UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
| | | | | | | | | | | |
(Mark One) | | | |
☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended | September 30, 2022March 31, 2023 |
OR
| | | | | | | | |
☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission file number 1-9172
| | | | | | | | | | | | | | | | | | | | |
| | | NACCO INDUSTRIES, INC. | | |
| | | (Exact name of registrant as specified in its charter) | | |
| Delaware | | | 34-1505819
| |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | |
| | | | | | |
| 5875 Landerbrook Drive | | | | |
| Suite 220 | | | | |
| Cleveland, | Ohio | | | 44124-4069 | |
| (Address of principal executive offices) | | | (Zip code) | |
| | | (440) | 229-5151 | | |
| | | (Registrant's telephone number, including area code) | | |
| | | N/A | | |
| | | (Former name, former address and former fiscal year, if changed since last report) | | |
Securities registered pursuant to Section 12(b) of the Act
| | | | | | | | | | | | | | |
Title of each class
| | Trading Symbol
| | Name of each exchange on which registered
|
Class A Common Stock, $1 par value per share | | NC | | New York Stock Exchange |
Class B Common Stock is not publicly listed for trade on any exchange or market system; however, Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | ☐ | | Accelerated Filer | ☑ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☑ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No þ
Number of shares of Class A Common Stock outstanding at OctoberApril 28, 2022: 5,775,9542023: 5,944,585
Number of shares of Class B Common Stock outstanding at OctoberApril 28, 2022: 1,566,3292023: 1,565,929
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | SEPTEMBER 30 2022 | | DECEMBER 31 2021 | | MARCH 31 2023 | | DECEMBER 31 2022 |
| | (In thousands, except share data) | | (In thousands, except share data) |
ASSETS | ASSETS | | | ASSETS | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 92,754 | | | $ | 86,005 | | Cash and cash equivalents | $ | 109,637 | | | $ | 110,748 | |
Trade accounts receivable | Trade accounts receivable | 23,603 | | | 25,667 | | Trade accounts receivable | 31,039 | | | 37,940 | |
Accounts receivable from affiliates | Accounts receivable from affiliates | 6,672 | | | 5,605 | | Accounts receivable from affiliates | 4,476 | | | 6,638 | |
Inventories | Inventories | 61,799 | | | 54,085 | | Inventories | 71,246 | | | 71,488 | |
| Federal income tax receivable | Federal income tax receivable | 23,046 | | | 15,054 | | Federal income tax receivable | 15,098 | | | 15,687 | |
Prepaid insurance | Prepaid insurance | 4,249 | | | 2,016 | | Prepaid insurance | 11,840 | | | 1,999 | |
Other current assets | Other current assets | 17,156 | | | 14,621 | | Other current assets | 12,918 | | | 15,907 | |
Total current assets | Total current assets | 229,279 | | | 203,053 | | Total current assets | 256,254 | | | 260,407 | |
Property, plant and equipment, net | Property, plant and equipment, net | 213,435 | | | 193,167 | | Property, plant and equipment, net | 219,772 | | | 217,952 | |
| Intangibles, net | Intangibles, net | 29,001 | | | 31,774 | | Intangibles, net | 27,328 | | | 28,055 | |
| Investments in unconsolidated subsidiaries | Investments in unconsolidated subsidiaries | 9,853 | | | 19,090 | | Investments in unconsolidated subsidiaries | 13,945 | | | 14,927 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 7,912 | | | 8,911 | | Operating lease right-of-use assets | 6,221 | | | 6,419 | |
Investment in private company equity units | 19,958 | | | 5,000 | | |
| Other non-current assets | Other non-current assets | 50,766 | | | 46,225 | | Other non-current assets | 38,604 | | | 40,312 | |
Total assets | Total assets | $ | 560,204 | | | $ | 507,220 | | Total assets | $ | 562,124 | | | $ | 568,072 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Accounts payable | Accounts payable | $ | 11,371 | | | $ | 12,208 | | Accounts payable | $ | 10,610 | | | $ | 11,952 | |
Accounts payable to affiliates | Accounts payable to affiliates | 699 | | | 741 | | Accounts payable to affiliates | 868 | | | 1,362 | |
| Current maturities of long-term debt | Current maturities of long-term debt | 2,955 | | | 2,527 | | Current maturities of long-term debt | 2,943 | | | 3,649 | |
Asset retirement obligations | Asset retirement obligations | 1,820 | | | 1,820 | | Asset retirement obligations | 2,497 | | | 1,746 | |
Accrued payroll | Accrued payroll | 16,640 | | | 16,339 | | Accrued payroll | 7,922 | | | 18,105 | |
| Deferred revenue | Deferred revenue | 1,334 | | | 4,082 | | Deferred revenue | 2,044 | | | 833 | |
Other current liabilities | Other current liabilities | 9,150 | | | 8,299 | | Other current liabilities | 7,128 | | | 6,623 | |
Total current liabilities | Total current liabilities | 43,969 | | | 46,016 | | Total current liabilities | 34,012 | | | 44,270 | |
Long-term debt | Long-term debt | 15,322 | | | 18,183 | | Long-term debt | 17,434 | | | 16,019 | |
Operating lease liabilities | Operating lease liabilities | 8,944 | | | 9,733 | | Operating lease liabilities | 7,278 | | | 7,528 | |
Asset retirement obligations | Asset retirement obligations | 43,326 | | | 42,131 | | Asset retirement obligations | 46,418 | | | 44,256 | |
Pension and other postretirement obligations | Pension and other postretirement obligations | 4,943 | | | 6,605 | | Pension and other postretirement obligations | 4,778 | | | 5,082 | |
Deferred income taxes | Deferred income taxes | 11,299 | | | 14,792 | | Deferred income taxes | 3,701 | | | 6,122 | |
Liability for uncertain tax positions | Liability for uncertain tax positions | 9,280 | | | 10,113 | | Liability for uncertain tax positions | 9,004 | | | 9,329 | |
Other long-term liabilities | Other long-term liabilities | 7,700 | | | 7,531 | | Other long-term liabilities | 7,813 | | | 8,500 | |
Total liabilities | Total liabilities | 144,783 | | | 155,104 | | Total liabilities | 130,438 | | | 141,106 | |
Stockholders' equity | Stockholders' equity | | | | Stockholders' equity | | | |
Common stock: | Common stock: | | | | Common stock: | | | |
Class A, par value $1 per share, 5,775,910 shares outstanding (December 31, 2021 - 5,616,568 shares outstanding) | 5,776 | | | 5,616 | | |
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,566,373 shares outstanding (December 31, 2021 - 1,566,613 shares outstanding) | 1,566 | | | 1,567 | | |
Class A, par value $1 per share, 5,944,585 shares outstanding (December 31, 2022 - 5,782,944 shares outstanding) | | Class A, par value $1 per share, 5,944,585 shares outstanding (December 31, 2022 - 5,782,944 shares outstanding) | 5,944 | | | 5,783 | |
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,565,929 shares outstanding (December 31, 2022 - 1,566,129 shares outstanding) | | Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,565,929 shares outstanding (December 31, 2022 - 1,566,129 shares outstanding) | 1,566 | | | 1,566 | |
Capital in excess of par value | Capital in excess of par value | 23,235 | | | 16,331 | | Capital in excess of par value | 24,109 | | | 23,706 | |
Retained earnings | Retained earnings | 392,666 | | | 336,778 | | Retained earnings | 409,059 | | | 404,924 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (7,822) | | | (8,176) | | Accumulated other comprehensive loss | (8,992) | | | (9,013) | |
Total stockholders' equity | Total stockholders' equity | 415,421 | | | 352,116 | | Total stockholders' equity | 431,686 | | | 426,966 | |
Total liabilities and equity | Total liabilities and equity | $ | 560,204 | | | $ | 507,220 | | Total liabilities and equity | $ | 562,124 | | | $ | 568,072 | |
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | THREE MONTHS ENDED | | NINE MONTHS ENDED | | THREE MONTHS ENDED | |
| | SEPTEMBER 30 | | SEPTEMBER 30 | | MARCH 31 | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | (In thousands, except per share data) | | (In thousands, except per share data) |
Revenues | Revenues | $ | 61,793 | | | $ | 51,742 | | | $ | 178,185 | | | $ | 142,743 | | Revenues | $ | 50,141 | | | $ | 55,023 | | |
Cost of sales | Cost of sales | 43,965 | | | 37,413 | | | 128,867 | | | 111,737 | | Cost of sales | 46,784 | | | 39,176 | | |
Gross profit | Gross profit | 17,828 | | | 14,329 | | | 49,318 | | | 31,006 | | Gross profit | 3,357 | | | 15,847 | | |
Earnings of unconsolidated operations | Earnings of unconsolidated operations | 14,588 | | | 17,652 | | | 43,802 | | | 46,536 | | Earnings of unconsolidated operations | 13,824 | | | 14,592 | | |
Contract termination settlement | — | | | 10,333 | | | 14,000 | | | 10,333 | | |
| Operating expenses | Operating expenses | | Operating expenses | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 17,790 | | | 13,830 | | | 48,415 | | | 40,471 | | Selling, general and administrative expenses | 14,876 | | | 14,784 | | |
Amortization of intangible assets | Amortization of intangible assets | 867 | | | 902 | | | 2,772 | | | 2,795 | | Amortization of intangible assets | 727 | | | 847 | | |
(Gain) loss on sale of assets
| 2 | | | (10) | | | (2,451) | | | 17 | | |
Asset impairment charges | 3,939 | | | — | | | 3,939 | | | — | | |
Gain on sale of assets
| | Gain on sale of assets
| (236) | | | (136) | | |
| | | 22,598 | | | 14,722 | | | 52,675 | | | 43,283 | | | 15,367 | | | 15,495 | | |
Operating profit | Operating profit | 9,818 | | | 27,592 | | | 54,445 | | | 44,592 | | Operating profit | 1,814 | | | 14,944 | | |
Other (income) expense | Other (income) expense | | | | Other (income) expense | | | |
Interest expense | Interest expense | 486 | | | 493 | | | 1,495 | | | 1,208 | | Interest expense | 545 | | | 513 | | |
Interest income | Interest income | (352) | | | (101) | | | (692) | | | (321) | | Interest income | (1,155) | | | (145) | | |
Closed mine obligations | Closed mine obligations | 398 | | | 372 | | | 1,155 | | | 1,119 | | Closed mine obligations | 409 | | | 380 | | |
Loss (gain) on equity securities | 316 | | | (445) | | | 1,676 | | | (2,530) | | |
Income from equity method investee | (2,156) | | | — | | | (2,156) | | | — | | |
Other contract termination settlements | — | | | — | | | (16,882) | | | — | | |
Gain on equity securities | | Gain on equity securities | (628) | | | (518) | | |
| Other, net | Other, net | (354) | | | (161) | | | (1,648) | | | (418) | | Other, net | (1,725) | | | (230) | | |
| | (1,662) | | | 158 | | | (17,052) | | | (942) | | | (2,554) | | | — | | |
Income before income tax provision | 11,480 | | | 27,434 | | | 71,497 | | | 45,534 | | |
Income tax provision | 866 | | | 2,597 | | | 11,121 | | | 5,231 | | |
Income before income tax (benefit) provision | | Income before income tax (benefit) provision | 4,368 | | | 14,944 | | |
Income tax (benefit) provision | | Income tax (benefit) provision | (1,324) | | | 2,362 | | |
Net income | Net income | $ | 10,614 | | | $ | 24,837 | | | $ | 60,376 | | | $ | 40,303 | | Net income | $ | 5,692 | | | $ | 12,582 | | |
| | | | | | | | | | | | | |
Earnings per share: | Earnings per share: | | Earnings per share: | | |
Basic earnings per share | Basic earnings per share | $ | 1.45 | | | $ | 3.47 | | | $ | 8.27 | | | $ | 5.65 | | Basic earnings per share | $ | 0.77 | | | $ | 1.73 | | |
Diluted earnings per share | Diluted earnings per share | $ | 1.45 | | | $ | 3.47 | | | $ | 8.24 | | | $ | 5.63 | | Diluted earnings per share | $ | 0.76 | | | $ | 1.72 | | |
| | | | | | | | | | | | | |
Basic weighted average shares outstanding | Basic weighted average shares outstanding | 7,337 | | | 7,165 | | | 7,302 | | | 7,136 | | Basic weighted average shares outstanding | 7,428 | | | 7,253 | | |
Diluted weighted average shares outstanding | Diluted weighted average shares outstanding | 7,337 | | | 7,165 | | | 7,329 | | | 7,153 | | Diluted weighted average shares outstanding | 7,515 | | | 7,321 | | |
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | THREE MONTHS ENDED | | NINE MONTHS ENDED | | THREE MONTHS ENDED | |
| | SEPTEMBER 30 | | SEPTEMBER 30 | | MARCH 31 | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | (In thousands) | | (In thousands) |
Net income | Net income | $ | 10,614 | | | $ | 24,837 | | | $ | 60,376 | | | $ | 40,303 | | Net income | $ | 5,692 | | | $ | 12,582 | | |
| Reclassification of pension and postretirement adjustments into earnings, net of $38 and $105 tax benefit in the three and nine months ended September 30, 2022, respectively, and net of $42 and $127 tax benefit in the three and nine months ended September 30, 2021, respectively. | 118 | | | 143 | | | 354 | | | 429 | | |
Reclassification of pension and postretirement adjustments into earnings, net of $6 and $35 tax benefit in the three months ended March 31, 2023 and March 31, 2022, respectively. | | Reclassification of pension and postretirement adjustments into earnings, net of $6 and $35 tax benefit in the three months ended March 31, 2023 and March 31, 2022, respectively. | 21 | | | 118 | | |
Total other comprehensive income | Total other comprehensive income | 118 | | | 143 | | | 354 | | | 429 | | Total other comprehensive income | 21 | | | 118 | | |
Comprehensive income | Comprehensive income | $ | 10,732 | | | $ | 24,980 | | | $ | 60,730 | | | $ | 40,732 | | Comprehensive income | $ | 5,713 | | | $ | 12,700 | | |
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | NINE MONTHS ENDED | | THREE MONTHS ENDED |
| | SEPTEMBER 30 | | MARCH 31 |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | (In thousands) | | (In thousands) |
Operating activities | Operating activities | | Operating activities | |
| Net cash provided by operating activities | $ | 54,929 | | | $ | 67,794 | | |
Net cash provided by (used for) operating activities | | Net cash provided by (used for) operating activities | $ | 6,254 | | | $ | (1,070) | |
| Investing activities | Investing activities | | | Investing activities | | |
Expenditures for property, plant and equipment and acquisition of mineral interests | Expenditures for property, plant and equipment and acquisition of mineral interests | (42,004) | | | (35,534) | | Expenditures for property, plant and equipment and acquisition of mineral interests | (7,879) | | | (4,649) | |
Proceeds from the sale of property, plant and equipment | Proceeds from the sale of property, plant and equipment | 2,824 | | | 547 | | Proceeds from the sale of property, plant and equipment | 272 | | | 135 | |
Proceeds from the sale of private company equity units | | Proceeds from the sale of private company equity units | 1,153 | | | — | |
| Other | Other | (58) | | | (52) | | Other | (10) | | | (15) | |
Net cash used for investing activities | Net cash used for investing activities | (39,238) | | | (35,039) | | Net cash used for investing activities | (6,464) | | | (4,529) | |
| | | | | | |
Financing activities | Financing activities | | | Financing activities | | |
Additions to long-term debt | Additions to long-term debt | 1,664 | | | 3,633 | | Additions to long-term debt | 2,112 | | | 3,348 | |
Reductions of long-term debt | Reductions of long-term debt | (2,118) | | | (3,131) | | Reductions of long-term debt | (1,456) | | | (2,689) | |
Net reductions to revolving credit agreements | (4,000) | | | (30,000) | | |
Net additions to revolving credit agreements | | Net additions to revolving credit agreements | — | | | 2,000 | |
Cash dividends paid | Cash dividends paid | (4,488) | | | (4,200) | | Cash dividends paid | (1,557) | | | (1,445) | |
| Net cash used for financing activities | (8,942) | | | (33,698) | | |
Net cash (used for) provided by financing activities | | Net cash (used for) provided by financing activities | (901) | | | 1,214 | |
| Cash and cash equivalents | Cash and cash equivalents | | | Cash and cash equivalents | | |
Total increase (decrease) for the period | 6,749 | | | (943) | | |
Total decrease for the period | | Total decrease for the period | (1,111) | | | (4,385) | |
Balance at the beginning of the period | Balance at the beginning of the period | 86,005 | | | 88,450 | | Balance at the beginning of the period | 110,748 | | | 86,005 | |
Balance at the end of the period | Balance at the end of the period | $ | 92,754 | | | $ | 87,507 | | Balance at the end of the period | $ | 109,637 | | | $ | 81,620 | |
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| | | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | (In thousands, except per share data) | | (In thousands, except per share data) |
Balance, January 1, 2021 | $ | 5,490 | | $ | 1,568 | | $ | 10,895 | | $ | 294,270 | | $ | (11,599) | | | $ | 300,624 | | |
Stock-based compensation | 92 | | — | | 923 | | — | | — | | | 1,015 | | |
Conversion of Class B to Class A shares | 1 | | (1) | | — | | — | | — | | | — | | |
Net income | — | | — | | — | | 8,961 | | — | | | 8,961 | | |
Cash dividends on Class A and Class B common stock: $0.1925 per share | — | | — | | — | | (1,374) | | — | | | (1,374) | | |
Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 143 | | | 143 | | |
Balance, March 31, 2021 | $ | 5,583 | | $ | 1,567 | | $ | 11,818 | | $ | 301,857 | | $ | (11,456) | | | $ | 309,369 | | |
Stock-based compensation | 12 | | — | | 1,110 | | — | | — | | | 1,122 | | |
Net income | — | | — | | — | | 6,505 | | — | | | 6,505 | | |
Cash dividends on Class A and Class B common stock: $0.1975 per share | — | | — | | — | | (1,412) | | — | | | (1,412) | | |
Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 143 | | | 143 | | |
Balance, June 30, 2021 | $ | 5,595 | | $ | 1,567 | | $ | 12,928 | | $ | 306,950 | | $ | (11,313) | | | $ | 315,727 | | |
Stock-based compensation | 12 | | — | | 1,614 | | — | | — | | | 1,626 | | |
Net income | — | | — | | — | | 24,837 | | — | | | 24,837 | | |
Cash dividends on Class A and Class B common stock: $0.1975 per share | — | | — | | — | | (1,414) | | — | | | (1,414) | | |
Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 143 | | | 143 | | |
Balance, September 30, 2021 | $ | 5,607 | | $ | 1,567 | | $ | 14,542 | | $ | 330,373 | | $ | (11,170) | | | $ | 340,919 | | |
| Balance, January 1, 2022 | Balance, January 1, 2022 | $ | 5,616 | | $ | 1,567 | | $ | 16,331 | | $ | 336,778 | | $ | (8,176) | | | $ | 352,116 | | Balance, January 1, 2022 | $ | 5,616 | | $ | 1,567 | | $ | 16,331 | | $ | 336,778 | | $ | (8,176) | | | $ | 352,116 | |
Stock-based compensation | Stock-based compensation | 145 | | — | | 978 | | — | | — | | | 1,123 | | Stock-based compensation | 145 | | — | | 978 | | — | | — | | | 1,123 | |
| Conversion of Class B to Class A shares | Conversion of Class B to Class A shares | 1 | | (1) | | — | | — | | — | | | — | | Conversion of Class B to Class A shares | 1 | | (1) | | — | | — | | — | | | — | |
