Q3 2021 NACCO Industries Inc Earnings Call
Excluding the <unk> termination payment earnings increased at all of our segments in particular, our minerals management segment had an outstanding quarter helped in part by settlement income higher natural gas and oil prices and income from newly acquired mineral interest our team at catapult mineral partners continues to.
We look for opportunities to expand our portfolio of mineral interests, while actively oversee the performance of our owned royalty and mineral interests.
And our coal mining segment third quarter 2021 coal mining operating profit improved over the prior year quarter, mainly due to the <unk> termination payment as well as an increase in earnings of unconsolidated operations, resulting from contractual.
From contractual price escalation and strong demand.
As more and more base load power generation facilities are shut down and natural gas prices increase power generation companies are increasingly relying on coal to provide low cost and dependable electricity.
Turning to North American mining, we've been game delivery deliveries at two new sand and gravel quarries located in Texas and Arkansas in the third quarter as we delivered on our goal to expand North American mining scope of work and geographic footprint.
We are conducting all mining operations at these two quarries just as we do in our coal mining operations and we'll do it the lithium mine in Nevada as I've said before there's a lot of growth potential in this business and North American Mining's pipeline of new projects remains strong.
We can leverage decades of experience in our whole company of experts to provide specialized mining services or operate an entire mine or quarry and we can apply our skills to meet a wide range of minerals.
I'd also like to note that lithium Americas are our customer at the factor past mine issued an update on the <unk> project in early October at that time. They noted that final permitting decisions are expected to be received in the first quarter of 2022 and early works construction is expected to begin in the first half of 2022.
We continue to provide support as they move forward with this project at maturity. This management fee contract is expected to deliver fee income similar to a mid size mid sized management fee coal mine.
The mitigation resources of North America team continues to advance development of their existing mitigation projects and is evaluating a number of interesting new projects as well.
Im really very pleased with the way all of these businesses are advancing their strategies.
Lastly, I should note that the previously announced sale of Gres Coal Creek station to Rainbow Energy Center has not yet closed.
Closing is expected to occur in the first quarter of 2022.
Once the sale is complete the existing agreements between GRE and fall Kirk will terminate when we will receive a $14 million termination payment from GRE and GRE will transfer ownership of certain other assets to us we look forward to the completion of this transaction.
I continue to be very optimistic about our long term outlook outlook, because I have a lot of confidence in our strategies to protect the core and to grow and diversify I.
I believe that we have strong businesses with strong teams executing on sound business strategies and I'm enthusiastic about how we can continue to grow our business by bringing natural resources to life with that I will turn the call back over to Christie to cover our results for the quarter in more detail.
Thanks, Jason.
Consolidated quarterly results and then provide additional details at the segment level.
On a consolidated basis, our third quarter operating profit improved significantly increasing to $27 6 million from $9 nine.
$9 $4 million in training training.
Validated net income also increased rising to $24 $8 million or $3 47 per share from $8 million.
<unk> per share last year.
However, the increase in operating profit net income less the $10 8 million dollar termination fee JC discussed consolidated adjusted EBITDA, which excludes the termination fee increased to 55, 3% to $23 $3 million.
$15 million in the prior year third corner as J P mentioned, excluding the contact fee. These increases were driven primarily by improved results in all three operating segments, most significantly our minerals management segment.
And our coal mining segment operating profit excluding the termination payment increased primarily due to improved earnings at our unconsolidated operations, partially offset by higher operating expenses segment EBITDA increased as a result of the improvement in operating profit as well as an increase in depreciation depletion and amortization expense.
Mississippi Lignite mining company.
North American mining third quarter 2021 segment adjusted EBITDA increased significantly over the prior year, primarily due to an increase in depreciation expense, resulting from the acquisition of additional equipment to support our contracts.
At JCR already the minerals management operating profit segment adjusted EBITDA for this quarter increased significantly over the prior year.
