales at Coal Mining and NAMining during the first six months of 2020.increased insurance premiums.
The change in net cash used for investing activities was primarily attributable to an increasea decrease in expenditures for property, plant and equipment at the NAMining and Coal Mining segments.segment.
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
| Financing activities: | | | | | |
| Net (reductions) additions to long-term debt and revolving credit agreement | $ | (2,187) | | | $ | 9,639 | | | $ | (11,826) | |
| Cash dividends paid | (1,374) | | | (1,339) | | | (35) | |
| Purchase of treasury shares | — | | | (1,002) | | | 1,002 | |
| | | | | |
| Net cash (used for) provided by financing activities | $ | (3,561) | | | $ | 7,298 | | | $ | (10,859) | |
|
| | | | | | | | | | | |
| | 2020 | | 2019 | | Change |
| Financing activities: | | | | | |
| Net additions to long-term debt and revolving credit agreement | $ | 3,479 |
| | $ | 895 |
| | $ | 2,584 |
|
| Cash dividends paid | (2,690 | ) | | (2,480 | ) | | (210 | ) |
| Purchase of treasury shares | (1,002 | ) | | (1,385 | ) | | 383 |
|
| Net cash used for financing activities | $ | (213 | ) | | $ | (2,970 | ) | | $ | 2,757 |
|
The change in net cash used for(used for) provided by financing activities was primarily due to increasedrepayments during the first three months of 2021 compared with borrowings during the first sixthree months of 2020 compared with the first six months of 2019.2020.
Financing Activities
Financing arrangements are obtained and maintained at the NACoal level. 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 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.
NACoal has an unsecured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in August 2022. Borrowings outstanding under the NACoal Facility were $14$28 million at June 30, 2020.March 31, 2021. At June 30, 2020,March 31, 2021, the excess availability under the NACoal Facility was $133.0$119.0 million, which reflects a reduction for outstanding letters of credit of $3.1$3.0 million.
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 June 30, 2020,March 31, 2021, for base rate and LIBOR loans were 0.75%1.00% and 1.75%2.00%, respectively. The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.30%0.35% on the unused commitment at June 30, 2020.March 31, 2021. The weighted average interest rate applicable to the NACoal facilityFacility at June 30, 2020March 31, 2021 was 1.93%1.87% including the floating rate margin.
The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum debt to EBITDA ratio of 3.00 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 2.00 to 1.00, or if greater than 2.00 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 June 30, 2020,March 31, 2021, NACoal was in compliance with all financial covenants in the NACoal Facility.
Capital ExpendituresSurety Bonds
The Company uses surety bonds to guarantee performance of its mine reclamation obligations. The Company will begin posting collateral of up to $28 million before the end of 2021 or replace a portion of the surety bonds with other instruments of financial assurance acceptable under reclamation regulations. The Company may post cash collateral, letters of credit or a combination of cash and letters of credit. The Company is also considering self-bonding where available. If the Company posts cash collateral, it could increase the amounts of borrowings under the NACoal Facility. The use of letters of credit would also reduce the amount available under the NACoal Facility.
Expenditures for property, plant and equipment and mineral interests
Expenditures for property, plant and equipment and mineral interests were $12.8$4.9 million during the first sixthree months of 2020.2021. Planned expenditures for the remainder of 20202021 are expected to be approximately $34$42 million, primarily consisting of $18$25 million in the Coal Mining segment, $7 million in the NAMining segment and $10 million in the Minerals Management Segment and $6 million in the NAMining segment. Capital expenditures are expected to be funded from internally generated funds and/or bank borrowings.
In the Coal Mining segment, elevated levels of expected capital expenditures through 2021 are primarily related to spending at
MLMC as it develops a new mine area. In the NAMining segment, expected capital expenditures in 2021 are primarily for the
acquisition, relocation and refurbishment of draglines. In the Minerals Management segment, capitalexpected expenditures in 20202021 are primarily for the acquisition of mineral interests and other purchases. In the NAMining segment, capital expenditures in 2020royalty interests.
Expenditures are primarily for the acquisition, relocation and refurbishmentexpected to be funded from internally generated funds and/or bank borrowings.
Capital Structure
NACCO's consolidated capital structure is presented below: | | | | JUNE 30
2020 | | DECEMBER 31
2019 | | Change | | MARCH 31
2021 | | DECEMBER 31
2020 | | Change |
| Cash and cash equivalents | $ | 95,546 |
| | $ | 122,892 |
| | $ | (27,346 | ) | Cash and cash equivalents | $ | 79,132 | | | $ | 88,450 | | | $ | (9,318) | |
| Other net tangible assets | 216,637 |
| | 174,465 |
| | 42,172 |
| Other net tangible assets | 261,824 | | | 244,907 | | | 16,917 | |
| Intangible assets, net | 36,333 |
| | 37,902 |
| | (1,569 | ) | Intangible assets, net | 34,348 | | | 35,330 | | | (982) | |
| Net assets | 348,516 |
| | 335,259 |
| | 13,257 |
| Net assets | 375,304 | | | 368,687 | | | 6,617 | |
| Total debt | (28,423 | ) | | (24,943 | ) | | (3,480 | ) | Total debt | (44,360) | | | (46,465) | | | 2,105 | |
| Bellaire closed mine obligations | (20,822 | ) | | (20,924 | ) | | 102 |
| Bellaire closed mine obligations | (21,575) | | | (21,598) | | | 23 | |
| Total equity | $ | 299,271 |
| | $ | 289,392 |
| | $ | 9,879 |
| Total equity | $ | 309,369 | | | $ | 300,624 | | | $ | 8,745 | |
| Debt to total capitalization | 9% | | 8% | | 1% | Debt to total capitalization | 13% | | 13% | | —% |
The increase in other net tangible assets was primarily due to payments made for deferred compensation and accrued incentive compensation as well as an increase in accounts receivableprepaid insurance from higher insurance premiums at June 30, 2020March 31, 2021 compared with December 31, 2019. The increase in other net tangible assets was partially offset by the decrease in cash and cash equivalents.2020.
Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2019,2020, 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 page 3646 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.2020. See Note 76 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 and six months ended March 31:
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Unconsolidated operations | 7,587 | | | 7,681 | | | | | |
| Consolidated operations | 835 | | | 767 | | | | | |
| Total tons delivered | 8,422 | | | 8,448 | | | | | |
June 30 (in millions):
|
| | | | | | | | | | | |
| | THREE MONTHS | | SIX MONTHS |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Unconsolidated operations | 6.0 |
| | 6.9 |
| | 13.6 |
| | 15.5 |
|
| Consolidated operations | 0.8 |
| | 0.9 |
| | 1.6 |
| | 1.5 |
|
| Total tons delivered | 6.8 |
| | 7.8 |
| | 15.2 |
| | 17.0 |
|
The results of operations for the Coal Mining segment were as follows for the three and six months ended March 31:
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Revenues | $ | 23,739 | | | $ | 20,928 | | | | | |
| Cost of sales | 21,602 | | | 21,274 | | | | | |
| Gross profit (loss) | 2,137 | | | (346) | | | | | |
Earnings of unconsolidated operations(a) | 14,404 | | | 15,027 | | | | | |
| Selling, general and administrative expenses | 6,914 | | | 6,719 | | | | | |
| Amortization of intangible assets | 982 | | | 777 | | | | | |
| Gain on sale of assets | (39) | | | — | | | | | |
| Operating profit | $ | 8,684 | | | $ | 7,185 | | | | | |
June 30:
|
| | | | | | | | | | | | | | | |
| | THREE MONTHS | | SIX MONTHS |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | $ | 21,573 |
| | $ | 22,570 |
| | $ | 42,501 |
| | $ | 39,320 |
|
| Cost of sales | 19,861 |
| | 21,254 |
| | 41,135 |
| | 37,178 |
|
| Gross profit | 1,712 |
| | 1,316 |
| | 1,366 |
| | 2,142 |
|
Earnings of unconsolidated operations(a) | 12,800 |
| | 13,529 |
| | 27,827 |
| | 29,310 |
|
| Selling, general and administrative expenses | 6,222 |
| | 6,714 |
| | 12,941 |
| | 12,685 |
|
| Amortization of intangible assets | 792 |
| | 881 |
| | 1,569 |
| | 1,528 |
|
| Gain on sale of assets | — |
| | (12 | ) | | — |
| | (30 | ) |
| Operating profit | $ | 7,498 |
| | $ | 7,262 |
| | $ | 14,683 |
| | $ | 17,269 |
|
(a) See Note 76 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Second Quarter
Revenues decreased 4.4%increased 13.4% in the secondfirst quarter of 2021 compared with the first quarter of 2020 compared with the second quarter of 2019primarily due to a reduction in tons delivered. This was partially offset byreclamation revenue from Caddo Creek and an increase in the per ton sales pricetons delivered at MLMC. The sales price at MLMC is index-based and includes adjustments for coal quality and reimbursable costs.
The following table identifies the components of change in operating profit for the secondfirst quarter of 20202021 compared with the secondfirst quarter of 2019:2020:
| | | | | |
| | Operating Profit |
| 2020 | $ | 7,185 | |
| Increase (decrease) from: | |
| Gross profit | 2,483 | |
| Net gain on sale of assets | 39 | |
| Earnings of unconsolidated operations | (623) | |
| Amortization of intangibles | (205) | |
| Selling, general and administrative expenses | (195) | |
| 2021 | $ | 8,684 | |
|
| | | |
| | Operating Profit |
| 2019 | $ | 7,262 |
|
| Increase (decrease) from: | |
| Selling, general and administrative expenses | 492 |
|
| Gross profit | 396 |
|
| Amortization of intangibles | 89 |
|
| Earnings of unconsolidated operations | (729 | ) |
| Net gain on sale of assets | (12 | ) |
| 2020 | $ | 7,498 |
|
Operating profit increased $0.2$1.5 million in the secondfirst quarter of 2021 compared with the first quarter of 2020 compared with the second quarter of 2019 primarily due to a decrease in selling, general and administrative expenses and an increase in gross profit, partially offset by a decrease in earnings of unconsolidated operations. The decrease in selling, general and administrative expenses was primarily attributable to lower employee-related expenses partially offset by an increase in outside service fees. The improvement in gross profit was primarilymainly due to an increase in customer demand, which contributed to a reduction in the cost per ton and an overall increase in the profit per ton delivered at MLMC. The increaseIn addition, a reduction in profit per ton delivered was primarily duecosts at Centennial Natural Resources contributed to the increaseimprovement in the per ton sales price partially offset by an increase in the cost per ton delivered.gross profit.
The decrease in earnings of unconsolidated operations was mainly due to lower customer demand at Sabine, Bisti and Camino, partially offset by an increase in customer demand at Coyote Creek and Falkirk. Sabine delivers coal to Southwestern Electric Power Company's Henry W. Pirkey Plant. The Pirkey power plant was dispatched at a lower rate during the second quarter of 2020 compared with the second quarter of 2019. The reduction in coal tons delivered at Bisti was due to an extended plant outage during the second quarter of 2020. The reduction in tons delivered at Camino was primarily due to a decreasethe termination of the Camino Real Fuels, LLC, contract mining agreement effective July 1, 2020 and the expected reduction in customer demand.
First Six Months of 2020 Compared with First Six Months of 2019
Revenues increased 8.1% in the first six months of 2020 compared with the first six months of 2019 due to an increase in MLMC's sales price and tons delivered. The sales price at MLMC is index-based and includes adjustments for coal quality and reimbursable costs. MLMC delivers coal to the Red Hills Power Plant, which supplies electricity to TVA under a long-term Power Purchase Agreement. The decision of which power plants to dispatch is determined by TVA. The Red Hills power plant experienced an increase in dispatch during the first six months of 2020 compared with the first six months of 2019, resulting in the increase in tons delivered.
The following table identifies the components of change in operating profit for the first six months of 2020 compared with the first six months of 2019:
|
| | | |
| | Operating Profit |
| 2019 | $ | 17,269 |
|
| Increase (decrease) from: | |
| Earnings of unconsolidated operations | (1,483 | ) |
| Gross profit | (776 | ) |
| Selling, general and administrative expenses | (256 | ) |
| Amortization of intangibles | (41 | ) |
| Net gain on sale of assets | (30 | ) |
| 2020 | $ | 14,683 |
|
Operating profit decreased $2.6 million in the first six months of 2020 compared with the first six months of 2019 primarily due to a decrease in earnings of unconsolidated operations, a decrease in gross profit and an increase inUnfavorable selling, general and administrative expenses.