Net income | Net income | — | | — | | — | | 12,582 | | — | | | 12,582 | | Net income | — | | — | | — | | 12,582 | | — | | | 12,582 | |
Cash dividends on Class A and Class B common stock: $0.1975 per share | Cash dividends on Class A and Class B common stock: $0.1975 per share | — | | — | | — | | (1,445) | | — | | | (1,445) | | Cash dividends on Class A and Class B common stock: $0.1975 per share | — | | — | | — | | (1,445) | | — | | | (1,445) | |
Reclassification adjustment to net income, net of tax | Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 118 | | | 118 | | Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 118 | | | 118 | |
Balance, March 31, 2022 | Balance, March 31, 2022 | $ | 5,762 | | $ | 1,566 | | $ | 17,309 | | $ | 347,915 | | $ | (8,058) | | | $ | 364,494 | | Balance, March 31, 2022 | $ | 5,762 | | $ | 1,566 | | $ | 17,309 | | $ | 347,915 | | $ | (8,058) | | | $ | 364,494 | |
Stock-based compensation | 7 | | — | | 2,325 | | — | | — | | | 2,332 | | |
| Net income | — | | — | | — | | 37,180 | | — | | | 37,180 | | |
Cash dividends on Class A and Class B common stock: $0.2075 per share | — | | — | | — | | (1,521) | | — | | | (1,521) | | |
Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 118 | | | 118 | | |
Balance, June 30, 2022 | $ | 5,769 | | $ | 1,566 | | $ | 19,634 | | $ | 383,574 | | $ | (7,940) | | | $ | 402,603 | | |
| | Balance, January 1, 2023 | | Balance, January 1, 2023 | $ | 5,783 | | $ | 1,566 | | $ | 23,706 | | $ | 404,924 | | $ | (9,013) | | | $ | 426,966 | |
Stock-based compensation | Stock-based compensation | 7 | | — | | 3,601 | | — | | — | | | 3,608 | | Stock-based compensation | 161 | | — | | 403 | | — | | — | | | 564 | |
| Net income | Net income | — | | — | | — | | 10,614 | | — | | | 10,614 | | Net income | — | | — | | — | | 5,692 | | — | | | 5,692 | |
Cash dividends on Class A and Class B common stock: $0.2075 per share | Cash dividends on Class A and Class B common stock: $0.2075 per share | — | | — | | — | | (1,522) | | — | | | (1,522) | | Cash dividends on Class A and Class B common stock: $0.2075 per share | — | | — | | — | | (1,557) | | — | | | (1,557) | |
Reclassification adjustment to net income, net of tax | Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 118 | | | 118 | | Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 21 | | | 21 | |
Balance, September 30, 2022 | $ | 5,776 | | $ | 1,566 | | $ | 23,235 | | $ | 392,666 | | $ | (7,822) | | | $ | 415,421 | | |
Balance, March 31, 2023 | | Balance, March 31, 2023 | $ | 5,944 | | $ | 1,566 | | $ | 24,109 | | $ | 409,059 | | $ | (8,992) | | | $ | 431,686 | |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022MARCH 31, 2023
(In thousands, except as noted and per share amounts)
NOTE 1—Nature of Operations and Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources businesses. The Company operates under three business segments: Coal Mining, North American Mining ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners ("Catapult") business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® ("Mitigation Resources") provides stream and wetland mitigation solutions.
The Company also has items not directly attributable to a reportable segment. Intercompany accounts and transactions are eliminated in consolidation.
Effective January 1, 2022, the Company changed the composition of its reportable segments. As a result, the Company retrospectively changed its computation of segment operating profit to reclassify the results of Caddo Creek Resources Company, LLC (“Caddo Creek”) and Demery Resources Company, LLC ("Demery") from the Coal Mining segment into the NAMining segment as these operations provide mining solutions for producers of industrial minerals, rather than for power generation. The Coal Mining segment now includes only mines that deliver coal to power generation companies. This segment reporting change has no impact on consolidated operating results. All prior period segment information has been reclassified to conform to the new presentation. See Note 8 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.
The Company’s operating segments are further described below:
Coal Mining Segment
The Coal Mining segment, operating as The North American Coal Corporation® ("NACoal"), operates surface coal mines under long-term contracts with power generation companies pursuant to a service-based business model. Lignite coalCoal is surface mined in North Dakota, Texas and Mississippi. Each mine is fully integrated with its customer's operations and is the exclusive supplier of coal to its customer's facilities.operations.
During the three and nine months ended September 30, 2022,March 31, 2023, the Coal Mining segment's operating coal mines were: The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Each of these mines deliver their coal production to adjacent power plants or synfuels plants under long-term supply contracts. MLMC’s coal supply contract contains a take or pay provision; all other coal supply contracts are requirements contracts under which earnings can fluctuate. Certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.
On May 2, 2022, Great River Energy (“GRE”) completed the sale of Coal Creek Station and the adjacent high-voltage direct current transmission line to Rainbow Energy Center, LLC (“Rainbow Energy”) and its affiliates. As a result of the completion of the sale of Coal Creek Station, the Coal Sales Agreement, the Mortgage and Security Agreement and the Option Agreement between GRE and Falkirk were terminated. The Company recognized a gain of $30.9 million within the accompanying Unaudited Condensed Consolidated Statements of Operations during the second quarter of 2022 as GRE paid NACoal $14.0 million in cash, as well as transferred ownership of an office building with an estimated fair value of $4.1 million, and conveyed membership units in a privately-held company involved in the ethanol industrywith an estimated fair value of $12.8 million, as agreed to under the termination and release of claims agreement between Falkirk and GRE. See Note 5 for further discussion on fair value. Prior to receiving the membership units from GRE, the Company held a $5.0 million investment in the same privately-held company carried at cost, less impairment. Subsequent to the receipt of the additional membership units on May 2, 2022, the Company began to account for the investment under the equity method of accounting subject to a one quarter reporting lag.
The new Coal Sales Agreement (“CSA”) between Falkirk and Rainbow Energy became effective upon the closing of the transaction. Falkirk continues to supply all coal requirements of Coal Creek Station and is paid a management fee per ton of coal delivered. To support the transfer to new ownership, Falkirk has agreed to a reduction in the current per ton management fee from the effective date of the new CSA through May 31, 2024. After May 31, 2024, the per ton management fee increases to a higher base in line with 2021 fee levels, and thereafter adjusts annually according to an index which tracks broad measures of U.S. inflation. Rainbow Energy is responsible for funding all mine operating costs, including mine reclamation, and directly or indirectly providing all of the capital required to operate the mine. The initial production period is expected to run ten years from the effective date of the CSA, but the CSA may be extended or terminated early under certain circumstances.
During the three and nine months ended September 30, 2021, the Coal Mining segment's operating coal mines also included Bisti Fuels Company, LLC (“Bisti”). Effective September 30, 2021, the contract mining agreement between Bisti and its customer, Navajo Transitional Energy Company ("NTEC"), was terminated.
Coteau operates the Freedom Mine in North Dakota. All coal production from the Freedom Mine is delivered to Basin Electric Power Cooperative (“Basin Electric”). Basin Electric utilizes the coal at the Great Plains Synfuels Plant (the “Synfuels Plant”), Antelope Valley Station and Leland Olds Station. The Synfuels Plant is a coal gasification plant, owned by Dakota Gasification Company (“Dakota Gas’), a subsidiary of Basin Electric, that manufactures synthetic natural gas and produces fertilizers, solvents, phenol, carbon dioxide, and other chemical products for sale. During 2020, Basin Electric informed Coteau that it is considering changes that may result in modifications to its Synfuels Plant that could potentially reduce or eliminate coal requirements at the Synfuels Plant. During 2021, Bakken Energy (“Bakken”) and Basin Electric signed a non-binding term sheet to transfer ownership of the assets of Dakota Gas to Bakken. Bakken stated the closing date is expected to be April 1, 2023. The closing is subject to the satisfaction of specified conditions. As part of the term sheet between Basin Electric and Bakken, Basin Electric indicated that the Synfuels Plant will continue existing operations through 2026. Basin Electric is also considering other options for the Synfuels Plant if the transaction with Bakken does not close.
Sabine operates the Sabine Mine in Texas. All production from Sabine is delivered to Southwestern Electric Power Company's (“SWEPCO”) Henry W. Pirkey Plant (the “Pirkey Plant”). SWEPCO is an American Electric Power (“AEP”) company. AEP intends to retireAs a result of the early retirement of the Pirkey Plant, Sabine ceased deliveries in 2023. Sabine expects deliveries to cease during the first quarter ofMarch 2023 at which time it expects to beginand final reclamation.reclamation began on April 1, 2023. Funding for mine reclamation is the responsibility of SWEPCO.SWEPCO, and Sabine will receive compensation for providing mine reclamation services.
The United States Environmental Protection Agency (the “EPA”) has a comprehensive regulatory program to manage the disposal of coal combustion residuals (“CCR”) from coal-fired power plants as non-hazardous material under the Resource Conservation and Recovery Act (“RCRA”). Individual states administer some or all of the provisions of RCRA. The North Dakota Department of Environmental Quality approved Falkirk’s customer's plan for an alternate disposal liner to store coal ash at the Coal Creek Station power plant. In the first quarter of 2023, the EPA proposed to deny the application. If denied, a new liner or new waste management unit(s) may need to be installed which could result in the temporary suspension of operations at Coal Creek Station. Falkirk is the sole supplier of lignite to Coal Creek Station. Any suspension of operations at Coal Creek Station would eliminate the need for lignite coal during the suspension period. Any such suspension of operations at Coal Creek Station or any of the power plants supplied by the Company's mines could have a material adverse effect on the Company’s business, financial condition and results of operations. See page 18 for further information on the Resource Conservation and Recovery Act.
MLMC is the exclusive supplier of lignite to the Red Hills Power Plant in Ackerman, Mississippi. Choctaw Generation Limited Partnership ("CGLP") leases the Red Hills Power Plant from a Southern Company subsidiary pursuant to a leveraged lease arrangement. CGLP's ability to make required payments to the Southern Company subsidiary is dependent on the operational performance of the Red Hills Power Plant. During 2022, Southern Company disclosed that it provided notice to the lessee, CGLP, to terminate the related operating and maintenance agreement effective June 30, 2023. Subsequently, CGLP failed to make the semi-annual lease payment due in December 2022 and as a result, the Southern Company subsidiary was unable to make its corresponding payment to the debtholders. The parties to the lease have entered into a forbearance agreement which suspends the related contractual rights of the parties while they continue restructuring negotiations, which could result in rescission of the termination notice. The ultimate outcome of this matter cannot be determined at this time but could have a material impact on the Company's financial statements if the operating and maintenance agreement is terminated.
At Coteau, Coyote Creek, Falkirk and Sabine,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 provide all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. See Note 6 for further discussion of Coyote Creek's guarantees.
Coteau, Coyote Creek, Falkirk and Sabine eachAll 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 VIEs is reported as Earnings of unconsolidated operations on the Unaudited Condensed Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in unconsolidated subsidiaries in the Unaudited Condensed Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the Income tax (benefit) provision line on the Unaudited Condensed Consolidated Statements of Operations includes income taxes related to these entities. See Note 6 for further information on the Unconsolidated Subsidiaries.
While Falkirk meets the definition of a VIE, the completion of the Rainbow Energy transaction resulted in a VIE reconsideration event. As the terms of the contract between Falkirk and Rainbow Energy are substantially the same as the terms of the contract between Falkirk and GRE, Falkirk will remain a VIE and Rainbow Energy is the primary beneficiary; therefore, NACCO will continue to account for Falkirk under the equity method.
The Company performs contemporaneous reclamation activities at each mine in the normal course of operations. Under all of the Unconsolidated Subsidiaries’ contracts, the customer has the obligation to fund final mine reclamation activities. Under certain contracts, the Unconsolidated Subsidiary holds the mine permit and is therefore responsible for final mine reclamation
activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement from customers for costs incurred.
The MLMC contract is the only operating coal contract in which the Company is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal and changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC.
MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority ("TVA") under a long-term Power Purchase Agreement. MLMC’s contract with its customer runs through 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision of which power plants to dispatch is determined by TVA. Reduction in dispatch of the Red Hills Power Plant will result in reduced earnings at MLMC.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of industrial minerals. The segment is a primary platform for the Company’s growth and diversification of mining activities outside of the thermal coal industry. NAMining provides contract mining services for independently owned mines and quarries, creating value for its customers by performing the mining aspects of its customers’ operations. This allows customers to focus on their areas of expertise: materials handling and processing, product sales and distribution. As of March 31, 2023, NAMining historically operated primarily at limestone quarriesoperates mines in Florida, but is focused on continuing to expand outside of Florida, mining materials other than limestoneTexas, Arkansas, Indiana, Virginia and expandingNebraska and will serve as exclusive contract miner for the scope of mining operations provided to its customers.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 derives income primarily by leasing its royalty and mineral interests to third-party exploration and production companies, and, to a lesser extent, other mining companies, granting them the rights to explore, develop, mine, produce, market and sell gas, oil, and coal in exchange for royalty payments based on the lessees' sales of those minerals.
During the first nine months ended September 30, 2022, the Minerals Management segment had capital expenditures totaling $12.3 million, primarily related to the $11.4 million acquisition of mineral interests in the Texas portion of the Permian Basin and the Wyoming portion of the Powder River Basin during the third quarter of 2022. During the first nine months of 2022, the Minerals Management segment also acquired mineral interests in the New Mexico portion of the Permian Basin. The Minerals Management segment intendsowns royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests.
•Royalty Interest. Royalty interests generally result when the owner of a mineral interest leases the underlying minerals to an exploration and production company pursuant to an oil and gas lease. Typically, the resulting royalty interest is a cost-free percentage of production revenues for minerals extracted from the acreage. A holder of royalty interests is generally not responsible for capital expenditures or lease operating expenses, but royalty interests may be calculated
net of post-production expenses, and typically has no environmental liability. Royalty interests leased to producers expire upon the expiration of the oil and gas lease and revert to the mineral owner.
•Mineral Interest. Mineral interests are perpetual rights of the owner to explore, develop, exploit, mine and/or produce any or all of the minerals lying below the surface of the property. The holder of a mineral interest has the right to lease the minerals to an exploration and production company. Upon the execution of an oil and gas lease, the lessee (the exploration and production company) becomes the working interest owner and the lessor (the mineral interest owner) has a royalty interest.
•Non-Participating Royalty Interest (“NPRIs”). NPRI is an interest in oil and gas production which is created from the mineral estate. The NPRI is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right to participate in the execution of oil and gas leases. The NPRI owner does, however, typically receive royalty payments.
•Overriding Royalty Interest (“ORRIs”). ORRIs are created by carving out the right to receive royalties from a working interest. Like royalty interests, ORRIs do not confer an obligation to make future acquisitionscapital expenditures or pay for lease operating expenses and have limited environmental liability; however, ORRIs may be calculated net of mineralpost-production expenses, depending on how the ORRI is structured. ORRIs that are carved out of working interests are linked to the same underlying oil and royalty interestsgas lease that meetcreated the Company’s acquisition criteria as partworking interest, and therefore, such ORRIs are typically subject to expiration upon the expiration or termination of its growth strategy.the oil and gas lease.