These improvements are driven by $3 $3 million of settlement income recognized in the current quarter and higher royalty income driven by increased production and higher natural gas and oil prices royalty.
Royalty income from the Permian Basin, and Eagle Ford Shale mineral interest acquired as part of our strategy to extend mineral management geographic footprint.
<unk> contributed to the improvement in earnings.
Those are the significant factors affecting the third quarter results now, let me turn to our outlook I will provide some insight on our expectations for the 2021 fourth quarter and full year as well as to provide a high level overview of our current expectations for 2022, while we are providing this first look at 2022 <unk> will be provided with.
The fourth quarter and full year 2021 earnings release once we have finalized our 2020 to annual operating plan.
And the coal mining segment, we expect fourth quarter operating profit increased significantly over the prior year operating loss because the prior year included charges totaling $4 $6 million to write down Mississippi lignite mining company's coal inventory and costs associated with the voluntary separation program and an asset impairment.
Excluding the impact of these 2020 items operating profit is expected to decrease from the prior year fourth quarter as a result of significantly reduced earnings at the unconsolidated coal mining operations and at Mississippi Lignite mining company.
These anticipated decreases are expected to be partly offset by lower operating expenses and the absence of wind down costs recognized in 2020 related to Camino real fuels.
For the 2021 full year, we expect coal deliveries to be moderately lower than 2020.
Despite fewer deliveries operating profit is expected to increase even after excluding the impact of the $10 $3 million termination payment and the various 2020 charges, mainly as a result of income associated with performing mine reclamation at Caddo Creek a.
The reduction in expenses at Centennial and the absence of costs associated with the closure of Camino real fuels.
Excluding the termination payment received this year and the fixed asset impairment charge recognized last year, we expect segment adjusted EBITDA for the fourth quarter and full year to increase over their respective prior year periods. As a result of operating profit improvements and an increase in depreciation depletion and amortization expense.
Looking into 2022, we anticipate coal deliveries to decrease from 2021 levels as a result of the best IPO of contract termination and current expectations of customer requirements.
<unk> fuels and anticipated GRE termination payments, we expect coal mining operating profit to decrease significantly from 2021 because of expected significant reductions in earnings at the consolidated and non consolidated coal mining operations.
As lower than anticipated increase in operating expenses.
Reduction in earnings at the unconsolidated coal mining operations is expected to be mainly driven by lower earnings from <unk>. As we have agreed to a reduction in the per ton management fee from the effective date of the new coal sales agreement through May 31, 2024.
After may of 2024.
The per ton management fee increases to a higher base in line with current fee levels and thereafter adjust annually. According to an index, which tracks a broad measure of U S inflation.
Termination of this type of those contract will also contribute to the expected decline in the earnings at the unconsolidated mining operations next year.
Segment adjusted EBITDA, excluding the termination payment received for Mantech and the anticipated $40 million payment from GRE is expected to decrease significantly in 2022 from 2021, primarily because of the forecast a reduction in operating profit.
At North American mining, we expect tons delivered an operating profit to increase in the fourth quarter and full year over the respective prior year periods, primarily because of increased production, partially offset by higher operating expenses in.
In 2022, North American mining expects full year operating profit increased significantly over this year due to contributions from contracts entered into during 2021 and an expected increase in other customer requirements.
Segment, adjusted EBITDA for North America mining in the fourth quarter 2021, and full year as well as in 2022 is expected to increase significantly compared with the respective prior year periods. As a result of the improved operating profit and increases in depreciation expense.
Moving to minerals management last year, the segment recorded impairment charges totaling $7 3 million of which $6 $7 million were taken in the fourth quarter.
Excluding the 2024th quarter charge, we expect mineral management operating profit and segment adjusted EBITDA to decrease in the fourth quarter, primarily due to the natural production decline curve of certain newer wells in Ohio.
We expect full year 2021, operating profit and segment adjusted EBITDA to increase over last year, including and excluding the prior year impairment charges. As a result of the addition of royalty income generated from recently acquired mineral interest and higher oil and gas market prices.