The decrease in earnings of unconsolidated operations was mainly due to lower customer demand, primarily at Sabine, Camino and Bisti, partially offset by an increase in customer demand at Coyote Creek and Falkirk. For more information about the unconsolidated operations, see the Second Quarter discussion above.
The decrease in gross profit wasexpenses were primarily due to an increase in the cost per ton delivered at MLMC, including the recognition of a portion of costs previously capitalized into inventory. The increase in selling, general and administrative expenses was primarily attributable to higher outside service feesinsurance expense partially offset by lowera decrease in employee-related expenses.
NORTH AMERICAN MINING ("NAMining") SEGMENT
FINANCIAL REVIEW
Tons of limestone delivered by the NAMining segment were as follows for the three and six months ended June 30 (in millions):March 31: |
| | | | | | | | | | | |
| | THREE MONTHS | | SIX MONTHS |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Unconsolidated operations | 2.2 |
| | 2.5 |
| | 4.4 |
| | 4.4 |
|
| Consolidated operations | 8.6 |
| | 9.3 |
| | 18.9 |
| | 19.1 |
|
| Total tons delivered | 10.8 |
| | 11.8 |
| | 23.3 |
| | 23.5 |
|
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Unconsolidated operations | 2,192 | | | 2,255 | | | | | |
| Consolidated operations | 10,406 | | | 10,279 | | | | | |
| Total tons delivered | 12,598 | | | 12,534 | | | | | |
The results of operations for the NAMining segment were as follows for the three and six months ended March 31:
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Revenues | $ | 16,142 | | | $ | 11,624 | | | | | |
| Cost of sales | 15,465 | | | 10,581 | | | | | |
| Gross profit | 677 | | | 1,043 | | | | | |
Earnings of unconsolidated operations(a) | 938 | | | 976 | | | | | |
| Selling, general and administrative expenses | 1,487 | | | 1,288 | | | | | |
| Gain on sale of assets | (2) | | | — | | | | | |
| Operating profit | $ | 130 | | | $ | 731 | | | | | |
June 30:
|
| | | | | | | | | | | | | | | |
| | THREE MONTHS | | SIX MONTHS |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | $ | 12,048 |
| | $ | 10,728 |
| | $ | 23,672 |
| | $ | 21,503 |
|
| Cost of sales | 11,408 |
| | 10,473 |
| | 21,989 |
| | 20,473 |
|
| Gross profit | 640 |
| | 255 |
| | 1,683 |
| | 1,030 |
|
Earnings of unconsolidated operations(a) | 978 |
| | 614 |
| | 1,954 |
| | 1,103 |
|
| Selling, general and administrative expenses | 1,321 |
| | 1,326 |
| | 2,609 |
| | 2,525 |
|
| Gain on sale of assets | (247 | ) | | (7 | ) | | (247 | ) | | (7 | ) |
| Operating profit (loss) | $ | 544 |
| | $ | (450 | ) | | $ | 1,275 |
| | $ | (385 | ) |
(a) See Note 76 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Second Quarter of 2020 Compared with Second Quarter of 2019
Despite a reduction in tons delivered, revenuesRevenues increased 12.3%38.9% in the secondfirst quarter of 2021 compared with the first quarter of 2020 compared with the second quarter of 2019 primarily due to new operations added since June 30, 2019, including work related to the Thacker Pass lithium project, and favorablean increase in reimbursable costs partially offset by changes in the mix of customer requirements.deliveries. Reimbursable costs have an offsetting amount in cost of sales and have no impact on operating profit.
The following table identifies the components of change in operating profit (loss) for the secondfirst quarter of 2020 compared with the second quarter of 2019:
|
| | | |
| | Operating Profit (Loss) |
| 2019 | $ | (450 | ) |
| Increase (decrease) from: | |
| Gross profit | 385 |
|
| Earnings of unconsolidated operations | 364 |
|
| Net gain on sale of assets | 240 |
|
| Selling, general and administrative expenses | 5 |
|
| 2020 | $ | 544 |
|
Operating profit increased $1.0 million in the second quarter of 2020 compared with the second quarter of 2019 primarily due to increases in gross profit and earnings of unconsolidated operations from new operations added since June 30, 2019 and favorable changes in the mix of customer requirements.
First Six Months of 2020 Compared with First Six Months of 2019
Despite a reduction in tons delivered, revenues increased 10.1% in the first six months of 20202021 compared with the first six monthsquarter of 20192020:
| | | | | |
| | Operating Profit |
| 2020 | $ | 731 | |
| Increase (decrease) from: | |
| Gross profit | (366) | |
| Selling, general and administrative expenses | (199) | |
| Earnings of unconsolidated operations | (38) | |
| Net gain on sale of assets | 2 | |
| 2021 | $ | 130 | |
Operating profit decreased $0.6 million in the first quarter of 2021 compared with the first quarter of 2020 primarily due to new operations added since June 30, 2019, includinga decrease in gross profit for work related to the Thacker Pass lithium project and favorable changesan increase in the mix of customer requirements.selling, general and administrative expenses mainly attributable to higher employee-related costs.
The following table identifies the components of change in operating profit (loss) for the first six months of 2020 compared with the first six months of 2019:
|
| | | |
| | Operating Profit (Loss) |
| 2019 | $ | (385 | ) |
| Increase (decrease) from: | |
| Earnings of unconsolidated operations | 851 |
|
| Gross profit | 653 |
|
| Net gain on sale of assets | 240 |
|
| Selling, general and administrative expenses | (84 | ) |
| 2020 | $ | 1,275 |
|
Operating profit increased $1.7 million in the first six months of 2020 compared with the first six months of 2019 primarily due to increases in earnings of unconsolidated operations and gross profit from new operations added since June 30, 2019 and favorable changes in the mix of customer requirements.
MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
The results of operations for the Minerals Management segment were as follows for the three and six months ended June 30:March 31:
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Revenues | $ | 5,500 | | | $ | 5,241 | | | | | |
| Cost of sales | 687 | | | 698 | | | | | |
| Gross profit | 4,813 | | | 4,543 | | | | | |
| Selling, general and administrative expenses | 578 | | | 276 | | | | | |
| | | | | | | |
| Operating profit | $ | 4,235 | | | $ | 4,267 | | | | | |
|
| | | | | | | | | | | | | | | |
| | THREE MONTHS | | SIX MONTHS |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | $ | 1,987 |
| | $ | 8,242 |
| | $ | 7,228 |
| | $ | 20,928 |
|
| Cost of sales | 558 |
| | 1,262 |
| | 1,256 |
| | 2,088 |
|
| Gross profit | 1,429 |
| | 6,980 |
| | 5,972 |
| | 18,840 |
|
| Selling, general and administrative expenses | 919 |
| | 191 |
| | 1,195 |
| | 382 |
|
| Operating profit | $ | 510 |
| | $ | 6,789 |
| | $ | 4,777 |
| | $ | 18,458 |
|
Revenues and operating profit decreasedincreased 4.9% in the three and six months ended June 30, 2020first quarter of 2021 compared with the 2019 periods. The first halfquarter of 2019 included significant2020 primarily due to an increase in royalty income generated from the Permian Basin mineral interests acquired in the fourth quarter of 2020. This increase was partially offset by a large number of new gasan expected reduction in royalty income generated from Ohio mineral interests due to declines in production volumes from existing wells put into commission during 2018 and early 2019. These wells are operated by third parties to extractlower natural gas fromprices.
Operating profit was comparable as the Company's Ohio Utica shale mineral reserves. Since new wells have high initial production rates and follow a natural decline before settling into relatively stable, long-term production, royalty incomeincrease in 2020 decreased substantially from 2019 levels. Therevenue was offset by an increase in selling, general and administrative expenses is due to a $0.5 million charge in the second quarter of 2020 to write-off certain leasehold interests.higher employee-related expenses.
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Unallocated Items and Eliminations were as follows for the three and six months ended March 31:
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Operating loss | $ | (4,719) | | | $ | (4,603) | | | | | |
| | | | | |
The operating loss was comparable between periods.
June 30:
|
| | | | | | | | | | | | | | |
| | THREE MONTHS | | SIX MONTHS |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Operating loss | $ | (4,070 | ) | | $ | (4,440 | ) | | $ | (8,673 | ) | | (9,808 | ) |
Operating loss decreased in the three and six months ended June 30, 2020 compared with the 2019 periods primarily due to lower employee-related expenses.
NACCO Industries, Inc. Outlook
Coal Mining Outlook - 2021
In the second half and for the full year of 2020,2021, the Company expects coal deliveries and Coal Mining operating profit to decrease from the respective prior year periods.be comparable to 2020 based on current expectations of customer requirements.
In the prior year fourth quarter, the Company recorded a $2.0 million unfavorable adjustment to mine reclamation liabilities at Centennial. Excluding the impact of this item, operatingOperating profit in the second half of 20202021 is expected to decrease compared with 2020, excluding prior year charges of $4.6 million related to an asset impairment, an inventory write-down and a voluntary separation program. The decrease in operating profit is primarily attributable to substantially fromlower full-year earnings expected at MLMC and reduced earnings at the second half of 2019. This decrease isunconsolidated Coal Mining operations. MLMC earnings are expected to be lower as a result of an anticipated decrease in earnings at the unconsolidated mining operationsprofit per ton of coal delivered in 2021 compared with 2020, due to reduced customer requirements and an expected increase in operating expenses, mainly duepart to higher professional fees.
In the second half of 2020, earnings at MLMC are expected to be comparable to the second half of 2019. An anticipated improvement in customer demand resulting from an expected increase in the dispatch of the customer's power plant is expected to be offset by an increase in the cost per ton delivered. If customer demand at MLMC decreases from expected levels, it could unfavorably affect the Company's 2020 earnings outlook.
Excluding the unfavorable 2019depreciation expense associated with development of a new mine reclamation adjustment, 2020 full-year operating profit is expected to decrease from 2019 due to aarea. The anticipated reduction in earnings at the unconsolidated miningCoal Mining operations andis expected to be mainly driven by a reduction in fees earned at the Liberty Mine, as the scope of final mine reclamation activities continues to decline. A decrease in employee-related costs resulting from lower headcount, primarily due to the 2020 voluntary separation program, is expected increaseto be partially offset by higher insurance expense.
Segment EBITDA, excluding the $1.1 million asset impairment charge recognized in operating expenses. Operating expenses are2020, is expected to increase moderately forover the full year.prior year as the increase in depreciation expense will be partially offset by the other items contributing to the reduction in operating profit.
Changes in customer power plant dispatch, including changes duerelated to historically low natural gas pricesprice fluctuations and the continued increase in renewable generation, particularly wind, could reduce customer demand below anticipated levels, which wouldcould further unfavorably affect the Company’s second half and full-year2021 outlook.
During 2020, outlook.
Capital expenditures are expected to be approximately $23 million in 2020. The Company expects high levels of capital expenditures in 2020 and 2021 primarily related to MLMC'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.
On May 7, 2020, Great River Energy ("GRE"),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 plant2022. The closure is not expected 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.
affect 2021 results. 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 specifyspecifies that GRE is responsible for all costs related to mine closure, including but not limitedmine reclamation. GRE has announced that it is in exclusive negotiations with a third party to final mine reclamation costs, post-retirement medical benefits and pension costs with respectsell Coal Creek Station. If GRE's efforts to sell the power plant are successful, the Company expects to continue to operate the Falkirk employees.
As mentioned above,Mine, however, the contract between Camino Real and DRCP was unexpectedly terminated effective July 1, 2020. Camino Real delivered 1.5 million tons of coal during 2019. Closureterms of the mine does not materially impact NACCO’s outlook for 2020. existing mining contract could change.
The contract mining agreement between Camino Real and DRCP was previouslyowner of the power plant served by the Company's Sabine Mine in Texas intends to retire the power plant in 2023. Deliveries from Sabine to the power plant are expected to terminate in 2021.
NAMining Outlook
In the second half and full year of 2020, NAMining expects limestone deliveries to increase modestly from the respective prior year periods.