The Company’sCompany may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an ORRI in a lease on the same tract of land in which it owns a mineral interest, the ORRI in that tract will relate to the same gross acres as the mineral interest in that tract.
The Minerals Management segment will benefit from the continued development of its mineral properties without the need for investment of additional capital once mineral and royalty interests have been acquired. The Minerals Management segment does not currently have any material investments under which it would be required to bear the cost of exploration, production or development.
The Company also manages legacy royalty and mineral interests are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal, coalbed methane and natural gas) and North Dakota (coal, oil and natural gas). The majority of the Company’s legacy reserves were acquired as part of its historical coal mining operations.
The Minerals Management segment owns royalty interests, mineral interests, nonparticipating royalty interests, and overriding royalty interests.Other Items: On December 1, 2022, the Company transferred its ownership interest in Midwest AgEnergy, LLC to HLCP Ethanol Holdco, LLC (“HLCP”). The Company may own more than one typereceived a payment of mineral and royalty interest$1.2 million in the same tractfirst quarter of land. For example, where the Company owns an overriding royalty interest2023 in connection with a leasepost-closing purchase price adjustment, which is included on the same tractline "Other, net" within the accompanying Unaudited Consolidated Statements of land in which it owns a mineral interest, the overriding royalty interest in that tract will relate to the same gross acres as the mineral interest in that tract.Operations.
The Minerals Management segment will benefit fromHLCP acquisition agreement includes two contingent earn-out arrangements under which additional payments are possible. The first earn-out is based on the continuedachievement of EBITDA targets through December 31, 2024. The second earn-out is based on the development of its mineral properties withouta carbon dioxide pipeline that will support a carbon dioxide sequestration project over a four-year period commencing on the needtransaction closing date. Additional payments to NACCO could range from $0 to approximately $12.9 million based on achievement of the two earn-outs as well as payment of amounts held in escrow to address potential indemnity claims during the 12-month period following the transaction date. Any future payments associated with the earn-outs or amounts held in escrow will be recognized when realized, consistent with the accounting 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.gain contingencies.
As an owner of royalty and mineral interests,2023, the Company’s accesswholly-owned subsidiary, Caddo Creek Resources Company (“Caddo Creek”), acquired 100% of the membership interests in the Marshall Mine located outside of Marshall, Texas from Advanced Emissions Solutions (“ADES”). Prior to information concerning activity and operations of its royalty and mineral interests is limited.the acquisition, Caddo Creek was performing mine reclamation under a fixed price contract with ADES. The Company does not have information that wouldreceived $2.2 million of cash, assumed the asset retirement obligation estimated to be available toapproximately $1.9 million and recognized a company with oil and natural gas operations because detailed information is not generally available to ownersgain of royalty and mineral interests.approximately $0.3 million.
Basis of Presentation: These financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position of the Company at September 30, 2022,March 31, 2023, the results of its operations, comprehensive income, cash flows and changes in equity for the ninethree months ended September 30,March 31, 2023 and 2022 and 2021 have been included. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.2022.
The balance sheet at December 31, 20212022 has been derived from the audited financial statements at that date but does not include all of the information or notes required by U.S. GAAP for complete financial statements.
Certain amounts in the prior period Unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.
NOTE 2—Revenue Recognition
Nature of Performance Obligations
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service that is distinct. To identify the performance obligations, the Company considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Each mine has a contract with its respective customer that represents a contract under ASC 606. For its consolidated entities, the Company’s performance obligations vary by contract and consist of the following:
At MLMC, each MMBtu delivered during the production period is considered a separate performance obligation. Revenue is recognized at the point in time that control of each MMBtu of lignite transfers to the customer. Fluctuations in revenue from period to period generally result from changes in customer demand.
At NAMining, the management service is primarily to oversee the operation of the equipment, and delivery of aggregates or other minerals is the performance obligation accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer over time. Consistent with the conclusion that the customer simultaneously receives and consumes the benefits provided, an input-based measure of progress is appropriate. As each month of service is completed, revenue is recognized for the amount of actual costs incurred, plus the management fee or fixed fee and the general and administrative fee (as applicable). Fluctuations in revenue from period to period result from changes in customer demand primarily due to increases and decreases in activity levels on individual contracts and variances in reimbursable costs.
Included within NAMining, Caddo Creek has a fixed-price contract to perform mine reclamation. The management service to perform mine reclamation is the performance obligation accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer over time. Revenue from this contract is recognized over time utilizing the cost-to-cost method to measure the extent of progress toward completion of the performance obligation. The Company believes the cost-to-cost method is the most appropriate method to measure progress and that the rate at which costs are incurred to fulfill the contract best depicts the transfer of control to the customer. The extent of progress towards completion is measured based on the ratio of costs incurred to date compared to total estimated costs at completion, and revenue is recorded proportionally based on an estimated profit margin.
The Minerals Management segment enters into contracts which grant third-party lessees the right to explore, develop, produce and sell minerals controlled by the Company. These arrangements result in the transfer of mineral rights for a period of time; however, no rights to the actual land are granted other than access for purposes of exploration, development, production and sales. The mineral rights revert back to the Company at the expiration of the contract.
Under these contracts, granting exclusive right, title, and interest in and to minerals is the performance obligation. The performance obligation under these contracts represents a series of distinct goods or services whereby each day of access that is provided is distinct. The transaction price consists of a variable sales-based royalty and, in certain arrangements, a fixed component in the form of an up-front lease bonus payment. As the amount of consideration the Company will ultimately be entitled to is entirely susceptible to factors outside its control, the entire amount of variable consideration is constrained at contract inception. The Company believes that the provisions of royalty contracts are customary in the industry. Up-front lease bonus payments represent the fixed portion of the transaction price and are recognized over the primary term of the contract, which is generally three to five years.
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. Each mitigation credit sale is considered a separate performance obligation. Revenue is recognized at the point in time that control of each mitigation credit transfers to the customer. Fluctuations in revenue from period to period generally result from changes in customer demand. Under the permittee-responsible stream and wetland mitigation model, the contracts are generally structured as a management fee agreement under which Mitigation Resources is reimbursed for all costs incurred in performing the required mitigation plus an agreed profit percentage or a fixed fee. The mitigation services provided is the performance obligation and is accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer as work is completed. Consistent with the conclusion that the customer simultaneously receives and consumes the benefits provided, an input-based measure of progress is appropriate. As each month of service is completed, revenue is recognized for the amount of actual costs incurred, plus the management fee or fixed fee. Fluctuations in revenue
from period to period result from changes in customer demand primarily due to increases and decreases in activity levels of individual contracts and variances in reimbursable costs.
Significant Judgments
The Company’s contracts with its customers contain different types of variable consideration including, but not limited to, management fees that adjust based on volumes or MMBtu delivered, however, the terms of these variable payments relate specifically to the Company's efforts to satisfy one or more, but not all of, the performance obligations (or to a specific outcome from satisfying the performance obligations) in the contract. Therefore, the Company allocates each variable payment (and subsequent changes to that payment) entirely to the specific performance obligation to which it relates. Management fees, as well as general and administrative fees, are also adjusted based on changes in specified indices (e.g., CPI) to compensate for general inflation changes. Index adjustments, if applicable, are effective prospectively.
Recognition of revenue and recognition of profit related to the Caddo Creek contract requires the use of assumptions and estimates related to the total contract value, the total cost at completion, and the measurement of progress towards completion of the performance obligation. Due to the nature of the contract, developing the estimated total contract value and total cost at completion requires the use of significant judgment. The total contract value includes variable consideration. The Company includes variable consideration in the transaction price at the most likely amount to be earned, based upon the Company’s assessment of expected performance. The Company records these amounts only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Cost Reimbursement
Certain contracts include reimbursement from customers of actual costs incurred for the purchase of supplies, equipment and services in accordance with contractual terms. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof is highly dependent on factors outside of the Company’s control. Accordingly, reimbursable revenue is fully constrained and not recognized until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. The Company is considered a principal in such transactions and records the associated revenue at the gross amount billed to the customer with the related costs recorded as an expense within cost of sales.
Prior Period Performance Obligations
The Company records royalty income in the month production is delivered to the purchaser. As a non-operator, the Company has limited visibility into when new wells start producing and production statements may not be received for 30 to 90 days or more after the date production is delivered. As a result, the Company is required to estimate the amount of production delivered to the purchaser of the product and the price that will be received for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded in "Trade accounts receivable" in the accompanying Unaudited Condensed Consolidated Balance Sheets. The difference between the Company’s estimates and the actual amounts received is recorded in the month that payment is received from the third-party lessee. For the three months ended September 30, 2022,March 31, 2023, royalty income recognized in the reporting periodsperiod related to performance obligations satisfied in prior reporting periods was immaterial. For the ninethree months ended September 30,March 31, 2022, royalty income of $2.1 million was recognized for a settlement related to the Company’s ownership interest in certain mineral rights. For the three and nine months ended September 30, 2021, the Company recognized $1.8 million of variable consideration that was previously constrained due to uncertainty of collectability.
Disaggregation of Revenue
In accordance with ASC 606-10-50, the Company disaggregates revenue from contracts with customers into major goods and service lines and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company’s business consists of the Coal Mining, NAMining and Minerals Management segments as well as Unallocated Items. See Note 8 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | |
| MARCH 31 | | |
| 2023 | | 2022 | | | | |
Timing of Revenue Recognition | | | | | | | |
Goods transferred at a point in time | $ | 20,146 | | | $ | 20,373 | | | | | |
Services transferred over time | 29,995 | | | 34,650 | | | | | |
Total revenues | $ | 50,141 | | | $ | 55,023 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 |
| 2022 | | 2021 | | 2022 | | 2021 |
Timing of Revenue Recognition | | | | | | | |
Goods transferred at a point in time | $ | 22,043 | | | $ | 20,436 | | | $ | 68,402 | | | $ | 61,931 | |
Services transferred over time | 39,750 | | | 31,306 | | | 109,783 | | | 80,812 | |
Total revenues | $ | 61,793 | | | $ | 51,742 | | | $ | 178,185 | | | $ | 142,743 | |
Contract Balances
The opening and closing balances of the Company’s current and long-term accounts receivable, contract assets and contract liabilities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Contract balances |
| Trade accounts receivable | | Contract asset (long-term) | | Contract liability (current) | | Contract liability (long-term) |
Balance, January 1, 2022 | $ | 25,667 | | | $ | 5,985 | | | $ | 4,082 | | | $ | 1,453 | |
Balance, September 30, 2022 | 23,603 | | | 5,985 | | | 1,334 | | | 1,860 | |
Increase (decrease) | $ | (2,064) | | | $ | — | | | $ | (2,748) | | | $ | 407 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract balances |
| Trade accounts receivable | | Contract asset (current) | | Contract asset (long-term) | | Contract liability (current) | | Contract liability (long-term) |
Balance, January 1, 2023 | $ | 37,940 | | | $ | 409 | | | $ | 5,985 | | | $ | 833 | | | $ | 1,709 | |
Balance, March 31, 2023 | 31,039 | | | — | | | 3,555 | | | 2,044 | | | 827 | |
Increase (decrease) | $ | (6,901) | | | $ | (409) | | | $ | (2,430) | | | $ | 1,211 | | | $ | (882) | |
As described above, the Company enters into royalty contracts that grant exclusive right, title, and interest in and to minerals. The transaction price consists of a variable sales-based royalty and, in certain arrangements, a fixed component in the form of an up-front lease bonus payment. The timing of the payment of the fixed portion of the transaction price is upfront, however, the performance obligation is satisfied over the primary term of the contract, which is generally three to five years. Therefore, at the time any such up-front payment is received, a contract liability is recorded which represents deferred revenue. The amount of royalty revenue recognized in both of the three months ended September 30,March 31, 2023 and 2022 and 2021 that was included in the opening contract liability was $0.2 million. The amount of royalty revenue recognized in both of the nine months ended September 30, 2022 and 2021 that was included in the opening contract liability was $0.7 million. This revenue consists of up-front lease bonus payments received under royalty contracts that are recognized over the primary term of the royalty contracts, which are generally three to five years.
The Company expects to recognize an additional $0.8$1.9 million in the remainder of 2022, $1.7 million in 2023, $0.5$0.6 million in 2024, $0.2$0.3 million in 2025 and a de minimis amount$0.1 million in 2026 and 2027 related to the contract liability remaining at September 30, 2022.March 31, 2023. The difference between the opening and closing balances of the Company’s contract balances results from the timing difference between the Company’s performance and the customer’s payment.
The Company has no contract assets recognized from the costs to obtain or fulfill a contract with a customer.
NOTE 3—Inventories
Inventories are summarized as follows:
| | | SEPTEMBER 30 2022 | | DECEMBER 31 2021 | | MARCH 31 2023 | | DECEMBER 31 2022 |
Coal | Coal | $ | 20,751 | | | $ | 19,352 | | Coal | $ | 26,229 | | | $ | 27,927 | |
Mining supplies | Mining supplies | 41,048 | | | 34,733 | | Mining supplies | 45,017 | | | 43,561 | |
Total inventories | Total inventories | $ | 61,799 | | | $ | 54,085 | | Total inventories | $ | 71,246 | | | $ | 71,488 | |
During the first quarter of 2023, the Company recorded a $2.4 million inventory impairment charge in the line “Cost of sales” in the accompanying Unaudited Consolidated Statements of Operations as mining costs exceeded net realizable value at MLMC.
NOTE 4—Stockholders' Equity
Stock Repurchase Program: On November 10, 2021, the Company's Board of Directors approved a stock repurchase program ("2021 Stock Repurchase Program") providing for the purchase of up to $20.0 million of the Company’s outstanding Class A common stock through December 31, 2023.
The timing and amount of any repurchases under the 2021 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 2021 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 2021 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. The Company has not repurchased any shares of common stock under the 2021 Stock Repurchase Program through September 30, 2022.March 31, 2023.
NOTE 5—Fair Value Disclosure
Recurring Fair Value Measurements: The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
| | | Fair Value Measurements at Reporting Date Using | | Fair Value Measurements at Reporting Date Using |
| | Quoted Prices in | | Significant | | Quoted Prices in | | Significant |
| | Active Markets for | | Significant Other | | Unobservable | | Active Markets for | | Significant Other | | Unobservable |
| | Identical Assets | | Observable Inputs | | Inputs | | Identical Assets | | Observable Inputs | | Inputs |
Description | Description | | Date | | (Level 1) | | (Level 2) | | (Level 3) | Description | | Date | | (Level 1) | | (Level 2) | | (Level 3) |
| | | September 30, 2022 | | | | | | | | | March 31, 2023 | | | | | | |
Assets: | Assets: | | | | Assets: | | | |
Equity securities | Equity securities | | $ | 14,084 | | | $ | 14,084 | | | $ | — | | | $ | — | | Equity securities | | $ | 16,172 | | | $ | 16,172 | | | $ | — | | | $ | — | |
| | | $ | 14,084 | | | $ | 14,084 | | | $ | — | | | $ | — | | | $ | 16,172 | | | $ | 16,172 | | | $ | — | | | $ | — | |
| | | | December 31, 2021 | | | December 31, 2022 | |
Assets: | Assets: | | | | Assets: | | | |
Equity securities | Equity securities | | $ | 16,070 | | | $ | 16,070 | | | $ | — | | | $ | — | | Equity securities | | $ | 15,534 | | | $ | 15,534 | | | $ | — | | | $ | — | |
| | $ | 16,070 | | | $ | 16,070 | | | $ | — | | | $ | — | | | $ | 15,534 | | | $ | 15,534 | | | $ | — | | | $ | — | |
|
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 2021,2022, Bellaire contributed $5.0 million to establish a mine water treatment trust (the "Mine Water Treatment Trust") 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 $0.6 million and a loss of $0.5 million and $2.7$0.7 million during the three and nine months ended September 30,March 31, 2023 and 2022, respectively, and a gain of less than $0.1 million and $1.0 million during the three and nine months ended September 30, 2021, respectively, related to the Mine Water Treatment Trust.
Prior to 2021,2022, 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 $0.2$0.1 million and $1.0$1.2 million during the three and nine months ended September 30,March 31, 2023 and 2022, respectively, and a gain of $0.4 million and $1.6 million during the three and nine months ended September 30, 2021, respectively, related to the investment in these equity securities.
The gains and losses related tochange in fair value of equity securities areis reported on the line Loss (gain)Gain on equity securities in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.
As discussed in Note 1, the Company recorded the estimated fair value of an office building and membership units of a privately held company during the second quarter of 2022. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 fair market values were determined using a variety of information, including estimated future cash flows and external appraisals, and considered both the income and market approaches.
The significant assumptions used in determining the fair value of the membership units are the estimated future cash flows and the discount rate applied to the estimated future cash flows. The estimate of future cash flows is based on available historical information and forecasts provided by the privately held company that are inherently uncertain. Management determined the appropriate discount rate based on the weighted average cost of capital ("WACC"). The WACC takes into account both the
after-tax cost of debt and cost of equity. A major component of the cost of equity is the current risk-free rate on twenty-year U.S. Treasury bonds as well as company specific risk and size premiums.