In 2022, we expect operating profit and segment adjusted EBITDA decreased significantly from this year. These declines are expected to be driven primarily by reduced production from the natural decline curve on wells in Ohio expectations for lower natural gas and oil prices and the absence of $3 $3 million of settle.
<unk> income recognized in 2021.
Our current expectation is that oil and gas market prices moderate in 2022 and stabilize at levels consistent with expected full year 2021 averages.
To summarize on a consolidated basis, we anticipate a significant increase in consolidated operating profit net income and consolidated adjusted EBITDA in the fourth quarter over last year, primarily because of the absence of prior year charges totaling $11 6 million.
Excluding those charges fourth quarter 2021 consolidated operating profit is expected to decrease from the prior year, primarily because we anticipated lower results in our coal mining and minerals management segment, partially offset by an increase in the North American mining segment.
For the full year.
We expect net income to be significantly higher than last year. As a result of this debt fuels termination payment and the absence of prior year charges totaling $12 1 million.
<unk> all of these items, we still expect significantly higher 2021, net income and consolidated adjusted EBITDA.
The strong results in the first nine months of this year.
In 2022, we expect consolidated net income to decrease significantly from 2021 lower earnings in the coal mining segment and an anticipated reduction in earnings in the minerals management segment.
Are expected to be partially offset by lower income tax expense.
Moving away from results expectations, Let me briefly provide some cash flow information we ended the quarter with consolidated cash of $87 5 million and debt of $17 million compared with consolidated cash of $85 million and debt of $32 million at the end of the second quarter. In addition, we had availability of 110.
$4 $9 million under our revolving credit facility.
We are in the process of refinancing our revolving credit agreement based on the current status. We believe it is probable that the refinancing will be complete by the end of this year.
We're also anticipating significant cash flow before financing activities in the 2021 full year as compared to a substantial use of cash in 2020. However.
However in 2022, we expect to return to a significant use of cash due to substantial capital expenditures in the forecast a reduction in earnings we will now turn to any questions you may have.
Yes.
Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one I'll now turn off from coupons.
When preparing to ask a question. Please ensure your devices on mute Mosley.
Our first question comes from Andrew Coombs from focused compounds capsule management, Andrew Your line is now open.
Thank you and good morning.
Good morning.
So my first question is I was curious I mean would you say natural gas.
Is the commodity price earnings you are most sensitive to because it affects both loyalty that minerals management and dispatch at coal powered plants.
And how do you decide on what natural gas price to queue.
When giving guidance.
Thanks for the question.
Your question was very specific about.
Is it the thing that as well.
We are most sensitive to.
A number of things that drive our business, including the timing of planned and unplanned power plant outages and other things but.
But if you want them to want to talk specifically about natural gas I mean, yes. It does.
Certainly affect the way utilities think about dispatching there their fleet of resources.
I think that high natural gas prices contributed.
Contributed pretty significantly to the increased demand that we've seen for coal from our customers.
And it also has benefited our.
Our oil and gas business the majority of our legacy assets.
In the minerals segment arent tied to.
Natural gas reserves in southern southeastern Ohio.
On your second part of your question is what do we look to one where we're making assumptions I think in the release, we said that.
Our assumption is that.
Prices are going to moderate and sort of return to an average for 2021.
We tend to take a pretty conservative view of forecasting.
In general.
Think it's probably appropriate in an industry like ours, because we'd rather.
Be conservative as we think about how we're going to operate and manage going forward. So that we don't.
Become overconfident and take risks that we probably shouldnt be changing.
So I think we've taken a pretty conservative view of natural gas prices, we look into the future and certainly if they stay at the current spot prices, which are much higher than the average for 2021 at least so far.
I think we should see better results.
For the rest of the year and into next year.
I will go back to the beginning and say that of course on the coal side.