NAMining expects operating profit in the second half of 2020 to improve over the second half of 2019, but decrease significantly fromcontinue until the first halfquarter of 2020. Operating profit2023 at which time the mine expects to begin final reclamation. Mine reclamation is expected to benefit fromthe responsibility of the customer.
Premature closure of power plants served by the Company's mines would have a material adverse effect on the future Earnings of unconsolidated operations of the Coal Mining segment and on the long-term earnings associated with new limestone mining contracts and favorable changes in the mixcash flows of customer requirements. Full-year 2020 operating profit is expected to increase significantly over 2019.NACCO.
Capital expenditures are expected to be approximately $13$27 million in 2021. The elevated levels of capital expenditures in the Coal Mining segment expected through 2021 relate to the development of a new mine area at MLMC. 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 return to lower pre-2019 levels beginning in 2022 through the end of the current contract term in 2032.
NAMining Outlook
NAMining expects an increase in tons delivered, operating profit and Segment EBITDA for the 2021 full year over 2020 as a result of increased production under existing contracts and contributions from new mining contracts. The increase in operating profit is expected to be partially offset by an increase in operating expenses primarily due to higher employee-related costs.
During the first quarter of 2021, NAMining entered into a 15-year mining services contract with a new customer at a limestone quarry in Central Florida. NAMining will operate a smaller dragline at this quarry over the next two years while it relocates and commissions a larger dragline that will increase production capacity. Deliveries are expected to be approximately 1.5 million tons annually once mining commences with the larger dragline, which is anticipated to occur in 2023. NAMining also amended a contract with an existing customer to operate an additional dragline at an existing limestone quarry in Florida. Finally, early in the second quarter of 2021, NAMining entered into a one-year mining services contract with an existing customer for a sand and gravel quarry in Indiana. This customer, which is among the largest aggregates producers in the United States, is hopeful that this new quarry will operate for multiple years providing aggregates for a multi-year transportation infrastructure project near Indianapolis. Deliveries are expected to be between 0.6 million to 1.0 million tons. NAMining anticipates that these new or
revised contracts will be accretive to earnings in 2021. NAMining has a substantial pipeline of potential new projects and is pursuing a number of growth initiatives that if successful would be accretive to future earnings.
Capital expenditures are expected to be approximately $10 million for the 2021 full year primarily for the acquisition, relocation and refurbishment of draglines.
In 2019, NAMining's subsidiary, Sawtooth Mining, LLC, entered into a mining 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 Nevada isIn January 2021, Thacker Pass received a Record of Decision from the U.S. Bureau of Land Management for the Thacker Pass Project following the completion of the National Environmental Policy Act Process. This decision represents an important milestone in the processdevelopment and the permitting of securingthe Thacker Pass Project. All major permits and currently expectsare expected to commence construction in 2021 and productionbe received by the end of lithium products in 2023.2021.
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, and, to a lesser extent, oil, natural gas liquids and coal, extracted primarily by third parties.
Minerals Management is targeting investments in mineral and royalty interests totaling approximately $10 million in 2021. These investments are expected to be accretive to earnings, but each investment's contribution to earnings is dependent on the details of each investment, including the size and type of interests acquired and the stage and timing of mineral development.
As part of this strategy, early in the second quarter of 2021, Minerals Management completed a small acquisition in the Delaware Basin for a purchase price of $0.3 million and a larger acquisition in the Eagle Ford Basin. The 2019 results includedEagle Ford Basin acquisition includes approximately 14.1 thousand gross acres and 1.7 thousand net royalty acres for a substantial increasepreliminary purchase price of $4.7 million.
Excluding the impact of the $7.3 million impairment charge in 2020 related to legacy assets and any income related to asset acquisitions made after March 31, 2021, operating profit and Segment EBITDA in the Minerals Management segment is expected to decrease moderately in 2021 from 2020. An anticipated reduction in royalty income particularlyfrom existing Ohio mineral and royalty assets is expected to be partially offset by royalty income generated from the Permian Basin mineral interests acquired in the first halffourth quarter of 2019, generated by2020.
Income from existing Ohio assets is expected to decline as a large numberresult of new gas wells put into commission during 2018 and early 2019. Given expectedanticipated lower natural gas prices, fewer expected new wells in Ohio, lower commodity prices and the natural production decline that occurs early in the life of a well, full-year 2020 royalty income is expected to decrease and be substantially lower than 2019 levels. While royalty income is expected to decrease in the second half of 2020 compared with the second half of 2019, the rate of decrease is expected to be substantially lower than the decrease in the first half of 2020 because prior year income significantly decreased between the first and the second halves of the year. Natural gas pricing declines and reduced business activity due to the COVID-19 pandemic have resulted in higher-than-average natural gas inventory market levels. Awell. Another sustained decline in natural gas prices could unfavorably affect the Company’s outlook.
Decline ratesThe acquired Permian Basin interests included producing wells that are generating royalty revenues, and are already contributing to 2021 earnings, as well as royalty and mineral interests that have not yet been developed. These acquired interests 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 oil-rich basins offering diversification from the Company’s legacy mineral interests.
Consolidated 2021 Outlook
Management continues to view the long-term business outlook positively. The outlook for individual wells can varygrowth in the NAMining and Minerals Management segments and in the Company's Mitigation Resources® business is strong. Each of these businesses continues to expand its pipeline of potential new projects with opportunities for growth and diversification. In the first four months of 2021, NAMining executed three new agreements and Minerals Management completed two acquisitions, demonstrating success in executing on their growth strategies.
Excluding the prior year charges of $12.1 million related to asset impairments, an inventory write-down and the voluntary separation program, as well as the favorable impact of additional business development activities, the Company expects substantially lower net income as a result of lower operating profit, an anticipated increase in interest expense and a reduction in interest income. Consolidated EBITDA in 2021 is expected to increase moderately over 2020, adjusted for prior year asset impairment charges.
The Company expects a tax benefit rate between 3% and 5% in 2021. The Company expects to recognize a tax benefit rather than tax expense due to factors like well depth, well length, formation pressurethe mix of earnings and facility design. In addition, royalty income can fluctuate favorably or unfavorably in response to a number of factors outsidethe benefit from percentage depletion at certain of the Company's control, includingmining operations.