In determining the $4.1 million fair value of the office building, the Company engaged an independent real estate appraiser to appraise the property utilizing observed sales transactions for similar assets as well as consideration of an income approach.
Prior to receiving the membership units from GRE, the Company held a $5.0 million investment in the same privately-held company. The Company previously elected to use the measurement alternative to fair value included in ASC 321, Investments – Equity Securities, that allows investments without readily determinable fair values to be carried at cost less impairment, if any, adjusted for observable price changes in orderly transactions for the identical or similar investments. The Company determined that the receipt of the additional membership units does not represent an observable transaction as defined in ASC 321. As such, the Company will add the fair value of the additional membership units of $12.8 million to the $5.0 million historical cost basis of the existing membership units, the total of which is the initial measurement of the Company’s equity method investment.
Subsequent to the receipt of the additional membership units on May 2, 2022, the Company began to account for the investment under the equity method of accounting subject to a one quarter reporting lag. The Company recorded $2.2 million, which represents its share of the privately-held company's second quarter earnings and immaterial basis difference adjustments, during the third quarter of 2022 on the "Income from equity method investee" line within the accompanying Unaudited Condensed Consolidated Statements of Operations.
The office building is included in Property, plant and equipment, net and the investment in the privately-held company is included in Investment in private company equity units within the accompanying Unaudited Condensed Consolidated Balance Sheets.
The Company regularly performs reviews of potential future development projects and identified certain legacy assets where future development is unlikely. As a result, the Company estimated the fair value of the assets using unobservable inputs, which are classified as Level 3 inputs. The long-lived assets, which included land, prepaid royalties and capitalized leasehold costs, were written off to zero in the third quarter of 2022 and resulted in non-cash asset impairment charges of $3.9 million in the Minerals Management segment. The impairment charges are reported on the line "Asset impairment charges" in the Unaudited Condensed Consolidated Statements of Operations.
There were no transfers into or out of Levels 1, 2 or 3 during the ninethree months ended September 30, 2022March 31, 2023 and 2021.2022.
NOTE 6—Unconsolidated Subsidiaries
Each of the Company's wholly owned Unconsolidated Subsidiaries, within the Coal Mining and NAMining segments, meet the definition of a VIE. The Unconsolidated Subsidiaries are capitalized primarily with debt financing provided by or supported by their respective customers, and generally without recourse to NACCO and NACoal. Although NACoalthe Company owns 100% of the equity and manages the daily operations of the Unconsolidated Subsidiaries, the Company has determined that the equity capital provided by NACoalthe Company is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, the Company is not the primary beneficiary and therefore does not consolidate these entities' financial positions or results of operations. See Note 1 for a discussion of these entities.
The Investment in the unconsolidated subsidiaries and related tax positions totaled $9.9$13.9 million and $19.1$14.9 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $4.7$4.5 million and $7.6$7.1 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Earnings of
unconsolidated operations were $14.6$13.8 million and $43.8$14.6 million during the three and nine months ended September 30,March 31, 2023 and 2022, respectively, and $17.7 million and $46.5 million during the three and nine months ended September 30, 2021.
The contract mining agreement between Bisti and NTEC was terminated effective September 30, 2021. As of October 1, 2021, NTEC assumed control and responsibility for operation and all reclamation of the Navajo Mine.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.
NOTE 7—Contingencies
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.
NOTE 8—Business Segments
The Company’s operating segments are: (i) Coal Mining, (ii) NAMining and (iii) Minerals Management. 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.
The Company has items not directly attributable to a reportable segment that are not included as part of the measurement of segment operating profit, which include primarily administrative costs related to public company reporting requirements at the parent company and the financial results of Mitigation Resources and Bellaire. 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.
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.
As discussed in Note 1, the Company retrospectively changed its computation of segment operating profit to reclassify the results of Caddo Creek and Demery from the Coal Mining segment into the NAMining segment. See Note 1 for additional discussion of the Company's reportable segments. The following tables present revenue, operating profit, capital expenditures and depreciation expense:
| | | THREE MONTHS ENDED | | NINE MONTHS ENDED | | THREE MONTHS ENDED | |
| | SEPTEMBER 30 | | SEPTEMBER 30 | | MARCH 31 | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Revenues | Revenues | | | | | | | | Revenues | | | | |
Coal Mining | Coal Mining | $ | 22,599 | | | $ | 20,946 | | | $ | 70,163 | | | $ | 63,577 | | Coal Mining | $ | 20,653 | | | $ | 20,962 | | |
NAMining | NAMining | 22,962 | | | 20,429 | | | 67,180 | | | 58,228 | | NAMining | 20,633 | | | 21,404 | | |
Minerals Management | Minerals Management | 16,172 | | | 10,607 | | | 40,888 | | | 21,715 | | Minerals Management | 8,285 | | | 12,754 | | |
Unallocated Items | Unallocated Items | 1,092 | | | 1,594 | | | 1,901 | | | 2,647 | | Unallocated Items | 1,191 | | | 192 | | |
Eliminations | Eliminations | (1,032) | | | (1,834) | | | (1,947) | | | (3,424) | | Eliminations | (621) | | | (289) | | |
Total | Total | $ | 61,793 | | | $ | 51,742 | | | $ | 178,185 | | | $ | 142,743 | | Total | $ | 50,141 | | | $ | 55,023 | | |
| Operating profit (loss) | Operating profit (loss) | | | | | Operating profit (loss) | | | | |
Coal Mining | Coal Mining | $ | 6,089 | | | $ | 21,985 | | | $ | 34,616 | | | $ | 37,769 | | Coal Mining | $ | 313 | | | $ | 7,352 | | |
NAMining | NAMining | (210) | | | 1,448 | | | 2,318 | | | 3,803 | | NAMining | 830 | | | 1,271 | | |
Minerals Management | Minerals Management | 10,616 | | | 9,454 | | | 35,317 | | | 17,862 | | Minerals Management | 6,044 | | | 11,628 | | |
Unallocated Items | Unallocated Items | (6,780) | | | (5,170) | | | (18,171) | | | (14,738) | | Unallocated Items | (5,353) | | | (5,439) | | |
Eliminations | Eliminations | 103 | | | (125) | | | 365 | | | (104) | | Eliminations | (20) | | | 132 | | |
Total | Total | $ | 9,818 | | | $ | 27,592 | | | $ | 54,445 | | | $ | 44,592 | | Total | $ | 1,814 | | | $ | 14,944 | | |
| | | Expenditures for property, plant and equipment and acquisition of mineral interests | Expenditures for property, plant and equipment and acquisition of mineral interests | | Expenditures for property, plant and equipment and acquisition of mineral interests | | |
Coal Mining | Coal Mining | $ | 3,141 | | | $ | 5,646 | | | $ | 11,141 | | | $ | 10,378 | | Coal Mining | $ | 2,686 | | | $ | 1,720 | | |
NAMining | NAMining | 604 | | | 13,309 | | | 8,985 | | | 19,127 | | NAMining | 4,423 | | | 1,820 | | |
Minerals Management | Minerals Management | 11,397 | | | 450 | | | 12,346 | | | 5,948 | | Minerals Management | 344 | | | 833 | | |
Unallocated Items | Unallocated Items | 1,944 | | | 2 | | | 9,532 | | | 81 | | Unallocated Items | 426 | | | 276 | | |
Total | Total | $ | 17,086 | | | $ | 19,407 | | | $ | 42,004 | | | $ | 35,534 | | Total | $ | 7,879 | | | $ | 4,649 | | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | | Depreciation, depletion and amortization | | |
Coal Mining | Coal Mining | $ | 4,257 | | | $ | 4,306 | | | $ | 12,683 | | | $ | 12,534 | | Coal Mining | $ | 4,240 | | | $ | 4,038 | | |
NAMining | NAMining | 1,585 | | | 1,031 | | | 4,545 | | | 2,966 | | NAMining | 1,886 | | | 1,467 | | |
Minerals Management | Minerals Management | 660 | | | 423 | | | 1,781 | | | 1,392 | | Minerals Management | 811 | | | 578 | | |
Unallocated Items | Unallocated Items | 67 | | | 36 | | | 175 | | | 106 | | Unallocated Items | 82 | | | 44 | | |
Total | Total | $ | 6,569 | | | $ | 5,796 | | | $ | 19,184 | | | $ | 16,998 | | Total | $ | 7,019 | | | $ | 6,127 | | |
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Amounts 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 brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources businesses. The Company operates under three business segments: Coal Mining, North American Mining ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners ("Catapult") business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® (“("Mitigation Resources”Resources") provides stream and wetland mitigation solutions.
The Company has items not directly attributable to a reportable segment that are not included as part of the measurement of segment operating profit, which primarily includes administrative costs related to public company reporting requirements at the parent company and the financial results of Mitigation Resources and Bellaire Corporation ("Bellaire"). Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities.
Effective January 1, 2022, the Company changed the composition of its reportable segments. As a result, the Company retrospectively changed its computation of segment operating profit to reclassify the results of Caddo Creek Resources Company, LLC (“Caddo Creek”) and Demery Resources Company, LLC ("Demery") from the Coal Mining segment into the NAMining segment as these operations provide mining solutions for producers of industrial minerals, rather than for power generation. The Coal Mining segment now includes only mines that deliver coal to power generation companies. This segment reporting change has no impact on consolidated operating results. All prior period segment information has been reclassified to conform to the new presentation.
All financial statement line items below operating profit (other income, including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis.
The Company’s operating segments are further described below:
Coal Mining Segment
The Coal Mining segment, operating as The North American Coal Corporation® ("NACoal"), operates surface coal mines under long-term contracts with power generation companies pursuant to a service-based business model. Lignite coalCoal is surface mined in North Dakota, Texas and Mississippi. Each mine is fully integrated with its customer's operations and is the exclusive supplier of coal to its customer's facilities.operations.
During the three and nine months ended September 30, 2022,March 31, 2023, the Coal Mining segment's operating coal mines were: The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Each of these mines deliver their coal production to adjacent power plants or synfuels plants under long-term supply contracts. MLMC’s coal supply contract contains a take or pay provision; all other coal supply contracts are requirements contracts under which earnings can fluctuate. Certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.
On May 2, 2022, Great River Energy (“GRE”) completed the sale of Coal Creek Station and the adjacent high-voltage direct current transmission line to Rainbow Energy Center, LLC (“Rainbow Energy”) and its affiliates. As a result of the completion of the sale of Coal Creek Station, the Coal Sales Agreement, the Mortgage and Security Agreement and the Option Agreement between GRE and Falkirk were terminated. The Company recognized a gain of $30.9 million within the accompanying Unaudited Condensed Consolidated Statements of Operations during the second quarter of 2022 as GRE paid NACoal $14.0 million in cash, as well as transferred ownership of an office building with an estimated fair value of $4.1 million, and conveyed membership units in a privately-held company involved in the ethanol industry with an estimated fair value of $12.8
million, as agreed to under the termination and release of claims agreement between Falkirk and GRE. See Note 5 for further discussion on fair value. Prior to receiving the membership units from GRE, the Company held a $5.0 million investment in the same privately-held company carried at cost, less impairment. Subsequent to the receipt of the additional membership units on May 2, 2022, the Company began to account for the investment under the equity method of accounting subject to a one quarter reporting lag.
The new Coal Sales Agreement (“CSA”) between Falkirk and Rainbow Energy became effective upon the closing of the transaction. Falkirk continues to supply all coal requirements of Coal Creek Station and is paid a management fee per ton of coal delivered. To support the transfer to new ownership, Falkirk has agreed to a reduction in the current per ton management fee from the effective date of the new CSA through May 31, 2024. After May 31, 2024, the per ton management fee increases to a higher base in line with 2021 fee levels, and thereafter adjusts annually according to an index which tracks broad measures of U.S. inflation. Rainbow Energy is responsible for funding all mine operating costs, including mine reclamation, and directly or indirectly providing all of the capital required to operate the mine. The initial production period is expected to run ten years from the effective date of the CSA, but the CSA may be extended or terminated early under certain circumstances.
During the three and nine months ended September 30, 2021, the Coal Mining segment's operating coal mines also included Bisti Fuels Company, LLC (“Bisti”). Effective September 30, 2021, the contract mining agreement between Bisti and its customer, Navajo Transitional Energy Company ("NTEC"), was terminated.
Coteau operates the Freedom Mine in North Dakota. All coal production from the Freedom Mine is delivered to Basin Electric Power Cooperative (“Basin Electric”). Basin Electric utilizes the coal at the Great Plains Synfuels Plant (the “Synfuels Plant”), Antelope Valley Station and Leland Olds Station. The Synfuels Plant is a coal gasification plant, owned by Dakota Gasification Company (“Dakota Gas’), a subsidiary of Basin Electric, that manufactures synthetic natural gas and produces fertilizers, solvents, phenol, carbon dioxide, and other chemical products for sale. During 2020, Basin Electric informed Coteau that it is considering changes that may result in modifications to its Synfuels Plant that could potentially reduce or eliminate coal requirements at the Synfuels Plant. During 2021, Bakken Energy (“Bakken”) and Basin Electric signed a non-binding term sheet to transfer ownership of the assets of Dakota Gas to Bakken. Bakken stated the closing date is expected to be April 1, 2023. The closing is subject to the satisfaction of specified conditions. As part of the term sheet between Basin Electric and Bakken, Basin Electric indicated that the Synfuels Plant will continue existing operations through 2026. Basin Electric is also considering other options for the Synfuels Plant if the transaction with Bakken does not close.
Sabine operates the Sabine Mine in Texas. All production from Sabine is delivered to Southwestern Electric Power Company's (“SWEPCO”) Henry W. Pirkey Plant (the “Pirkey Plant”). SWEPCO is an American Electric Power (“AEP”) company. AEP intends to retireAs a result of the early retirement of the Pirkey Plant, Sabine ceased deliveries in 2023. Sabine expects deliveries to cease during the first quarter ofMarch 2023 at which time it expects to beginand final reclamation.reclamation began on April 1, 2023. Funding for mine reclamation is the responsibility of SWEPCO.SWEPCO, and Sabine will receive compensation for providing mine reclamation services.
MLMC is the exclusive supplier of lignite to the Red Hills Power Plant in Ackerman, Mississippi. Choctaw Generation Limited Partnership ("CGLP") leases the Red Hills Power Plant from a Southern Company subsidiary pursuant to a leveraged lease arrangement. CGLP's ability to make required payments to the Southern Company subsidiary is dependent on the operational performance of the Red Hills Power Plant. During 2022, Southern Company disclosed that it provided notice to the lessee, CGLP, to terminate the related operating and maintenance agreement effective June 30, 2023. Subsequently, CGLP failed to make the semi-annual lease payment due in December 2022 and as a result, the Southern Company subsidiary was unable to make its corresponding payment to the debtholders. The parties to the lease have entered into a forbearance agreement which suspends the related contractual rights of the parties while they continue restructuring negotiations, which could result in rescission of the termination notice. The ultimate outcome of this matter cannot be determined at this time but could have a material impact on the Company's financial statements if the operating and maintenance agreement is terminated.
At Coteau, Coyote Creek, Falkirk and Sabine,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 provide all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. See Note 6 for further discussion of Coyote Creek's guarantees.
Coteau, Coyote Creek, Falkirk and Sabine eachAll 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 VIEs is reported as Earnings of unconsolidated operations on the Unaudited Condensed Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in unconsolidated subsidiaries in the Unaudited Condensed Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the Income tax (benefit) provision line on the Unaudited Condensed Consolidated Statements of Operations includes income taxes related to these entities. See Note 6 for further information on the Unconsolidated Subsidiaries.
The Company performs contemporaneous reclamation activities at each mine in the normal course of operations. Under all of the Unconsolidated Subsidiaries’ contracts, the customer has the obligation to fund final mine reclamation activities. Under certain contracts, the Unconsolidated Subsidiary holds the mine permit and is therefore responsible for final mine reclamation
activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement from customers for costs incurred.
The MLMC contract is the only operating coal contract in which the Company is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal and changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC.
MLMC delivers coal toSee page 18 for information on 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 gasResource Conservation and renewables. The decision of which power plants to dispatch is determined by TVA. Reduction in dispatch of the Red Hills Power Plant will result in reduced earnings at MLMC.Recovery Act.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of industrial minerals. The segment is a primary platform for the Company’s growth and diversification of mining activities outside of the thermal coal industry. NAMining provides contract mining services for independently owned mines and quarries, creating value for its customers by performing the mining aspects of its customers’ operations. This allows customers to focus on their areas of expertise: materials handling and processing, product sales and distribution. As of March 31, 2023, NAMining historically operated primarily at limestone quarriesoperates mines in Florida, but is focused on continuing to expand outside of Florida, mining materials other than limestoneTexas, Arkansas, Indiana, Virginia and expandingNebraska and will serve as exclusive contract miner for the scope of mining operations provided to its customers.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 derives income primarily by leasing its royalty and mineral interests to third-party exploration and production companies, and, to a lesser extent, other mining companies, granting them the rights to explore, develop, mine, produce, market and sell gas, oil, and coal in exchange for royalty payments based on the lessees' sales of those minerals.