It depends on what happens with the individual power plants related to I guess, primarily unplanned outages planned outages, we know will go.
Does that answer your question.
Yes, no that does thanks a lot.
And then I just have a couple more I'm curious are you expecting any changes in credit availability due to new fossil fuel lending policy that banks.
Maybe you could speak to if it's becoming more difficult for coal companies to borrow.
Well it certainly is it any easier for coal companies tomorrow.
And we.
We all see.
Gosh, you know all the time do you see banks that decide that they're going to get out of fossil fuels are going to steer away from energy.
They've all got their own reasons for doing that some I think.
Politically driven I think summer driven by.
Possibly troubled.
Credits that they've had in Midtown in the past.
So the mix of banks that we work with have certainly changed over time and they continue to change.
As for terms.
No.
It is certainly possible to borrow.
We're working on a refinancing right now expected to be completed.
During this quarter before the end of the year and I'm pleased with the terms that we were able to at least so far the team. The terms that we're able to work out with lenders. So I think thats.
Probably what I would have to say about that.
Our status as the lending markets as it relates to us.
Got it and then can you talk a little bit about the $2 million in Capex mitigation resources.
What kind of things will capex in this business, usually before and then im going to jump back in the queue.
Yes, good question so.
The accounting for mitigation resources as sort of an interesting thing.
As we acquire a piece of property and spend money.
To develop.
The mitigation bank on that property it actually has treated more like work in process inventory.
So investments that we're making.
In mitigation resources on actual mitigation banking credits.
Not really thought of as Capex, it's really building inventory the capex that we're mentioning here is actually for some equipment that.
We intend to acquire.
That will be used.
By us to do the dirt work on mitigation banks.
Dirt work as a core part of our skills, it's what we do at our coal.
Coal mining operation, it's directly related to what we do at North American mining.
And we're just taking those skills and expanding them into mitigation resources to enhance the.
The financial returns from that business. So the $2 million that we referenced there is related to equipment.
It's good it's very good question. Thank you.
As a reminder to ask any follow up questions. Please press star followed by one on your telephone keypad.
Our next question comes from Samsung.
Samsung from Donovan LNG Mahalo. Your line is now open.
Thanks, Hey, guys great quarter, just a couple of specific questions.
Can you great news about the new wholesale agreement with Parker can you provide a little color on the risk of early termination of that contract had an early termination.
Earlier under the former management of coal Creek, what's the how should we think about the potential for that plant just closing again in a few years.
Well.
It's a good question.
No.
The new owners Rainbow Energy Center.
<unk>.
They are in the business.
<unk> company and all these all the.
Leaders of that business are involved in the.
Are involved in the marketing and sale of electricity and capacity and things like that.
They are very different than a utility.
In particular, our co op and.
And the way that they think about how they would operate that plant.
The.
Yeah.
<unk>.
They are viewing at least in the conversations we've had with them. They are viewing this point a very much like a manufacturing company would view a factory.
And there are any changes to run that thing.
Like you would a factory at high capacities, which produce.
Particularly at that plant produces very low cost electricity.
And increasingly valuable capacity.
Revenues were available from that plan.
Dan.
They are making a bet that they can do that successfully into the future.
Now they are their business plan risks there are regulatory risk political risk.
We all sort of read about newspaper every day.
So my ability to really think about.
What are the specific risks for that plant.
No.
Something that.
Sure.
I could really call out because we are really dependent upon share plans for their business model, but I will tell you I think.
The conversations that we've had with them, it's very exciting to see how they are approaching this business and how they are thinking about.
Running a plant like this in the current energy environment, and what we see going forward I'd add of course, this hasnt closed yet.
This transaction share.
As.
Going through the final regulatory steps and we expect it to close in the first part of next year and we're looking forward to the point when that transition happens I think it will be I think it will be a great thing for the plant and for the community and certainly for the colon.
Sure, Thanks, and so do I understand it affected nacco.