In light of ongoing regulatory, economic and public opinion challenges facing the number of wells being operated by third parties, fluctuationscoal-fired power generation industry, in commodity prices (primarily natural gas), fluctuations in production rates associated with operator decisions, regulatory risks,late 2020, the Company's lessees' willingness and
ability to incur well-development and other operating costs, and changes in the availability and continuing development of infrastructure.
Minerals Management capital expendituresCompany offered a voluntary separation program for certain corporate headquarters employees. Estimated net benefits from this voluntary separation program are expected to total approximately $11be between $1.5 and $2.5 million annually beginning in 2021.
Cash flow before financing activities in 2020 primarily forincluded a significant use of cash related to changes in working capital, capital expenditures and the acquisition of mineral interests and other investments.
Consolidated Outlook
NACCO expects a significant decrease in full-year 2020 consolidated net income compared with 2019, primarily due to the substantial decrease in operating profit at Minerals Management in the first half of 2020, the anticipated reduction in earnings at the Coal Mining segment and the absence of $2.7 million pre-tax income associated with a prior India venture recorded in the third quarter of 2019. These items are expected to be partially offset by the recognition of a 2020 tax benefit as a result of the CARES Act and an improvement in earnings at the NAMining segment.
In 2020,royalty interests. The Company anticipates positive cash flow before financing activities is expected to bein 2021 but at a uselevel below the level of cash due to significant capital expenditures and payments madegenerated in the first half of the year related to deferred compensation and other payroll liabilities.2019. Consolidated capital expenditures are expected to be approximately $47 million in 2020. Capital expenditures were approximately $13 million in2021.
The extent to which COVID-19 impacts the first halfCompany going forward will depend on numerous factors, including but not limited to the duration of 2020.
Significant uncertainties exist regarding the ongoing pandemic, the severity of any COVID-19 pandemic, includingvariants, the effectiveness of actions taken to contain and treat COVID-19 and its variants, the nature of, and the public's adherence to, public health guidelines, the pace of vaccinations and subsequent achievement of herd immunity, as well as the severity of pandemic-related supply chain and cost inflation challenges and the pace and the extent of economic disruption it may cause in the future.recovery. While the Company's existing mining operations to date have not been materially affected by the pandemic, future developments, which are highly uncertain and unpredictable, could change the Company's status significantly and rapidly and could havecause a material adverse effect ondeterioration in the Company’s operations,results, supply chain channels and customers. customer demand.
Growth and Diversification
The extentCompany is pursuing growth and diversification by strategically leveraging its core mining and natural resources management skills to which COVID-19 may adversely impactbuild a strong portfolio of affiliated businesses.
NAMining is pursuing growth and diversification by expanding the Company depends on many factors, including but not limitedscope of its business development activities to the extentinclude potential customers who require a broad range of new outbreaks as communities reopen, the extent to which additional lockdowns may be needed, the nature of the government public health guidelinesminerals and the public's adherence to those guidelines, the success of businesses reopening,materials and the timing for proven treatments and vaccines for COVID-19. Even after the COVID-19 pandemic has subsided, the Company may experience material adverse effects due to a resulting decline in economic activity. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets and may continue to adversely impact NACCO's stock price.
One ofby leveraging the Company’s core strategiesmining skills to expand the range of contract mining services it provides. NAMining advanced this effort in early 2021, when it entered into a contract to mine sand and gravel in Indiana, expanding the traditional scope of its core limestone mining business in Florida. In addition, NAMining is pursuing opportunities to provide comprehensive mining services to operate entire mines when appropriate, as is the case at the new lithium project in Nevada. The goal is to build NAMining into a leading provider of contract mining services for customers who 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.
The Minerals Management segment continues its efforts to grow and diversify by pursuing acquisitions of additional mineral and royalty interests in the United States, in what the Company believes is a buyer-friendly market. Once mineral and royalty interests have been acquired, the Minerals Management segment will benefit from the continued development of its mineral properties without additional capital investment. 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 a sizeable pipeline of potential acquisitions under review. The goal is to construct a diversified portfolio of high-quality oil, 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 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, 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 works to drive downremains focused on managing coal production costs and maximizemaximizing efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive. This benefitsThese activities benefit both customers and the Company's Coal Mining segment, as fuel cost is the majora significant driver for power plant dispatch. Increased power plant dispatch drivesresults in increased demand for coal by the Coal Mining segment's customers, just as lower dispatch reduces demand.customers.
The Company continues to evaluatelook for opportunities to expand its coal mining business howeverwhere it can apply its management fee business model to assume operation of existing surface coal mining operations in the United States. However, opportunities are likely to be
very limited.limited in the current environment. Low natural gas prices and growth in renewable energy sources, such as wind and solar, couldare likely to continue to unfavorably affect the amount of electricity dispatched from coal-fired power plants. TheIn addition, the political and regulatory environment is not generally receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines. However, the Company does continue to seek out and pursue opportunities where it can apply its management fee business model to replace legacy operators of existing surface coal mining operations in the United States. Outright acquisitions of existing coal mines or mining companies with exposure to fluctuating coal commodity markets, or structures that would create significant leverage, are outside the Company’s area of focus.
The Company is focused on building a strong portfolio of affiliated businesses for diversification. NAMining continues to expand the scope of its business development activities to grow and diversify by targeting potential customers who require a broad range of minerals and materials. NAMining also continues to leverage the Company’s core mining skills to expand the range of contract mining services provided, in addition to providing comprehensive mining services to operate entire mines when appropriate, as is the case at the new lithium project in Nevada.
The Company’s efforts to grow and diversify the Minerals Management segment includes evaluating acquisitions of additional mineral interests or similar investments in the energy industry. The Company's primary initial focus will be on diversifying acquisitions of mineral interests with a balance of near-term cash flow yields and upside potential from future development. During the second quarter of 2020, the Company’s subsidiary, Catapult Mineral Partners, invested $2.0 million to acquire shares of a public company with a diversified portfolio of royalty producing mineral interests as part of this growth and diversification strategy. The recent dramatic downturn in petroleum prices provided an opportunity to make this investment at an attractive market multiple for a company with a conservative financial position, strong earnings potential and attractive historical dividend yield.