During the first nine months ended September 30, 2022, the Minerals Management segment had capital expenditures totaling $12.3 million, primarily related to the $11.4 million acquisition of mineral interests in the Texas portion of the Permian Basin and the Wyoming portion of the Powder River Basin during the third quarter of 2022. During the first nine months of 2022, the Minerals Management segment also acquired mineral interests in the New Mexico portion of the Permian Basin. The Minerals Management segment intendsowns royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests.
•Royalty Interest. Royalty interests generally result when the owner of a mineral interest leases the underlying minerals to an exploration and production company pursuant to an oil and gas lease. Typically, the resulting royalty interest is a cost-free percentage of production revenues for minerals extracted from the acreage. A holder of royalty interests is generally not responsible for capital expenditures or lease operating expenses, but royalty interests may be calculated net of post-production expenses, and typically has no environmental liability. Royalty interests leased to producers expire upon the expiration of the oil and gas lease and revert to the mineral owner.
•Mineral Interest. Mineral interests are perpetual rights of the owner to explore, develop, exploit, mine and/or produce any or all of the minerals lying below the surface of the property. The holder of a mineral interest has the right to lease the minerals to an exploration and production company. Upon the execution of an oil and gas lease, the lessee (the exploration and production company) becomes the working interest owner and the lessor (the mineral interest owner) has a royalty interest.
•Non-Participating Royalty Interest (“NPRIs”). NPRI is an interest in oil and gas production which is created from the mineral estate. The NPRI is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right to participate in the execution of oil and gas leases. The NPRI owner does, however, typically receive royalty payments.
•Overriding Royalty Interest (“ORRIs”). ORRIs are created by carving out the right to receive royalties from a working interest. Like royalty interests, ORRIs do not confer an obligation to make future acquisitionscapital expenditures or pay for lease operating expenses and have limited environmental liability; however, ORRIs may be calculated net of mineralpost-production expenses, depending on how the ORRI is structured. ORRIs that are carved out of working interests are linked to the same underlying oil and royalty interestsgas lease that meetcreated the Company’s acquisition criteria as partworking interest, and therefore, such ORRIs are typically subject to expiration upon the expiration or termination of its growth strategy.the oil and gas lease.
The Company’sCompany may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an ORRI in a lease on the same tract of land in which it owns a mineral interest, the ORRI in that tract will relate to the same gross acres as the mineral interest in that tract.
The Minerals Management segment will benefit from the continued development of its mineral properties without the need for investment of additional capital once mineral and royalty interests have been acquired. The Minerals Management segment does not currently have any material investments under which it would be required to bear the cost of exploration, production or development.
The Company also manages legacy royalty and mineral interests are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal, coalbed methane and natural gas) and North Dakota (coal, oil and natural gas). The majority of the Company’s legacy reserves were acquired as part of its historical coal mining operations.
The Minerals Management segment owns royalty interests, mineral interests, nonparticipating royalty interests, and overriding royalty interests. The Company may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an overriding royalty interest in a lease on the same tract of land in which it owns a mineral interest, the overriding royalty interest in that tract will relate to the same gross acres as the mineral interest in that tract.RESOURCE CONSERVATION AND RECOVERY ACT ("RCRA")
The Minerals Management segment will benefitRCRA affects coal mining operations by establishing requirements for the treatment, storage and disposal of wastes, including hazardous wastes. Coal mine wastes, such as overburden and coal cleaning wastes, currently are exempted from hazardous waste management. In 2014, the continued developmentU.S. Environmental Protection Agency (the “EPA”) finalized a rule specifying management standards for coal combustion residuals or coal ash ("CCRs") as a non-hazardous waste. In 2018, the EPA finalized revisions to the 2014 regulations in response to litigation of its mineral properties without the need2014 rule. One revision allows a state director (in a state with an approved CCR permit program) or the EPA (where EPA is the permitting authority) to suspend groundwater monitoring requirements if there is evidence that there is no potential for investmentmigration of hazardous constituents to the uppermost aquifer during the active life of the unit and post closure care. The second revision allows issuance of technical certifications in lieu of a professional engineer. In addition, the EPA revised the groundwater protection standards and extended the deadline for some facilities that must close CCR units. In 2020, the EPA finalized additional capital once mineralchanges to the CCR rule that classified all clay-lined surface impoundments that receive CCR as unlined, which triggered a pond closure date of April 2021 for impoundments that failed the aquifer location restriction. The EPA also established alternative deadlines to cease receipt of waste to include new site-specific alternatives due to lack of capacity with a deadline to initiate closure no later than October 15, 2023 and royalty interests have been acquired. The Minerals Management segment does not have any investments under which it would be requireda new site-specific alternative due to bearpermanent cessation of coal-fired boilers with two deadlines to complete closure: (a) no later than October 17, 2023 for surface impoundments 40 acres or smaller; and (b) October 17, 2028 for surface impoundments larger than 40 acres. Additionally, the CCR Part B Final Rule allowed facilities to demonstrate that there is no reasonable probability of adverse effects to human health and the environment at non-conforming units. These new rules may raise the cost for CCR disposal at coal-fired power plants, making them less competitive, and/or result in early closure which could have an adverse impact on demand for coal and ultimately result in the early closure of exploration, production or development.the mines servicing these plants, including closure of the Company's mines.
As anIn compliance with the regulations, the owner of royaltythe Coal Creek Station power plant, Falkirk’s customer, submitted a Part B application to the EPA in 2020 asserting a unit complied with the CCR rules. In the first quarter of 2023, the EPA proposed to deny the owner’s application. The owner and mineral interests,other parties have submitted additional information and comments supporting the owner’s position and, as of May 2, 2023, the EPA has not taken further action. If EPA ultimately denies the owner’s application, a new liner may need to be installed or new waste management processes and/or units may need to be constructed. Accordingly, it is possible that a denial by the EPA could require a temporary unit shut down. Any temporary unit shut down could result in a temporary suspension of operations at Coal Creek Station. Falkirk is the sole supplier of lignite to Coal Creek Station. Any suspension of operations at Coal Creek Station would eliminate the need for lignite coal during the suspension period. Any such suspension of operations at Coal Creek Station or any of the power plants supplied by the Company's mines could have a material adverse effect on the Company’s accessbusiness, financial condition and results of operations.
The EPA rule exempts CCRs beneficially used at mine sites and reserves any regulation thereof to information concerning activitythe Office of Surface Mining Reclamation and Enforcement ("OSMRE"). The OSMRE suspended all rulemaking actions on CCRs, but could re-initiate them in the future. The outcome of these rulemakings, and any subsequent actions by the EPA and OSMRE, could impact those Company operations that beneficially use CCRs. If the Company were unable to beneficially use CCRs, its revenues for handling CCRs from its customers may decrease and its costs may increase due to the purchase of its royalty and mineral interests is limited. The Company does not have information that would be available to a company with oil and natural gas operations because detailed information is not generally available to owners of royalty and mineral interests.alternative materials for beneficial uses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 4552 through 4654 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.2022. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2021.2022.
CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three and nine months ended September 30:March 31:
| | | THREE MONTHS | | NINE MONTHS | | THREE MONTHS | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | |
Coal Mining | Coal Mining | $ | 22,599 | | | $ | 20,946 | | | $ | 70,163 | | | $ | 63,577 | | Coal Mining | $ | 20,653 | | | $ | 20,962 | | |
NAMining | NAMining | 22,962 | | | 20,429 | | | 67,180 | | | 58,228 | | NAMining | 20,633 | | | 21,404 | | |
Minerals Management | Minerals Management | 16,172 | | | 10,607 | | | 40,888 | | | 21,715 | | Minerals Management | 8,285 | | | 12,754 | | |
Unallocated Items | Unallocated Items | 1,092 | | | 1,594 | | | 1,901 | | | 2,647 | | Unallocated Items | 1,191 | | | 192 | | |
Eliminations | Eliminations | (1,032) | | | (1,834) | | | (1,947) | | | (3,424) | | Eliminations | (621) | | | (289) | | |
Total revenue | Total revenue | $ | 61,793 | | | $ | 51,742 | | | $ | 178,185 | | | $ | 142,743 | | Total revenue | $ | 50,141 | | | $ | 55,023 | | |
Operating profit (loss): | Operating profit (loss): | | | | | | | | Operating profit (loss): | | | | |
Coal Mining | Coal Mining | $ | 6,089 | | | $ | 21,985 | | | $ | 34,616 | | | $ | 37,769 | | Coal Mining | $ | 313 | | | $ | 7,352 | | |
NAMining | NAMining | (210) | | | 1,448 | | | 2,318 | | | 3,803 | | NAMining | 830 | | | 1,271 | | |
Minerals Management | Minerals Management | 10,616 | | | 9,454 | | | 35,317 | | | 17,862 | | Minerals Management | 6,044 | | | 11,628 | | |
Unallocated Items | Unallocated Items | (6,780) | | | (5,170) | | | (18,171) | | | (14,738) | | Unallocated Items | (5,353) | | | (5,439) | | |
Eliminations | Eliminations | 103 | | | (125) | | | 365 | | | (104) | | Eliminations | (20) | | | 132 | | |
Total operating profit | Total operating profit | 9,818 | | | 27,592 | | | 54,445 | | | 44,592 | | Total operating profit | 1,814 | | | 14,944 | | |
Interest expense | Interest expense | 486 | | | 493 | | | 1,495 | | | 1,208 | | Interest expense | 545 | | | 513 | | |
Interest income | Interest income | (352) | | | (101) | | | (692) | | | (321) | | Interest income | (1,155) | | | (145) | | |
Closed mine obligations | Closed mine obligations | 398 | | | 372 | | | 1,155 | | | 1,119 | | Closed mine obligations | 409 | | | 380 | | |
Loss (gain) on equity securities | 316 | | | (445) | | | 1,676 | | | (2,530) | | |
Income from equity method investee | (2,156) | | | — | | | (2,156) | | | — | | |
Other contract termination settlements | — | | | — | | | (16,882) | | | — | | |
Gain on equity securities | | Gain on equity securities | (628) | | | (518) | | |
| Other, net | Other, net | (354) | | | (161) | | | (1,648) | | | (418) | | Other, net | (1,725) | | | (230) | | |
Other (income) expense, net | Other (income) expense, net | (1,662) | | | 158 | | | (17,052) | | | (942) | | Other (income) expense, net | (2,554) | | | — | | |
Income before income tax provision | 11,480 | | | 27,434 | | | 71,497 | | | 45,534 | | |
Income tax provision | 866 | | | 2,597 | | | 11,121 | | | 5,231 | | |
Income before income tax (benefit) provision | | Income before income tax (benefit) provision | 4,368 | | | 14,944 | | |
Income tax (benefit) provision | | Income tax (benefit) provision | (1,324) | | | 2,362 | | |
Net income | Net income | $ | 10,614 | | | $ | 24,837 | | | $ | 60,376 | | | $ | 40,303 | | Net income | $ | 5,692 | | | $ | 12,582 | | |
| Effective income tax rate | Effective income tax rate | 7.5 | % | | 9.5 | % | | 15.6 | % | | 11.5 | % | Effective income tax rate | (30.3) | % | | 15.8 | % | |
The components of the change in revenues and operating profit are discussed below in "Segment Results."
ThirdFirst Quarter of 2022 Compared with Third Quarter of 2021, and First Nine Months of 20222023 Compared with First Nine MonthsQuarter of 20212022
Other income,(income) expense, net
During the second quarter ofInterest income increased $1.0 million primarily due to a higher average invested cash balance during 2023 compared with 2022 GRE transferred ownership ofas well as an office building with an estimated fair value of $4.1 million and conveyed membership unitsincrease in a privately-held company with an estimated fair value of $12.8 million, as agreed to under
the termination and release of claims agreement between Falkirk and GRE. The Company recognized a gain of $16.9 million on the "Other contract termination settlements" line within the accompanying Unaudited Condensed Consolidated Statements of Operations during the second quarter of 2022 as a result of the transactions with GRE.
Subsequent to the receipt of the additional membership units on May 2, 2022, the Company began to account for the investment under the equity method of accounting subject to a one quarter reporting lag. The Company recorded $2.2 million, which represents its share of the privately-held company's second quarter earnings and immaterial basis difference adjustments, during the third quarter of 2022 on the "Income from equity method investee" line within the accompanying Unaudited Condensed Consolidated Statements of Operations.
Loss (gain)Gain on equity securities represents changes in the market price of invested assets reported at fair value. The change in the third quarter of 2022 and the first ninethree months of 20222023 compared with the respective 2021 periods2022 period was due to fluctuations in the market prices of the exchange-traded equity securities.
See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Other contract termination settlements, equity method investment and equity securities.
Income TaxesOn December 1, 2022, the Company transferred its ownership interest in Midwest AgEnergy, LLC (“MAG”) to HLCP Ethanol Holdco, LLC (“HLCP”). The Company received a payment of $1.2 million in the first quarter of 2023 in connection with a post-closing purchase price adjustment, which is included on the line "Other, net" within the accompanying Unaudited Consolidated Statements of Operations. See Note 1 to the Unaudited Condensed Consolidated Financial Statement for further discussion of MAG.
$1.2 million discrete tax benefit during the third quarter of 2022, primarily due to the IRS concluding its examination of tax years 2013-2016.
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 annualbenefit of percentage depletion is not directly related to the amount of consolidated pre-tax income recorded in a period. Accordingly, as a result of the significant reduction in 2023 forecasted income before income tax compared with 2022, the proportional effect of the benefit from percentage depletion on the effective income tax rate differs from the U.S. federal statutoryresults in a negative forecasted effective tax rate due, in part, to the benefit from percentage depletion.for 2023. Changes in the estimated annual effective tax rate result in a cumulative adjustment. The increase in the effective income tax rate for the nine months ended September 30, 2022 compared with the 2021 period reflects the impact of a higher forecast of full-year pre-tax income in 2022 compared with the prior year, including the $30.9 million gain recognized as a result of the settlement under the termination and release of claims agreement with GRE.
The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions, including an excise tax on stock repurchases and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three-year period in excess of $1 billion. The Company does not expect the Act to materially impact its financial statements. The enactment of additional tax reform legislation could adversely impact the Company’s financial position and results of operations. Legislation or other changes in U.S. tax law, including the elimination of certain U.S. federal income tax benefits currently available to coal mining and oil and gas exploration and development companies, could increase the Company’s tax liability and adversely affect its after-tax profitability.
LIQUIDITY AND CAPITAL RESOURCES OF NACCO
Cash Flows
The following tables detail NACCO's changes in cash flow for the ninethree months ended September 30:March 31:
| | | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
Operating activities: | Operating activities: | | | | | | Operating activities: | | | | | |
| Net cash provided by operating activities | $ | 54,929 | | | $ | 67,794 | | | $ | (12,865) | | |
Net cash provided by (used for) operating activities | | Net cash provided by (used for) operating activities | $ | 6,254 | | | $ | (1,070) | | | $ | 7,324 | |
| Investing activities: | Investing activities: | | Investing activities: | |
Expenditures for property, plant and equipment and acquisition of mineral interests | Expenditures for property, plant and equipment and acquisition of mineral interests | (42,004) | | | (35,534) | | | (6,470) | | Expenditures for property, plant and equipment and acquisition of mineral interests | (7,879) | | | (4,649) | | | (3,230) | |
Other | Other | 2,766 | | | 495 | | | 2,271 | | Other | 1,415 | | | 120 | | | 1,295 | |
Net cash used for investing activities | Net cash used for investing activities | (39,238) | | | (35,039) | | | (4,199) | | Net cash used for investing activities | (6,464) | | | (4,529) | | | (1,935) | |
Cash flow before financing activities | Cash flow before financing activities | $ | 15,691 | | | $ | 32,755 | | | $ | (17,064) | | Cash flow before financing activities | $ | (210) | | | $ | (5,599) | | | $ | 5,389 | |
The $12.9$7.3 million change in net cash provided by (used for) operating activities was primarily due to a net unfavorablefavorable change in working capital, mainly attributable to an increase in Federal income tax receivable in the first nine months of 2022 compared withpartially offset by a decrease in the first nine months of 2021. The $20.1 million increase in net income was offset by non-cash adjustments recognized during the first nine months of 2022, including $16.9 million related to the termination and release of claims agreement between Falkirk and GRE.income.
| | | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
Financing activities: | Financing activities: | | | | | | Financing activities: | | | | | |
Net reductions to long-term debt and revolving credit agreement | $ | (4,454) | | | $ | (29,498) | | | $ | 25,044 | | |
Net borrowings to long-term debt and revolving credit agreement | | Net borrowings to long-term debt and revolving credit agreement | $ | 656 | | | $ | 2,659 | | | $ | (2,003) | |
Cash dividends paid | Cash dividends paid | (4,488) | | | (4,200) | | | (288) | | Cash dividends paid | (1,557) | | | (1,445) | | | (112) | |
| Net cash used for financing activities | $ | (8,942) | | | $ | (33,698) | | | $ | 24,756 | | |
Net cash (used for) provided by financing activities | | Net cash (used for) provided by financing activities | $ | (901) | | | $ | 1,214 | | | $ | (2,115) | |
The change in net cash used for(used for) provided by financing activities was primarily due to fewer repayments as a result of a reduction in borrowings under the Company’s revolving line of credit during the first ninethree months of 20222023 compared with the first ninethree months of 2021.2022.
