Hamilton Beach 2014 Annual Report Download - page 8

6
North American Coal
Unconsolidated Mines
North American Coal (“NACoal”) employs a
different business model than most other coal
industry participants. A large majority of NACoal’s
mines operate under contracts to supply coal to
an individual customer’s power plant for a long
period of time, often for decades. The mines
and the customer facilities are in close proximity,
often adjacent to one another. These contracts
include “cost-plus” pricing terms under which
NACoal’s compensation includes all operating
costs, plus a comparatively small but consistent
amount of agreed profit on tons or heating
units (btu) delivered. All but two of NACoal’s coal
mining operations operate pursuant to cost-plus
contracts. This contractual approach also applies
to NACoal’s value-added service operations, such
as its Florida dragline mining operations, where
NACoal personnel operate and maintain draglines
for extraction of limerock at customer-owned
limerock mines.
While the pre-tax profits generated from
these mines are included in NACoal’s income
statement, these mines, which are referred to as
the “unconsolidated mines,” are not consolidated
in the Company’s financial statements. Financing
for these mines is supported by, or in some
instances, actually provided by customers to
minimize costs. NACoal and its customers believe
strongly that these long-term contracts fully align
the long-term interests of the mine and the
customer facility in a way that assures low costs
for the customer over the long term. NACoal’s
analysis of historical data supports that conclusion.
Consolidated Mines
Two of NACoal’s coal mines, one in Mississippi
and one in Alabama, operate pursuant to a
more traditional business model, where NACoal
provides the capital for the mine and sells coal
produced to customers. These mines are referred
to as the “consolidated mines” because they are
consolidated in the Company’s financial state-
ments. At Mississippi Lignite Mining Company
(“MLMC”), coal is delivered to a single power plant
which is adjacent to the mine. MLMC’s coal
prices are fixed, but they escalate pursuant
to established indices over time and are not
subject to spot coal market fluctuations. MLMC’s
contract expires in 2032.
The Centennial Natural Resources coal
mining business in Alabama, formerly known as
Reed Minerals until the beginning of 2015, was
acquired in August 2012 as the foundation of
what was expected to become a metallurgical
coal platform for NACoal. Key to this acquisition
was an existing multi-year contract to sell a
majority of the coal produced as steam coal for
use by a significant U.S.-based public utility.
NACoal viewed this contract as providing stability
against the recognized volatility in the market for
metallurgical coal, which accounted for the balance
of Centennial’s coal production. Centennial is
the only part of NACoal’s business that has any
exposure to fluctuations in spot coal prices.
When this business was acquired in 2012, the
Company believed the metallurgical coal market
was at a relative low point. Market analysis at the
time of the acquisition indicated that the metal-
lurgical coal market was close to bottom and
suggested that improvements in both price and
demand were on the horizon. That analysis was
proven to be incorrect as global demand for
metallurgical coal has fallen significantly, including
in important export markets such as China, and
the price for metallurgical coal has deteriorated
far beyond what NACoal expected. Customer