Mitigation Resources of North America® was formed to create and sell stream and wetland mitigation credits and provide services to those engaged in permittee-responsible mitigation. This business has achieved several early successes and is positioned for additional growth.
The Company is leveraging its core mining skills to develop a strong and diverse portfolio of service-based businesses operating in the mining and natural resources industries. The Company is also committed to maintaining a conservative capital structure while it grows and diversifies, withoutwhile avoiding unnecessary risk. Ultimately, diversified strategic growth is the key to increasingStrategic diversification will allow for increased free cash flow availablethat can be re-invested to continue to re-invest instrengthen 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.
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 a long-term mining contract, or a customer default under a contract, including any actions taken related to Great River Energy's Coal Creek Station power plant, (2) the duration and severity of the COVID-19 pandemic, any preventive or protective actions takena significant reduction in purchases by governmental authorities, the effectiveness of actions taken globally to contain or mitigate its effects and any unfavorable effects of the COVID-19 pandemic on the Company's suppliers' ability to provide products or replacement parts if the virus continues to spread or quarantines are reinstated, as well as other disruptions from natural or human causes,customers, including severe weather, accidents, fires, earthquakes, terrorist acts, any of which could result in suspension of operations or harm to people or the environment, (3) 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, (3) 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, (4) failure to obtain adequate insurance coverages at reasonable rates, (5) the impact of the COVID-19 pandemic, (6) 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, (5)(7) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (6)(8) regulatory actions,
changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (7)(9) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (8)(10) weather or equipment problems that could affect deliveries to customers, (9)(11) 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 (10)and leasing and development of oil and gas reserves on federal lands, (12) changes in the costs to reclaim mining areas, (11)(13) costs to pursue and develop new mining and value-added service opportunities, (12)(14) delays or reductions in coal or aggregates deliveries, (13)(15) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas and oil, (16) the ability to successfully evaluate investments and (14) increased competition,achieve intended financial results in new business and growth initiatives, (17) the effects of receiving low sustainability scores which could result in the exclusion of the Company's securities from consideration by certain investment funds, and (18) disruptions from natural or human causes, including consolidation withinsevere weather, accidents, fires, earthquakes and terrorist acts, any of which could result in suspension of operations or harm to people or the coal and aggregates industries.environment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide this information.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures: An evaluation was carried out under the supervision and with the participation of the Company's management, including the principal executive officer and the principal financial officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on
that evaluation, these officers have concluded that the Company's disclosure controls and procedures are effective.
Changes in internal control over financial reporting: During the secondfirst quarter of 2020,2021, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
None.
Item 1A Risk Factors
During the quarter ended June 30, 2020,March 31, 2021, there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, except as follows:
The Company’s results of operations, financial condition, cash flows and stock price could be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.
The Company’s results of operations, financial condition, cash flows and stock price could be adversely affected by pandemics, epidemics or other public health emergencies, such as the global outbreak of COVID-19. The COVID-19 pandemic resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures.
The Company has continued to operate as an essential business because it supports critical infrastructure industries, as defined by the U.S. Department of Homeland Security. Although the Company has continued to operate facilities consistent with federal guidelines and state and local orders, the ongoing COVID-19 pandemic and the preventive or protective actions taken by governmental authorities may have a material adverse effect on the Company’s operations, work force, supply chain or customers, including business shutdowns or disruptions. The extent to which COVID-19 may adversely impact the Company's businesses depends on future developments, which are highly uncertain and unpredictable, including the extent of new outbreaks as communities reopen, the extent to which additional lockdowns may be needed, the nature of the government public health guidelines and the public's adherence to those guidelines, the success of businesses reopening, and the timing for proven treatments and vaccines for COVID-19. Any resulting financial impact cannot reasonably be estimated at this time, but could have a material adverse effect on the Company’s financial condition, cash flows and results of operations.
Even after the COVID-19 pandemic has subsided, the Company may experience material adverse effects due to a decline in economic activity. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact NACCO's stock price.
Termination of or default under long-term mining contracts could materially reduce the Company's profitability.
Substantially all of the Coal Mining segment's profits are derived from long-term mining contracts. Although the Company has long-term contracts, numerous political and regulatory authorities, along with well-funded environmental activist groups, are devoting substantial resources to anti-coal activities to minimize or eliminate the use of coal as a source of electricity generation. As a result of such activities, the Coal Mining segment's customers could prematurely retire certain coal-fired generating units. Any customers' premature plant closure could have a material adverse effect on the Company’s business, financial condition and results of operations.
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.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract under which Falkirk also supplies approximately 0.3 million tons of lignite coal per year to Spiritwood Station. Falkirk has approximately 480 employees, and, in 2019, delivered a total of 7.4 million tons of lignite coal and contributed approximately $16 million to NACCO’s Earnings from Unconsolidated Operations. The closure of Coal Creek Station would have a material adverse effect on the long-term earnings of NACCO. 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.
Also noted in GRE’s announcement is their plan to negotiate an agreement to terminate their steam and water supply contract with Blue Flint, an ethanol biorefinery fueled by process steam from Coal Creek Station. Blue Flint’s owner,
Midwest AgEnergy, is considering using the contract termination payment from Great River Energy to reinvest in an economical alternate source for its process heat. NACCO has a $5.0 million investment in Midwest AgEnergy. If Midwest AgEnergy is unable to find an economical alternate source for its process heat, the Company’s investment could become impaired.
State implementation of the EPA’s Regional Haze Rule (“RHR”) could require Coyote Creek’s customers to incur significant new costs at the Coyote Station power plant, which could, dependent on determinations by state regulatory commissions on approval to recover such costs from Coyote Creek’s customer’s customers, negatively impact Coyote Creek’s customers’ net income, financial position and cash flows. The Company understands that the North Dakota Department of Environmental Quality (“NDDEQ”) intends to require sources subject to RHR Round 2 reasonable progress determinations, including Coyote Station, to undertake emissions control measures. If NDDEQ requires significant emissions controls at Coyote Station by December 31, 2028, it may not be economically feasible for Coyote Creek's customers to invest in such equipment and an early retirement of Coyote Station and the Coyote Creek mine could be necessary. NDDEQ’s state implementation plan is due to be submitted to the EPA by July 2021. The Company expects the NDDEQ to begin drafting preliminary control scenarios for regional visibility modeling in the first half of 2020 and a state implementation plan later in 2020.
Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), the Company would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, the Company is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. Any decision by Coyote Creek’s customers to reduce operations or prematurely close the Coyote mine would have a material adverse effect on the Company’s results of operations, financial position and cash flows.
Mississippi Lignite Mining Company ("MLMC") is subject to risks associated with its capital investment, operating and equipment costs, growing use of alternative power generation that competes with coal-fired power generation, changes in customer demand and inflationary adjustments.
The profitability of MLMC is subject to the risk of loss of investment in this operation, increases in the cost of mining, changes in customer demand, growing competition from alternative power generation that competes with coal-fired generation and the emergence of adverse mining conditions. At MLMC, the costs of mining operations are not reimbursed by MLMC's customer. As such, increased costs at MLMC or decreased revenues could materially reduce the Company's profitability. Any reduction in customer demand at MLMC, including reductions related to reduced mechanical availability of the customer’s power plant, would adversely affect the Company's operating results and could result in significant impairments. In addition, MLMC sells lignite at contractually agreed upon prices which are subject to changes in the level of established indices over time. The price of diesel fuel is heavily-weighted among these indices. As such, a substantial decline in diesel prices could materially reduce MLMC's profitability, as the decline in revenue will only be partially offset by the effect of lower diesel prices on production costs.
MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The Red Hills Power Plant supplies electricity to TVA under a long-term PPA. MLMC’s contract with its customer runs through 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. In 2019, TVA published its updated Integrated Resource Plan ("IRP"). The IRP indicates TVA plans to increase its reliance on solar power. A decrease in the number of days TVA dispatches the Red Hills Power Plant would reduce MLMC's customer's demand for coal. The decision of which power plants to dispatch is determined by TVA. TVA has dispatched Red Hills Power Plant at a lower rate in the last two years than in prior years.
Choctaw Generation Limited Partnership ("CGLP") leases the Red Hills Power Plant from a Southern Company subsidiary pursuant to a leveraged lease arrangement. The ability of the lessee to make required payments to the Southern Company subsidiary is dependent on the operational performance of the Red Hills Power Plant. Southern Company recently publicly disclosed that while all CGLP lease payments have been paid in full through June 30, 2020, operational and other risks have resulted in cash liquidity challenges at the Red Hills Power Plant, and based on current forecasts of energy prices in the years following the expiration of the PPA in 2032, concerns exist regarding the lessee's ability to make the remaining semi-annual lease payments through the end of the lease term in 2047. During the fourth quarter of 2019, Southern Company concluded that it was no longer probable that all of the payments would be received over the term of the lease and therefore recognized an impairment charge to reduce the value of the lease investment. During the second quarter 2020, Southern Company revised the estimated cash flows to be received under the leveraged lease which resulted in a full impairment of the lease investment. If any future lease payment is not paid
in full, the Southern Company subsidiary may be unable to make its corresponding payment to the holders of the underlying non-recourse debt related to the Red Hills Power Plant. Failure to make the required payment to the debtholders could represent an event of default that would give the debtholders the right to foreclose on, and take ownership of, the Red Hills Power Plant from the Southern Company subsidiary. A foreclosure of the Red Hills Power Plant could have a material adverse effect on MLMC's financial condition, results of operations and cash flows.
Similar to the Company's unconsolidated mines, all production costs at MLMC are capitalized into inventory and recognized in cost of sales as tons are delivered. In periods of limited or no deliveries, MLMC may be required to reduce its inventory carrying value using the lower of cost or net realizable value approach, which could adversely affect MLMC’s results of operations.
Changes in customer demand for any reason, including, but not limited to, reduced mechanical availability of the customer’s power plant, dispatch of power generated by other energy sources ahead of coal, fluctuations in demand due to unanticipated weather conditions, regulations or comparable policies which may promote planned and unplanned outages at the Red Hills Power Plant, economic conditions, including an economic slowdown and a corresponding decline in the use of electricity, governmental regulations and inflationary adjustments could have a material adverse effect on MLMC's financial condition, results of operations and cash flows.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
| | | | | | | | | | | | | |
Issuer Purchases of Equity Securities (1) |
| Period | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of the Publicly Announced Program | | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (1) |
Month #1 (April 1 to 30, 2020) | — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
Month #2 (May 1 to 31, 2020) | — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
Month #3 (June 1 to 30, 2020) | — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
| Total | — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities (1) |
| Period | In November 2019, the Company established a stock repurchase program allowing for the purchase(a)
Total Number of up to $25.0 millionShares Purchased | | (b)
Average Price Paid per Share | | (c)
Total Number of Shares Purchased as Part of the Company's Class A Common Stock outstanding through DecemberPublicly Announced Program | | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (1) |
Month #1
(January 1 to 31, 2021. See Note 52021) | — | | | $ | — | | | — | | | $ | 22,659,516 | |
Month #2
(February 1 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program.28, 2021) | — | | | $ | — | | | — | | | $ | 22,659,516 | |
Month #3
(March 1 to 31, 2021) | — | | | $ | — | | | — | | | $ | 22,659,516 | |
| Total | — | | | $ | — | | | — | | | $ | 22,659,516 | |
(1) During 2019, the Company established a stock repurchase program allowing for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2021. See Note 4 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 filed with this Quarterly Report on Form 10-Q for the period ended June 30, 2020.March 31, 2021.
Item 5 Other Information
None.
Item 6 Exhibits
| | | | | | | | |
| Exhibit | | |
| Number* | | Description of Exhibits |
| | |
Exhibit31(i)(1) | | |
Number* | | Description of Exhibits |
| | |
31(i)(1) | | |
| 31(i)(2) | | |
| 32 | | |
| 95 | | |
| 101.INS | | Inline XBRL Instance Document |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Numbered in accordance with Item 601 of Regulation S-K.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | | | | |
| | NACCO Industries, Inc. (Registrant) | |
| Date: | AugustMay 5, 20202021 | /s/ Elizabeth I. Loveman | |
| | Elizabeth I. Loveman | |
| | Vice President and Controller
(principal financial and accounting officer) | |