Hamilton Beach 2015 Annual Report Download - page 8

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North American Coal
North American Coal’s mines operate
under contracts to supply coal to an individual
customer’s power plant or coal processing
facility for a long period of time, often for
decades. The mines and the customer facilities
are in close proximity, often adjacent to one
another. NACoal also provides value-added
services, such as operating and maintaining
draglines for limerock producers, and operating
and maintaining a coal processing system for
a customer’s power plant.
Unconsolidated Mines
NACoal employs a business model that
differs from most other coal industry participants.
All but one of NACoal’s contracts include “cost-
plus” pricing terms under which NACoal’s compen-
sation includes reimbursement of all operating
costs, plus a comparatively small but consistent
amount of agreed profit on coal tons or heating
units (btu) delivered. Each contract specifies the
indices and mechanics by which agreed profits
change over time, generally in line with broad
measures of inflation. Financing for these mines
is supported by, or in some instances actually
provided by, their respective customers in order
to minimize costs and are without recourse to
NACoal or NACCO.
These mines are referred to as “unconsoli-
dated mines” because they are not consolidated
in the Company’s financial statements. The pre-
tax profits generated from these mines are shown
separately in the Company’s income statement as
“Earnings of unconsolidated mines.” NACoal and
its customers believe strongly that the structure
of these long-term contracts fully aligns long-term
interests of the mine and the customer in a way
that assures low costs for the customer over the
long term. NACoal’s analysis of historical data
supports that conclusion.
NACoal entered into a new 15-year agree-
ment in 2015 to operate a mine for the Navajo
Transitional Energy Company (NTEC). Under this
agreement NACoal, through a new wholly owned
subsidiary named Bisti Fuels, will act as NTEC’s
contract miner at NTEC’s Navajo Mine, a surface
coal mine located within the Navajo Nation near
Fruitland, New Mexico. Similar to most of NACoal’s
other mining agreements, the agreement with
NTEC is a cost-plus arrangement, under which
NTEC will reimburse Bisti for all operating costs
of the mine, provide the capital required to
operate the mine and pay NACoal an agreed fee
per btu of heating value delivered. Production
is expected to be 5 million to 6 million tons of
coal per year. NTEC will deliver that coal to the
third-party owners of the nearby Four Corners
Generating Station.
Consolidated Mines
NACoal has a coal mine located in Mississippi
that operates pursuant to a more traditional
business model in which NACoal pays all operating
costs and provides the capital for the mine.
This mine is referred to as a “consolidated mine”
because its results are consolidated in the
Company’s financial statements. Mississippi
Lignite Mining Company (MLMC) delivers coal
to a single power plant adjacent to the mine.
MLMC’s sales prices are not subject to spot coal
market fluctuations since 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 over
time. The indices include cost components such
as labor and diesel fuel. The price of diesel fuel is
heavily weighted among these indices. The recent
substantial decline in diesel fuel prices is expected
to reduce 2016 earnings as a moderate increase
in tons sold and the beneficial effect of lower
diesel prices on production costs will only partially