Financing Activities
Financing arrangements are obtained and maintained at the NACoal level. NACoal has a secured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in November 2025. There were no borrowings outstanding under the NACoal Facility at September 30, 2022.March 31, 2023. At September 30, 2022,March 31, 2023, the excess availability under the NACoal Facility was $119.3$117.0 million, which reflects a reduction for outstanding letters of credit of $30.7$33.0 million.
NACCO has not guaranteed any borrowings of NACoal. The borrowing agreements at NACoal allow for the payment to NACCO of dividends and advances under certain circumstances. Dividends (to the extent permitted by NACoal's borrowing agreement) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders.
The NACoal Facility has performance-based pricing, which sets interest rates based upon NACoal achieving various levels of debt to EBITDA ratios, as defined in the NACoal Facility. Borrowings bear interest at a floating rate plus a margin based on the level of debt to EBITDA ratio achieved. The applicable margins, effective September 30, 2022,March 31, 2023, for base rate and LIBOR loans were 1.25%1.23% and 2.25%2.23%, respectively. The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.35%0.34% on the unused commitment at September 30, 2022. During the nine months ended September 30, 2022, the average borrowing under the NACoal Facility was $2.6 million and the weighted-average annual interest rate was 3.8%.March 31, 2023.
The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum net debt to EBITDA ratio of 2.75 to 1.00 and an interest coverage ratio of not less than 4.00 to 1.00. The NACoal Facility provides the ability to make loans, dividends and advances to NACCO, with some restrictions based on maintaining a maximum debt to
EBITDA ratio of 1.50 to 1.00, or if greater than 1.50 to 1.00, a Fixed Charge Coverage Ratio of 1.10 to 1.00, in conjunction with maintaining unused availability thresholds of borrowing capacity, as defined in the NACoal Facility, of $15.0 million. At September 30, 2022,March 31, 2023, NACoal was in compliance with all financial covenants in the NACoal Facility.
The obligations under the NACoal Facility are guaranteed by certain of NACoal's direct and indirect, existing and future
domestic subsidiaries, and is secured by certain assets of NACoal and the guarantors, subject to customary exceptions and
limitations.
The Company believes funds available from cash on hand, the NACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the NACoal Facility in November 2025.
Expenditures for property, plant and equipment and mineral interests
Expenditures for property, plant and equipment and mineral interests were $42.0$7.9 million during the first ninethree months of 2022.2023. Planned expenditures for the remainder of 20222023 are expected to be approximately $14 million in the Coal Mining segment, $3$32 million in the NAMining segment, and $2$21 million at Mitigation Resources. Planned expenditures for 2023 are expected to be approximatelyin the Minerals Management segment, $10 million in the Coal Mining segment $29and $1 million in the NAMining segment and $10 million in the Minerals Management segment.at Mitigation Resources.
In the Coal MiningNAMining segment, elevated levels of expected2023 capital expenditures through 2022 are primarily related to spending at MLMC as it develops a new mine area. In the NAMining segment, expected capital expenditures through 2023 are primarily for the acquisition, relocation and refurbishment of draglines as well as the acquisition of other mining equipment to support the expansion of contract mining services beyond NAMining's historical dragline-oriented model, including the acquisition of equipment to supportbe used at the
Thacker Pass lithium project. Sawtooth is the contract miner for the Thacker Pass lithium project. Under the terms of the contract
mining agreement, the customer will reimburse Sawtooth for these capital expenditures over a five-year period from the
equipment acquisition date.
Expenditures are expected to be funded from internally generated funds and/or bank borrowings.
Capital Structure
NACCO's consolidated capital structure is presented below:
| | | SEPTEMBER 30 2022 | | DECEMBER 31 2021 | | Change | | MARCH 31 2023 | | DECEMBER 31 2022 | | Change |
Cash and cash equivalents | Cash and cash equivalents | $ | 92,754 | | | $ | 86,005 | | | $ | 6,749 | | Cash and cash equivalents | $ | 109,637 | | | $ | 110,748 | | | $ | (1,111) | |
Other net tangible assets | Other net tangible assets | 333,506 | | | 276,733 | | | 56,773 | | Other net tangible assets | 336,347 | | | 329,045 | | | 7,302 | |
Intangible assets, net | Intangible assets, net | 29,001 | | | 31,774 | | | (2,773) | | Intangible assets, net | 27,328 | | | 28,055 | | | (727) | |
Net assets | Net assets | 455,261 | | | 394,512 | | | 60,749 | | Net assets | 473,312 | | | 467,848 | | | 5,464 | |
Total debt | Total debt | (18,277) | | | (20,710) | | | 2,433 | | Total debt | (20,377) | | | (19,668) | | | (709) | |
Bellaire closed mine obligations | Bellaire closed mine obligations | (21,563) | | | (21,686) | | | 123 | | Bellaire closed mine obligations | (21,249) | | | (21,214) | | | (35) | |
Total equity | Total equity | $ | 415,421 | | | $ | 352,116 | | | $ | 63,305 | | Total equity | $ | 431,686 | | | $ | 426,966 | | | $ | 4,720 | |
Debt to total capitalization | Debt to total capitalization | 4% | | 6% | | (2)% | Debt to total capitalization | 5% | | 4% | | 1% |
The increase in other net tangible assets at September 30, 2022March 31, 2023 compared with December 31, 20212022 was primarily due tomainly the result of an increase in Property, plantPrepaid insurance due to timing and equipment,a decrease in Accrued payroll for payments made during the receiptfirst quarter of 2023 under the membership unitsCompany's incentive compensation plans. These increases were partially offset by a decrease in a privately-held company and office building that were transferred from GRETrade accounts receivable due to lower revenue in the first quarter of 2023 compared with a fair valuethe fourth quarter of $12.8 million and $4.1 million, respectively, and an increase in Federal income tax receivable.2022.
Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2021,2022, there have been no significant changes in the total amount of NACCO's contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on pages 50 through 51page 58 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.2022. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of certain guarantees related to Coyote Creek.
SEGMENT RESULTS
COAL MINING SEGMENT
FINANCIAL REVIEW
Tons of coal delivered by the Coal Mining segment were as follows for the three and nine months ended September 30:March 31:
| | | THREE MONTHS | | NINE MONTHS | | THREE MONTHS | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Unconsolidated operations | Unconsolidated operations | 7,210 | | | 8,206 | | | 19,061 | | | 21,733 | | Unconsolidated operations | 6,192 | | | 6,317 | | |
Consolidated operations | Consolidated operations | 750 | | | 768 | | | 2,397 | | | 2,378 | | Consolidated operations | 711 | | | 732 | | |
Total tons delivered | Total tons delivered | 7,960 | | | 8,974 | | | 21,458 | | | 24,111 | | Total tons delivered | 6,903 | | | 7,049 | | |
The results of operations for the Coal Mining segment were as follows for the three and nine months ended September 30:March 31:
| | | THREE MONTHS | | NINE MONTHS | | THREE MONTHS | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Revenues | Revenues | $ | 22,599 | | | $ | 20,946 | | | $ | 70,163 | | | $ | 63,577 | | Revenues | $ | 20,653 | | | $ | 20,962 | | |
Cost of sales | Cost of sales | 20,933 | | | 17,817 | | | 64,421 | | | 55,950 | | Cost of sales | 25,878 | | | 18,850 | | |
Gross profit | 1,666 | | | 3,129 | | | 5,742 | | | 7,627 | | |
Gross (loss) profit | | Gross (loss) profit | (5,225) | | | 2,112 | | |
Earnings of unconsolidated operations(a) | Earnings of unconsolidated operations(a) | 13,300 | | | 16,380 | | | 40,086 | | | 42,718 | | Earnings of unconsolidated operations(a) | 12,466 | | | 13,326 | | |
Contract termination settlement | — | | | 10,333 | | | 14,000 | | | 10,333 | | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 8,008 | | | 6,960 | | | 22,439 | | | 20,152 | | Selling, general and administrative expenses | 6,437 | | | 7,239 | | |
Amortization of intangible assets | Amortization of intangible assets | 867 | | | 902 | | | 2,772 | | | 2,795 | | Amortization of intangible assets | 727 | | | 847 | | |
Loss (gain) on sale of assets | 2 | | | (5) | | | 1 | | | (38) | | |
Gain on sale of assets | | Gain on sale of assets | (236) | | | — | | |
Operating profit | Operating profit | $ | 6,089 | | | $ | 21,985 | | | $ | 34,616 | | | $ | 37,769 | | Operating profit | $ | 313 | | | $ | 7,352 | | |
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Third Quarter of 2022 Compared with Third Quarter of 2021
Revenues increased 7.9% in the third quarter of 2022 compared with the third quarter of 2021 primarily due to a higher per ton sales price at MLMC.
The following table identifies the components of change in operating profit for the third quarter of 2022 compared with the third quarter of 2021:
| | | | | |
| Operating Profit |
2021 | $ | 21,985 | |
Increase (decrease) from: | |
Contract termination settlement received in 2021 | (10,333) | |
Earnings of unconsolidated operations | (3,080) | |
Gross profit | (1,463) | |
Selling, general and administrative expenses | (1,048) | |
Gain on sale of assets | (7) | |
Amortization of intangibles | 35 | |
2022 | $ | 6,089 | |
Operating profit decreased $15.9 million in the third quarter of 2022 compared with the third quarter of 2021 due to the $10.3 million payment related to the Bisti contract termination recognized during the third quarter of 2021, a decrease in the earnings of unconsolidated operations, a decrease in gross profit and an increase in selling, general and administrative expenses.
The decrease in earnings of unconsolidated operations was primarily due to a reduction in the per ton management fee at Falkirk as well as the Bisti contract termination as of September 30, 2021. These decreases were partially offset by an increase in customer requirements at Coteau.
The decrease in gross profit was primarily due to an increase in the cost per ton delivered at MLMC, due in part to an increase in the costs of diesel fuel as well as repairs and maintenance expense.
The increase in selling, general and administrative expenses was primarily due to higher employee-related costs.
First Nine Months of 2022 Compared with First Nine Months of 2021
Revenues increased 10.4% in the first nine monthsquarter of 2022 compared with2023 were comparable to the first nine monthsquarter of 2021 primarily due to a higher per ton sales price at MLMC.2022.
The following table identifies the components of change in operating profit for the first nine monthsquarter of 20222023 compared with the first nine monthsquarter of 2021:2022:
| | | Operating Profit | | Operating Profit |
2021 | $ | 37,769 | | |
2022 | | 2022 | $ | 7,352 | |
Increase (decrease) from: | Increase (decrease) from: | | Increase (decrease) from: | |
Gross profit, excluding inventory impairment charge | | Gross profit, excluding inventory impairment charge | (4,913) | |
Inventory impairment charge | | Inventory impairment charge | (2,424) | |
Earnings of unconsolidated operations | Earnings of unconsolidated operations | (2,632) | | Earnings of unconsolidated operations | (860) | |
Selling, general and administrative expenses | Selling, general and administrative expenses | (2,287) | | Selling, general and administrative expenses | 802 | |
Gross profit | (1,885) | | |
Gain on sale of assets | Gain on sale of assets | (39) | | Gain on sale of assets | 236 | |
Contract termination settlements in 2022 and 2021, net | 3,667 | | |
Amortization of intangibles | Amortization of intangibles | 23 | | Amortization of intangibles | 120 | |
2022 | $ | 34,616 | | |
2023 | | 2023 | $ | 313 | |
Operating profit decreased $3.2$7.0 million in the first nine monthsquarter of 20222023 compared with the first nine monthsquarter of 2021 primarily2022 due to a decrease in gross profit and a decrease in the earnings of unconsolidated operations, an increase inpartially offset by lower selling, general and administrative expenses and a decrease in gross profit.
The decrease in earnings of unconsolidated operations was primarily due to a reduction in earnings as a result of the Bisti contract termination as of September 30, 2021 as well as a reduction in the per ton management fee at Falkirk. These decreases were partially offset by a contractual price escalation and an increase in customer requirements at Coteau.
The increase in selling, general and administrative expenses was primarily due to higher employee-related costs and professional service expenses.
The decrease in gross profit was primarily due to an increase in the cost per ton delivered at MLMC as well as a $2.4 million inventory impairment charge. All production costs are capitalized into inventory at MLMC. The increase in cost per ton delivered at MLMC is due to costs associated with establishing operations in parta new mine area and a reduction in the number of tons severed. The reduction in severed tons was due to adverse mining conditions caused by the amount of rain during the first quarter of 2023, as well as operational inefficiencies related to final mining activities at the existing mine area. Fewer tons
severed caused a decrease in tons held in inventory since more tons were sold than produced during the first quarter of 2023, which resulted in an increase in the cost of diesel fuel.per ton and an inventory impairment charge to write down coal inventory to its net realizable value.
The decreasesdecrease in operating profit were partiallyearnings of unconsolidated operations was primarily due to a reduction in the per ton management fee at Falkirk effective May 2022 through May 2024 to support the transition of the Coal Creek Station Power Plant to Rainbow Energy. This decrease in earnings of unconsolidated operations was partly offset by an increaseimproved results at Coteau and at Sabine.
The decrease in contract termination settlements. The $14.0 million contract termination settlement from GRE recognized during the second quarter of 2022selling, general and administrative expenses was partially offset by the $10.3 million payment relatedprimarily due to the Bisti contract termination recognized during the third quarter of 2021.lower professional service expenses.
NORTH AMERICAN MINING ("NAMining") SEGMENT
FINANCIAL REVIEW
Tons delivered by the NAMining segment were as follows for the three and nine months ended September 30:March 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS | | NINE MONTHS |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
Total tons delivered | 13,421 | | | 14,215 | | | 40,756 | | | 40,460 | |
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
Total tons delivered | 14,829 | | | 13,962 | | | | | |
The results of operations for the NAMining segment were as follows for the three and nine months ended September 30:March 31:
| | | THREE MONTHS | | NINE MONTHS | | THREE MONTHS | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Total revenues | Total revenues | $ | 22,962 | | | $ | 20,429 | | | $ | 67,180 | | | $ | 58,228 | | Total revenues | $ | 20,633 | | | $ | 21,404 | | |
Reimbursable costs | Reimbursable costs | 15,259 | | | 12,278 | | | 41,337 | | | 37,835 | | Reimbursable costs | 12,092 | | | 12,016 | | |
Revenues excluding reimbursable costs | Revenues excluding reimbursable costs | $ | 7,703 | | | $ | 8,151 | | | $ | 25,843 | | | $ | 20,393 | | Revenues excluding reimbursable costs | $ | 8,541 | | | $ | 9,388 | | |
| Total revenues | Total revenues | $ | 22,962 | | | $ | 20,429 | | | $ | 67,180 | | | $ | 58,228 | | Total revenues | $ | 20,633 | | | $ | 21,404 | | |
Cost of sales | Cost of sales | 21,853 | | | 18,886 | | | 62,086 | | | 53,678 | | Cost of sales | 19,241 | | | 19,650 | | |
Gross profit | Gross profit | 1,109 | | | 1,543 | | | 5,094 | | | 4,550 | | Gross profit | 1,392 | | | 1,754 | | |
Earnings of unconsolidated operations(a) | Earnings of unconsolidated operations(a) | 1,288 | | | 1,272 | | | 3,716 | | | 3,818 | | Earnings of unconsolidated operations(a) | 1,358 | | | 1,266 | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 2,607 | | | 1,372 | | | 6,417 | | | 4,510 | | Selling, general and administrative expenses | 1,920 | | | 1,754 | | |
Loss (gain) on sale of assets | — | | | (5) | | | 75 | | | 55 | | |
Operating profit (loss) | $ | (210) | | | $ | 1,448 | | | $ | 2,318 | | | $ | 3,803 | | |
Gain on sale of assets | | Gain on sale of assets | — | | | (5) | | |
Operating profit | | Operating profit | $ | 830 | | | $ | 1,271 | | |
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Third Quarter of 2022 Compared with Third Quarter of 2021
Total revenues increased 12.4%decreased 3.6% in the thirdfirst quarter of 2023 compared with the first quarter of 2022 compared with the third quarter of 2021 primarily due to an increasea reduction in reimbursable costs, which have an offsetting amountrevenue as final mine reclamation activities at Caddo Creek were substantially completed in cost of sales and have no impact on operating profit, as well as a higher average per ton sales price at the consolidated operations. These improvements were2022. This decrease was partially offset by a reduction in revenue at Caddo Creek as the scope of final reclamation activities declined.
The following table identifies the components of change in operating profit (loss) for the third quarter of 2022 compared with the third quarter of 2021:
| | | | | |
| Operating Profit (Loss) |
2021 | $ | 1,448 | |
Increase (decrease) from: | |
Selling, general and administrative expenses | (1,000) | |
Voluntary retirement program charge | (769) | |
Gain on sale of assets | (5) | |
Gross profit | 100 | |
Earnings of unconsolidated operations | 16 | |
2022 | $ | (210) | |
Operating profit decreased $1.7 million in the third quarter of 2022 compared with the third quarter of 2021 primarily due to an increase in selling, general and administrative expenses and a voluntary retirement charge.
During the third quarter of 2022, the Company implemented a voluntary retirement program for employees who met certain age and service requirements to reduce overall headcount. As a result of this program, the third quarter 2022 operating loss includes a charge of $0.8 million related to one-time termination benefits. The increase in selling, general and administrative expenses was mainly due to higher employee-related costs.