Partially subsidizing the early years of this new arrangement with a lower management fee.
And as subsidizing is probably the wrong word.
Repeating some value to it as is.
How should we think about that.
Is that a below cost arrangement is that it cost arrangement.
Okay. So two parts of that question and I'll address the second one first you said is it below cost remember that this is a management fee contract today as well as after after the transition which means the customer pays a 100% of the cost and provides all the capital.
And we receive a fee for the work that we do.
And what we described in our earnings release, I think we've done for a couple of quarters now.
Is that what we have.
Have agreed to as a reduction in our feet.
So the concept of it being below cost doesn't really apply in this equation because all we earn from operating any of these management fee coal mines is RFP.
Got any other costs.
My first reaction when you said subsidy is okay, well I wouldn't think about this as a subsidy and you ultimately pointed that out thats, probably not the right word.
I would say.
As is true in many transactions in order to get a deal done.
Many parties to the transaction need too.
Right and getting a deal done.
And that was one of the ways that we were able to help get a deal done.
In evaluating that decision we of course thought a lot about what is the potential.
For the future.
And what we are we giving up given that its management fee.
It's not like we're in a losing situation. It's just we're going to make less for a period of time, we viewed that as a 100% okay with us and in fact, we were pleased to be able to support.
The.
Completion of the transaction.
Like I said, it's great for its great for the power plant, it's great for the community it's great for consumers.
It certainly is good for our employees and we were we were happy to do that.
Thanks.
That's really helpful. One more question and I appreciate your patience switching over to Mississippi for a minute.
Im trying to reconcile the broad optimism.
Im hearing around.
Gas prices and base load retirements and the uplift that provides to macros contract.
With the persistently lower capacity factors.
And after that.
Demand is there.
If you look at the customer end.
Help me understand how to think about that how to reconcile that.
What's the.
Worst case scenario in the worst case scenario right now in Mississippi Glory, but could it go lower.
I mean, it's hard to think about worst case scenarios right.
What exactly are those.
Certainly I believe that.
Increased natural gas prices have supported the high level of dispatch out of that plant. So far this year, the Red Hills power plant.
It is.
Proving to be an important resource in the mix of generation that serving that part of TBA.
Certainly increased natural gas prices will help with that dispatch I believe.
And the.
The plant has been running well and historically, it's had some mechanical issues.
It's been running well I think it benefits power plants in general including that plant.
These plants are built to run at a high level, so having high natural gas higher natural gas prices.
Allows these plants to run at a higher dispatch level, there's less cycling them, which means.
We're ramping them up ramping them down.
Because that causes issues that can affect mechanical availability.
So having a plant running at a higher level during the year has been helpful.
And I think it would be in the future.
Your question about worst case scenario.
I guess worst case scenario is that they are.
Develop some kind of regulation that shuts the whole play it down, but I don't see that happening right now.
I think it would.
Zinc TVA views this as a power purchase agreement.
Not as an operated asset which is.
It is a power purchase agreement and so it's kind of an independent contractual arrangement that runs through 2032. So I think it is likely to continue to operate it.
As part of the fleet at least through that period of time.
Does that answer your question.
Very well. Thank you so much for all the additional detail I appreciate it.
Yes, thanks for the question.
We have no further questions I'll hand back to the management team for any closing remarks.
Thank you very much Stacy did you have anything you wanted nothing else Christy. Thanks, Alright. Thanks, JT will close with a few final reminder, a replay of our call will be available online. Later. This morning, we'll also post the transcript on the Investor Relations website. When it becomes available. If you have any questions. Please reach out to me you can reach me at the phone number available.
The press release I Hope you have a great day, and I will turn it back over to Elliot to conclude the call.
Thank you. This concludes today's conference the audio recording will be available two hours. After the conclusion of this call.
To access it by dialing 1866839403 and by using 309 to five.
<unk> III play.
A playback will be available until November.
November 2021.
Okay.
[music].