The increase in gross profit was due to higher earnings at consolidated quarries, partially offset by a reduction in earnings at Caddo Creek as the scope of final mine reclamation activities declined.
First Nine Months of 2022 Compared with First Nine Months of 2021
Total revenues increased 15.4% in the first nine months of 2022 compared with the first nine months of 2021 primarily due to an increase in reimbursable costs, which have an offsetting amount in cost of sales and have no impact on operating profit, as well as anmodest increase in customer requirements and tons delivered at the consolidated operations.requirements.
The following table identifies the components of change in operating profit for the first nine monthsquarter of 20222023 compared with the first nine monthsquarter of 2021:2022:
| | | Operating Profit | | Operating Profit |
2021 | $ | 3,803 | | |
2022 | | 2022 | $ | 1,271 | |
Increase (decrease) from: | Increase (decrease) from: | | Increase (decrease) from: | |
Gross profit | | Gross profit | (362) | |
Selling, general and administrative expenses | Selling, general and administrative expenses | (1,672) | | Selling, general and administrative expenses | (166) | |
Voluntary retirement program charge | (769) | | |
Gain on sale of assets | | Gain on sale of assets | (5) | |
Earnings of unconsolidated operations | Earnings of unconsolidated operations | (102) | | Earnings of unconsolidated operations | 92 | |
Loss on sale of assets | (20) | | |
Gross profit | 1,078 | | |
2022 | $ | 2,318 | | |
2023 | | 2023 | $ | 830 | |
Operating profit decreased $1.5$0.4 million in the first nine monthsquarter of 20222023 compared with the first nine monthsquarter of 20212022 primarily due to a decrease in gross profit and an increase in selling, general and administrative expenses andexpenses. The decrease in gross profit was due to a voluntary retirement charge,reduction in earnings at Caddo Creek as final mine reclamation activities were substantially completed in 2022, partially offset by an increase in gross profit.
Duringhigher earnings at the third quarter of 2022, the Company implemented a voluntary retirement program for employees who met certain age and service requirements to reduce overall headcount. As a result of this program, the third quarter 2022 operating loss includes a charge of $0.8 million related to one-time termination benefits.consolidated quarries. The increase in selling, general and administrative expenses was primarilymainly due to higher employee-related costs.
The increase in gross profit was primarily attributable tocosts at Sawtooth Mining for the earnings associated with the reclamation contract and water sales at Caddo Creek, partially offset by a decrease in gross profit from the active operations mainly due to an increase in employee-related costs.Thacker Pass lithium project.
MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
The results of operations for the Minerals Management segment were as follows for the three and nine months ended September 30:March 31:
| | | THREE MONTHS | | NINE MONTHS | | THREE MONTHS | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Revenues | Revenues | $ | 16,172 | | | $ | 10,607 | | | $ | 40,888 | | | $ | 21,715 | | Revenues | $ | 8,285 | | | $ | 12,754 | | |
Cost of sales | Cost of sales | 1,006 | | | 755 | | | 2,487 | | | 2,398 | | Cost of sales | 1,052 | | | 748 | | |
Gross profit | Gross profit | 15,166 | | | 9,852 | | | 38,401 | | | 19,317 | | Gross profit | 7,233 | | | 12,006 | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 611 | | | 398 | | | 1,672 | | | 1,455 | | Selling, general and administrative expenses | 1,189 | | | 509 | | |
Gain on sale of assets | Gain on sale of assets | — | | | — | | | (2,527) | | | — | | Gain on sale of assets | — | | | (131) | | |
Asset impairment charges | 3,939 | | | — | | | 3,939 | | | — | | |
| Operating profit | Operating profit | $ | 10,616 | | | $ | 9,454 | | | $ | 35,317 | | | $ | 17,862 | | Operating profit | $ | 6,044 | | | $ | 11,628 | | |
During the three and nine months ended September 30, 2022,first quarter of 2023, the oil and natural gas industry experienced continued improvementa decline in commodity prices compared with the respective 2021 periods, primarily due to:
•Higher demand as the impact from COVID-19 abates;
•Changes in domestic supply and demand dynamics as well as increased discipline around production and capital investments by oil and gas companies; and
•Instability and constraints on global supply, particularly with respect to instability in Russia and Ukraine.
2022. Oil and natural gas prices have been historically volatile and may continue to be volatile in the future. The table below demonstrates such volatility with the average price as reported by the United States Energy Information Administration for the three and nine months ended September 30:March 31:
| | | THREE MONTHS | | NINE MONTHS | | | THREE MONTHS | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
West Texas Intermediate Average Crude Oil Price | West Texas Intermediate Average Crude Oil Price | $ | 93.18 | | | $ | 70.62 | | | $ | 98.79 | | | $ | 64.83 | | | West Texas Intermediate Average Crude Oil Price | $ | 76.08 | | | $ | 94.45 | | |
Henry Hub Average Natural Gas Price | Henry Hub Average Natural Gas Price | $ | 7.99 | | | $ | 4.36 | | | $ | 6.71 | | | $ | 3.62 | | | Henry Hub Average Natural Gas Price | $ | 2.65 | | | $ | 4.66 | | |
Revenues and operating profit increaseddecreased significantly in the three and nine months ended September 30, 2022first quarter of 2023 compared with the respective 2021 periods. The increase isfirst quarter of 2022, primarily due to substantially higherlower natural gas and oil prices increasedand a reduction in volumes as existing wells followed their natural production due in part to income generated from newly developed wells on Company leases duringdecline. In addition, the first quarter of 2022 as well asincluded $2.1 million of settlement income recognized during the first quarter of 2022. The settlement relatesincome. An increase in selling, general and administrative expenses, mainly due to higher employee-related costs, also contributed to the Company’s ownership interestdecrease in certain mineral rights. In addition, operating profit increased due to a $2.4 million gain on the sale of land related to legacy operations during the second quarter of 2022.
The Company regularly performs reviews of potential future development projects and identified certain legacy coal assets where future development is unlikely. The long-lived assets, which included land, prepaid royalties and capitalized leasehold costs, were written off in the third quarter of 2022 and resulted in non-cash asset impairment charges of $3.9 million.profit.
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Unallocated Items and Eliminations were as follows for the three and nine months ended September 30:March 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS | | NINE MONTHS |
| 2022 | | 2021 | | 2022 | | 2021 |
Operating loss | $ | (6,677) | | | $ | (5,295) | | | $ | (17,806) | | | $ | (14,842) | |
| | | | | |
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2023 | | 2022 | | | | |
Operating loss | $ | (5,373) | | | $ | (5,307) | | | | | |
| | | | | |
The operating loss increased $1.4 million and $3.0 million in the three and nine months ended September 30, 2022, respectively, compared with the respective 2021 periods primarily duefirst quarter of 2023 was comparable to higher employee-related costs.the first quarter of 2022.
NACCO Industries, Inc. Outlook
Coal Mining Outlook - 2022
In fourth-quarter 2022,2023, the Company expects coal deliveries to increasedecrease moderately from 2021, while2022 levels. The owner of the Coal Mining segment operating profit is expected to be comparable topower plant served by the prior year. Lower earnings anticipated atCompany's Sabine Mine in Texas retired the Falkirk MinePirkey power plant in March 2023, and as a result Sabine ceased deliveries in March 2023. The cessation of these deliveries is the reduction inprimary driver for the per ton management fee through May 2024, to support the transition of the Coal Creek Station Power Plant to Rainbow Energy, are expected to be offset by higher earnings at Coteau due to an increase in tons delivered and contractual price escalation. Segment Adjusted EBITDA is expected to increase modestly primarily due to improved EBITDA at MLMC where increased depreciation expense associated with capital expenditures in recent years has negatively affected operating profit.year-over-year decline.
Coal Mining operating profit and Segment Adjusted EBITDA for the 20222023 full year isare expected to decrease compared with 2021, bothsignificantly year-over-year, including and excluding the contract$14.0 million termination paymentspayment received from Falkirk's former customer, Great River Energy, in 2022 and 2021.2022. The expected reductions aredecline is primarily the result of reducedan expected significant reduction in earnings at both the consolidated operations and an anticipated moderate decrease in earnings of unconsolidated coaloperations.
Results at the consolidated mining operations are projected to decrease significantly in 2023 versus 2022. The decrease is mainly due to an expected substantial decline in earnings at MLMC from increased costs associated with establishing operations in a new mine area, as well as higher operating expenses recognizeddepreciation expense related to recent capital expenditures to develop this new mine area. The anticipated ongoing inefficiencies of this project are expected to continue through the third quarter of 2023, and then moderate in the first nine monthsfourth quarter of 2022.
Capital2023 and into 2024. MLMC does not anticipate opening additional mine areas through the remaining contract term. As a result, mine development capital expenditures should moderate from 2024 through 2032. While increased depreciation from capital expenditures related to the new mine area will affect future results, the Company anticipates MLMC should contribute favorably to Segment Adjusted EBITDA in future years. In 2023, capital expenditures are expected to be approximately $14$12 million, primarily for mine development and equipment replacement.
The anticipated lower earnings at the unconsolidated coal mining operations is expected to be driven primarily by temporary price concessions at Falkirk through May 2024. This will result in a reduction in the fourth quarterper ton management fee for 12 months in 2023 compared with eight months in 2022. The early retirement of 2022the Pirkey power plant and approximately $25 millioncommencement of final reclamation of the Sabine Mine started on April 1, 2023 will also contribute to the reduction in earnings. Sabine will receive compensation for providing final mine reclamation services, but at a lower rate than during active mining. Funding for Sabine's mine reclamation is the 2022 full year.responsibility of the customer.
The Company's contract structure at each of its coal mining operations eliminates exposure to spot coal market price fluctuations. However, fluctuations in natural gas prices and the availability of renewable power generation, particularly wind, can contribute to changes in power plant dispatch and customer demand for coal. Sustained higher natural gas prices could result in increased demand for coal. Changes to expectations for customer power plant dispatch couldwould affect the Company’s outlook for the remainder of 2022 and 2023, as well as over the longer term. The owner of the power plant served by the Company's Sabine Mine in Texas intends to retire the power plant in 2023. Sabine expects deliveries to cease in the first quarter
of 2023 at which time Sabine expects to begin final reclamation. Funding for mine reclamation is the responsibility of the customer.
Coal Mining Outlook - 2023
In 2023, the Company expects coal deliveries to decrease moderately from 2022 levels as a result of the cessation of Sabine deliveries in the 2023 first quarter and current expectations of customer requirements.
Coal Mining operating profit and Segment Adjusted EBITDA for the 2023 full year are expected to decrease significantly compared with 2022, including and excluding the $14.0 million GRE termination payment received in 2022. The decline is primarily the result of an expected significant reduction in earnings at the consolidated operations and an anticipated modest decrease in earnings of unconsolidated operations.
Results at the consolidated mining operations are projected to decrease significantly predominantly due to an expected substantial decline in earnings at MLMC driven by an increase in the cost per ton of coal delivered in 2023 versus 2022. Anticipated cost inflation on repairs, diesel fuel and supplies, as well as higher depreciation expense related to recent capital expenditures to develop a new mine area are expected to contribute to the higher cost per ton. MLMC sells lignite at contractually agreed upon prices which are subject to changes in the level of established indices generally reflecting inflation over time. The increase in production costs will not be offset by an immediate increase in the revenue generated from contractual price escalation as there is a lag in the timing of the effect of inflation on the index-based coal sales price.
The anticipated lower earnings at the unconsolidated coal mining operations is expected to be driven primarily by the reduction in the per ton management fee at Falkirk for all 12 months in 2023 compared with 7 months in 2022, as well as the cessation of Sabine deliveries starting late in the first quarter of 2023. These decreases are expected to be partly offset by higher earnings at Coteau.
Capital expenditures are expected to be approximately $10 million in 2023.
NAMining Outlook
NAMining expects tons delivered,
Despite an expected continuation of improved results at the aggregates operations for the remaining quarters of 2023, operating profit and Segment Adjusted EBITDA to increase in the 2022 fourth quarter primarily because of anticipated increased earnings under existing contracts, including Sawtooth Mining. Excluding the effect of the charge for the voluntary retirement program, full-year operating profitat NAMining is expected to increase over 2021.
Segment Adjusted EBITDA for the 2022 full year is expected to increase significantlydecrease moderately in full-year 2023 compared with 2022. The decrease is due to the prior year, including and excluding the third quarter voluntary retirement charge. This improvement is a resultsubstantial completion of the improvement in operating profit from higherincome-generating mine reclamation incomeactivities at Caddo Creek in mid-2022. Segment Adjusted EBITDA is expected to improve over 2022 because of a significant increase in depreciation expense. The increased depreciation expense is driven by elevated historical capital expenditures to support NAMining's growth initiatives.
A number of initiatives are underway or in the first nine months of 2022 and increasedplanning stages that are expected to support improved future financial results at the activeNAMining's mining operations. Until profit improves at existing operations, and Sawtooth Mining partially offset by an increase in operating expenses.NAMining has narrowed its business development efforts.
In 2023, NAMining expects full-year operating profit and Segment Adjusted EBITDA to increase significantly over 2022 due to increased results from active mining operations and an anticipated reduction in operating expenses, in part due to an anticipated reduction in employee-related costs from the voluntary retirement program.
NAMining continues to have a substantial pipeline of potential new projects and is pursuing a number of growth initiatives that, if successful, would be accretive to future earnings.
In 2019, Sawtooth Mining, LLC, entered into a mining services agreement to serve as the exclusive contract miner for the Thacker Pass lithium project in northern Nevada, owned by Lithium Nevada Corp., a subsidiary of Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Lithium Americas owns the lithium reserves at Thacker Pass and will be responsible for the processing and sale of the lithium produced. In October 2022, Lithium Americas provided an update on the Thacker Pass project, which noted that all key state-level permits had been issued for Thacker Pass, feasibility study results are expected in the first quarter of 2023 and construction is expected to begin in 2023. At maturity, this management fee contract is expected to deliver fee income similar to a mid-sized management fee coal mine.
NAMining expects full-year 2022 capital expenditures to be approximately $12 million, with approximately $3 million expended in the fourth quarter primarily for the acquisition, relocation and refurbishment of draglines, as well as the acquisition of other mining equipment to support the continued expansion of contract-mining services. In 2023, capital expenditures are expected to be approximately $29$37 million primarily for the acquisition of equipment to support the Thacker Pass lithium project. The cost of mining equipment related to Thacker Pass will be reimbursed by the customer over a five-year period from the equipment acquisition date.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas, oil, natural gas liquids and coal, extracted primarily by third parties. Changing prices of natural gas and oil have a significant impact on Minerals Management’s operating profit.
In the 2022 fourth quarter and full year, operating profit and Segment Adjusted EBITDA are expected to continue to increase significantly over the respective prior year periods primarily driven by current expectations for natural gas and oil prices and increases in production volumes.
In 2023, operating profit and Segment Adjusted EBITDA are expected to decrease significantly compared with 20222022. This decrease is primarily driven by current market expectations for natural gas and oil prices, an anticipated reduction in volumes as existing wells follow their natural production decline and limited forecastedmodest expectations for development of additional new wells by third-party lessees.exploration and production companies.
Based on market expectations, the Company's forecast assumes oil and gas market prices will continue to moderate in 2023 to levels in line with 2021 averages; however, commodity prices are inherently volatile. The actions of OPEC, the Russia-Ukraine conflict, inventory levels of natural gas and oil and the uncertainty associated with demand, as well as other factors, have the potential to impact future oil and gas prices. An increase in natural gas and oil prices above current expectations could result in improvements to the 2023 forecast.
As an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations with respect to its interests is limited. The Company's expectations are based on the best information currently available and could
vary positively or negatively as a result of adjustments made by operators, additional leasing and development and/or changes to commodity prices. The production decline is particularly pronounced in new wells, such as those that began production in the fourth quarter of 2021 and early in 2022 on Company leases. Development of newadditional wells on existing interests in excess of current expectations could be accretive to future results.
In 2023, the third quarter of 2022, Minerals Management completed an $11.4expects capital expenditures of approximately $21 million, acquisitionwhich includes up to $20 million of mineral interests in the Texas portion of the Permian Basin and the Wyoming portion of the Powder River Basin. Minerals Management is targeting additional investments in mineral and royalty interests of upinterests. Future investments are expected to $10 million in 2023. Potential future acquisitions could be accretive, but each investment's contribution to 2023 resultsnear-term earnings is dependent on the details of that investment, including the size and type of interests acquired and the stage and timing of mineral development.
Consolidated Outlook
Management continues to view the long-term business outlook for NACCO expects apositively, despite an expected significant increasedecrease in 2023 consolidated operating profit, net income and Consolidated Adjusted EBITDAversus 2022 in part because 2022 included $30.9 million of pre-tax contract settlement income. Excluding the contract termination settlement income recognized in the fourth2022 second quarter, net income in the first half of 2022 due2023 is still expected to anticipated higher resultsbe significantly lower than the first half of 2022. The decrease is primarily driven by an expected significant reduction in earnings at the Minerals Management and NAMining segments, as well as income from an equity interest in a North Dakota-based ethanol business.
ForCoal Mining segments. At Minerals Management, the 2022 full year, excluding the settlements associated with the GRE/Rainbow Energy transaction recognized in 2022 and the Bisti termination fee recognized in 2021, NACCO expects consolidated operating profit, net income and Consolidated Adjusted EBITDA to improve significantly over 2021. Substantially higher earningsdecrease in the Minerals Management segment, as well as incomefirst half of 2023 is primarily driven by an expected significant reduction in commodity prices from an equity interesthistorically high price levels in a North Dakota-based ethanol business, are expected to be partially offset by significantly lower operating profit fromthe first half of 2022. At the Coal Mining segment, and an increase in unallocated employee-related expenses. In addition, income recognized in 2021 on exchange-traded equity securities held by the Company is not expected to reoccur due to a deterioration in public equity markets during 2022. The effective income tax rate, including the settlementsincreased costs associated with the GRE/Rainbow Energy transaction, is expected to be between 15% and 17%.
In 2023, NACCO expects consolidated net income to decrease significantly from 2022 largely due to $30.9 million of pre-tax contract termination income recognized during 2022. Excluding the effect of the contract termination settlements, net income is expected to decrease substantially due to significantly reduced royalty income at the Minerals Management segment and lower earningsestablishing operations in the Coal Mining segment,a new mine area as well as an anticipated reduction in income from an equity interestinventory levels during the first half of 2023 will result in a North Dakota-based ethanol business.higher cost per ton that will reduce earnings at MLMC. In addition, a reduction in earnings from the unconsolidated mines, primarily Falkirk, is expected to contribute to the decrease. These reductions are expected to be partially offset by lower income tax expense and improved results in the NAMining segment.expense. The Company expects ana negative effective income tax rate between 2%30% and 5%35% in 2023. Securing contracts for new mining projects and acquisitions of additional mineral interests could be accretive to the current forecast.
Consolidated capital expenditures are expected to total approximately $61 million in 2022, including approximately $12 million for expenditures at Mitigation Resources of North America®. The Company expects cash flow before financing activities continued to build on the substantial foundation established over the past several years and ended the 2023 first quarter with eight mitigation banks and four permittee-responsible mitigation projects located in 2022Tennessee, Mississippi, Alabama and Texas. Mitigation Resources was recently named a designated provider of abandoned mine land restoration by the State of Texas. It plans to be significantly lower than in 2021 primarily due to increased capital expenditures. provide ecological restoration services for abandoned surface mines as well as pursue additional environmental restoration projects during 2023.
In 2023, the Company expects capital expenditures of approximately $39$72 million, excludingwhich includes up to $20 million of investments at Minerals Management. Minerals Management is targeting investments of up $10 million. Future investments at MineralMinerals Management are expected to continue to align with the Company’s strategy and objectives to establish a blended portfolio of selectively acquiring mineral and royalty interests with a balance of near-term cash-flow yields and
long-term growth potential.interests. As a result of the forecasted capital expenditures and anticipated substantial decrease in net income, cash flow before financing activities in 2023 is expected to return to a significant use of cash.be positive but decline significantly from 2022.
As of September 30, 2022, the Company held an investment in Midwest AgEnergy, a North Dakota-based ethanol business. This investment is accounted for under the equity method. On October 26, 2022, Midwest AgEnergy announced that it has finalized an agreement under which the equity holders of Midwest AgEnergy, including NACCO, would sell their equity interests for cash. The transaction is expected to close before the end of 2022, however there can be no assurance that the transaction will be finalized in the anticipated timeframe or at all. The amountLong-term Growth and timing of NACCO’s cash proceeds will be dependent on the terms of the transaction. The transaction is not expected to have a material impact on 2022 results of operations based on current estimates.Diversification Outlook
Growth and Diversification
The Company is pursuing growth and diversification by strategically leveraging its core mining and natural resources management skills to build a strong portfolio of affiliated businesses. Management continues to be optimistic about the long-term outlook for growth inoutlook. In the NAMining and Minerals Management segments andsegment, as well as in the Company's Mitigation Resources business. Each of these businesses continues to expand its pipeline of potential new projects withbusiness, opportunities for growth and diversification.
NAMining is pursuing growth and diversification by expanding the scoperemain strong. Acquisitions of its business development activities to include potential customers who require a broad range of minerals and materials and by leveraging the Company’s core mining skills to expand the range of contract mining services it provides. The goal is to build NAMining into a leading provider of contract mining services for customers that produce a wide variety of minerals and materials. The Company believes NAMining can grow to be a substantial contributor to operating profit, delivering unlevered after-tax returns on invested capitaladditional mineral interests, an improvement in the mid-teens as this business model matures2024 outlook for the Company's largest Coal Mining segment customers and achieves significant scale, butsecuring contracts for Mitigation Resources and new NAMining projects could be accretive to the pace of growth will be dependent on the mix and scale of new projects.Company's outlook.
The Minerals Management segment continues to grow and diversify by pursuingpursue acquisitions of mineral and royalty interests in the United States. The Minerals Management segment willexpects to benefit from the continued development of its mineral properties without additional capital investment, as all further development costs are borne entirely by third-party producersexploration and development companies who lease the minerals. This business model can deliver higher average operating margins over the life of a reserve than traditional oil and gas companies that bear the cost of exploration, production and/or development. Catapult, Mineral Partners, the Company’s business unit focused on managing and expanding the Company’s portfolio of oil and gas mineral and royalty interests, has developed a strong network to source and secure new acquisitions. The goal is to construct a high-quality diversified portfolio of oil and gas mineral and royalty interests in the United States that deliverdelivers 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-teensmid-teens as the portfolio of reserves and mineral interests grows and this business model matures.
The Company remains committed to expanding the NAMining business while improving profitability. NAMining intends to be a substantial contributor to operating profit over time. The pace of achieving that objective will be dependent on the execution and successful implementation of profit improvement initiatives in the aggregates operations, and the mix and scale of new projects. The Sawtooth Mining lithium project is expected to contribute more significantly when production commences at
Thacker Pass.
Sawtooth Mining has a mining services agreement to serve as the exclusive contract miner for the Thacker Pass lithium project in northern Nevada, owned by Lithium Nevada Corp., a subsidiary of Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Lithium Americas owns the lithium reserves at Thacker Pass. On March 2, 2023, Lithium Americas announced that construction has commenced. Phase 1 production is projected to begin in the second half of 2026. Sawtooth Mining plans to begin acquiring equipment for this project in 2023. Under the terms of the contract mining agreement, Lithium Americas will reimburse Sawtooth for these capital expenditures over a five-year period from the equipment acquisition date. Sawtooth will be reimbursed for all costs of mine construction plus a construction fee. The Company expects to recognize moderate income in 2024 and 2025 prior to commencement of production in 2026. Once production commences, Sawtooth will receive a management fee per metric ton of lithium delivered. At maturity, this contract is expected to deliver fee income similar to a mid-sized management fee coal mine.
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.mitigation as well as provides other environmental restoration services. This business offers an opportunity for growth and diversification in an industry where the Company has substantial knowledge and expertise and a strong reputation. During the first nine months of 2022, Mitigation Resources purchased property to establish a new mitigation bank north of Dallas/Fort Worth and established a joint venture to provide mitigation services for the Lake Ralph Hall project in Northern Texas. With these new 2022 projects, Mitigation Resources is involved in over 10 mitigation banks and permittee-responsible mitigation projects in Tennessee, Alabama, Mississippi and Texas and is making strong progress toward its goal to beof becoming a top ten provider of stream and wetland mitigation services in the Southeastsoutheastern United States. The Company believes that Mitigation Resources can provide solid rates of return as this business matures.
The Company also continues to pursue activities which can strengthen the resiliency of its existing coal mining operations. The Company remains focused on managing coal production costs and maximizing efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive. These activities benefit both customers and the Company's Coal Mining segment, as fuel cost is a significant driver for power plant dispatch. Increased power plant dispatch results in increased demand for coal by the Coal Mining segment's customers. Fluctuating natural gas prices and availability of renewable energy sources, such as wind and solar, could affect the amount of electricity dispatched from coal-fired power plants. While the Company realizes the coal mining industry faces political and regulatory challenges and demand for coal is projected to decline over the longer-term, the Company believes coal will be an essential part of the energy mix in the United States for the foreseeable future. Subsequent to 2023, the Coal Mining segment expects increased profitability compared with 2023 expectations due in part to improvements at Falkirk and MLMC. At Falkirk, the temporary price concessions end in June 2024. At MLMC, the move to a new mine area will be completed during 2023, and as a result, cost per ton delivered in 2024 is expected to moderate. In addition, certain costs incurred at MLMC in 2023 will be passed through to the customer and included in revenues in 2024.
The Company continues to look for ways to create additional value by utilizing its core mining competencies which include reclamation and permitting. One such way the Company may be able to utilize these skills is through development of utility-scale solar projects on reclaimed mining properties. Reclaimed mining properties offer large tracts of land that could be well-suited for solar and other energy-related projects. These projects could be developed by the Company itself or through joint ventures that include partners with expertise in energy development projects. During the first quarter of 2023, the Company acquired 100% of the membership interests in the Marshall Mine, where Caddo Creek had been performing mine reclamation work. The Company is considering development of a utility-scale solar project at this location.
The Company is committed to maintaining a conservative capital structure as it continues to grow and diversify, while avoiding unnecessary risk. Strategic diversification will generate cash that can be re-invested to strengthen and expand the businesses. The Company also continues to maintain the highest levels of customer service and operational excellence with an unwavering focus on safety and environmental stewardship.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without limitation: (1) changes to or termination of customer or other third-party contracts, or a customer or other third party default under a contract, (2) any customer's premature facility closure, (3) a significant reduction in purchases by the Company's customers, including as a result of changes in coal consumption patterns of U.S. electric power
generators, or changes in the power industry that would affect demand for the Company's coal and other mineral reserves, (4) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas, natural gas liquids and oil, (5) failure or delays by the Company's lessees in achieving expected production of natural gas and other hydrocarbons; the availability and cost of transportation and processing services in the areas where the Company's oil and gas reserves are located; federal and state legislative and regulatory initiatives relating to hydraulic fracturing; and the ability of lessees to obtain capital or financing needed for well-development operations and leasing and development of oil and gas reserves on federal lands, (6) failure to obtain adequate insurance coverages at reasonable rates, (7) supply chain disruptions, including price increases and shortages of parts and materials, (8) the impact of the COVID-19 pandemic, including any impact on suppliers, customers and employees, (9) changes in tax laws or regulatory requirements, including the elimination of, or reduction in, the percentage depletion tax deduction, changes in mining or power plant emission regulations and health, safety or environmental legislation, (10)(9) the ability of the Company to access credit in the current economic environment, or obtain financing at reasonable rates, or at all, and to maintain surety bonds for mine reclamation as a result of current market sentiment for fossil fuels, (11)(10) impairment charges, (12)(11) the effects of investors’ and other stakeholders’ increasing attention to environmental, social and governance (“ESG”) matters, (13)(12) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (14)(13) regulatory actions, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (15)(14) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (16)(15) weather or equipment problems that could affect deliveries to customers, (17)(16) changes in the costs to reclaim mining areas, (18)(17) costs to pursue and develop new mining, mitigation, and oil and gas and solar development opportunities and other value-added service opportunities, (19)(18) delays or reductions in coal or aggregates deliveries, (20)(19) the ability to successfully evaluate investments and achieve intended financial results in new business and growth initiatives, (21)(20) disruptions from natural or human causes, including severe weather, accidents, fires, earthquakes and terrorist acts, any of which could result in suspension of operations or harm to people or the environment, and (22)(21) the ability to attract, retain, and replace workforce and administrative employees.
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 thirdfirst quarter of 2022,2023, 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 September 30, 2022,March 31, 2023, 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, 2021,2022, except as follows:
The valuecoal mining industry is subject to ongoing complex governmental regulations and legislation that could adversely impact the Company’s long-term mining contracts and the Company’s results of our investment inoperations, liquidity, financial condition and cash flow.
The United States Environmental Protection Agency (the “EPA”) has a private company involvedcomprehensive regulatory program to manage the disposal of coal combustion residuals (“CCR”) from coal-fired power plants as non-hazardous material under the Resource Conservation and Recovery Act (“RCRA”). Individual states administer some or all of the provisions of RCRA. The North Dakota Department of Environmental Quality approved Falkirk’s customer's plan for an alternate disposal liner to store coal ash at the Coal Creek Station power plant. In the first quarter of 2023, the EPA proposed to deny the application. If denied, a new liner or new waste management unit(s) may need to be installed which could result in the ethanol industrytemporary suspension of operations at Coal Creek Station. Falkirk is the sole supplier of lignite to Coal Creek Station. Any suspension of operations at Coal Creek Station would eliminate the need for lignite coal during the suspension period. Any such suspension of operations at Coal Creek Station or any of the power plants supplied by the Company's mines could decline, could be illiquid and could be volatile in terms of value and returns, which could adversely affect ourhave a material adverse effect on the Company’s business, financial condition and results of operations.
As of September 30, 2022, we held a $20.0 million investment in Midwest AgEnergy, a North Dakota-based ethanol business. Financial returns on ethanol investments are highly dependent on commodity prices, which are subject to significant volatility, uncertainty and regional supply shortages. The valuation for this investment is based, in part, on an assumption that the private company will implement carbon capture and storage to capture carbon dioxide generated in the ethanol production process. This process increases the value of the ethanol produced by the private company. Should this capture process be delayed or not implemented, the value of this investment may be impaired.
On October 26, 2022, Midwest AgEnergy announced that it has finalized an agreement, under which the equity holders of Midwest AgEnergy, including NACCO, would sell their equity interests. The transaction is expected to close before the end of 2022, however there can be no assurance that the transaction will be finalized in the anticipated timeframe or at all. The amount and timing of NACCO’s cash proceeds will be dependent on the terms of the transaction. The transaction is not expected to have a material impact on 2022 results of operations based on current estimates.
If for any reason the proposed merger is not completed, this investment will continue to be accounted for under the equity method under which we report our proportionate share of the net earnings or losses of this private company as a component of Income before income tax provision. If the earnings or losses of and distributions from this investment is material in any year, those earnings or losses may have a material effect on our net income, cash flows, financial condition and liquidity. We do not control the day-to-day operations of this investment; however, how the company is managed could impact our results of operations and cash flows. Additionally, this business is subject to laws, regulations, market conditions and other risks inherent in its operations.
If the announced transaction is not finalized, this investment is non-marketable and we may not be able to achieve a return on our investment in a timely manner, if at all. Midwest Ag Energy’s operating agreement restricts the Company's ability to transfer the membership units, resulting in a liquidity discount. Since there is no active market for the exchange of these securities, our ability to liquidate this investment will likely be dependent on a liquidity event. Valuations of privately-held companies are inherently complex and uncertain due to the lack of readily available market data for such securities. If we determine that this investment has experienced a decline in value, we will be required to recognize an impairment charge in net income. Any of these factors could adversely impact our results of operations, our cash flows and the value of our investment.
MLMC is subject to risks associated with its capital investment, operating and equipment costs, growing use of alternative generation that competes with coal fired 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. MLMC has approximately $135 million of long-lived assets, including property, plant and equipment and a coal supply agreement intangible asset, which are subject to periodic impairment analysis and review. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including assumptions about future power plant dispatch levels, changes in operating
costs and other factors that impact anticipated revenue and customer demand, requires significant judgment. Actual future operating results could differ significantly from these estimates, which may result in an impairment charge in a future period, which could have a substantial impact on the Company’s results of operations.
MLMC sells lignite at contractually agreed upon prices which are subject to changes in the level of established indices over time. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC.
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 power purchase agreement. 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, which indicates 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.
Choctaw Generation Limited Partnership ("CGLP") leases the Red Hills Power Plant from a Southern Company subsidiary pursuant to a leveraged lease arrangement. CGLP's ability to make required payments to the Southern Company subsidiary is dependent on the operational performance of the Red Hills Power Plant. During 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. Southern Company publicly disclosed that all required lease payments have been paid in full through December 31, 2021. On October 27, 2022, Southern Company disclosed in its Form 10-Q, that it provided notice to the lessee, CGLP, to terminate the related operating and maintenance agreement effective June 30, 2023. The parties to the lease agreement are currently negotiating a potential restructuring, which could result in rescission of the termination notice. The ultimate outcome of this matter cannot be determined at this time but could have a material impact on the Company's financial statements if the operating and maintenance agreement is terminated.
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 and 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 (JulyJanuary 1 to 31, 2022)2023) | — | | | $ | — | | | — | | | $ | 22,659,516 | |
Month #2 (AugustFebruary 1 to 31, 2022)28, 2023) | — | | | $ | — | | | — | | | $ | 22,659,516 | |
Month #3 (SeptemberMarch 1 to 30, 2022)31, 2023) | — | | | $ | — | | | — | | | $ | 22,659,516 | |
Total | — | | | $ | — | | | — | | | $ | 22,659,516 | |
(1) During 2021, the Company established a stock repurchase program allowing for the purchase of up to $20.0 million of the Company's Class A Common Stock outstanding through December 31, 2023. 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 September March 31, 2023.
Item 5 Other Information
None.
Item 6 Exhibits
| | | | | | | | |
Exhibit | | |
Number* | | Description of Exhibits |
| | |
10.1 | | |
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.
** Filed herewith.
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: | November 2, 2022May 3, 2023 | /s/ Elizabeth I. Loveman | |
| | Elizabeth I. Loveman | |
| | Vice President and Controller (principal financial and accounting officer) | |