NACCO Industries (NC) 10-K 2014 FY Annual report

Exhibit 99

A U D I T E D C O M B I N E D F I N A N C I A L S T A T EME N T S

The Unconsolidated Mines of

The North American Coal Corporation

Years Ended December 31, 2014, 2013, and 2012

With Report of Independent Registered Public Accounting Firm

The Unconsolidated Mines of

The North American Coal Corporation

Audited Combined Financial Statements

Years Ended December 31, 2014, 2013 and 2012

Contents

Report of Independent Registered Public Accounting Firm ..........................................................1

Audited Combined Financial Statements

Combined Balance Sheets...............................................................................................................2

Combined Statements of Net Income..............................................................................................4

Combined Statements of Equity .....................................................................................................5

Combined Statements of Cash Flows..............................................................................................6

Notes to Combined Financial Statements .......................................................................................7

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of NACCO Industries, Inc.

We have audited the accompanying combined balance sheets of The Unconsolidated Mines of The North American Coal Corporation as of December 31, 2014 and 2013, and the related combined statements of net income and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2014. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of The Unconsolidated Mines of The North American Coal Corporation at December 31, 2014 and 2013, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with U.S. generally accepted accounting principles.

/ s / Ernst & Young LLP

Cleveland, Ohio

March 9, 2015

1

The Unconsolidated Mines of

The North American Coal Corporation

Combined Balance Sheets

(Amounts in Thousands)

	December 31
	2014	2013
Assets
Current assets:
Cash and cash equivalents	$ 17,556	$ 19,864
Accounts receivable	21,338	28,999
Accounts receivable from affiliated companies	1,029	115
Inventories	97,054	91,007
Deferred income taxes	4,972	4,483
Other current assets	753	619
Total current assets	142,702	145,087
Property, plant and equipment:
Coal lands and real estate	112,063	106,181
Advance minimum royalties	1,308	1,277
Plant and equipment	966,244	979,543
Construction in progress	56,375	24,746
	1,135,990	1,111,747
Less allowance for depreciation, depletion,
and amortization	(522,046)	(495,223)
	613,944	616,524
Deferred charges:
Deferred lease costs	4,714	8,842
Other	418	449
	5,132	9,291
Other assets:
Note receivable from Parent Company	3,625	4,347
Other investments and receivables	152,606	104,679
	156,231	109,026
Total assets	$ 918,009	$ 879,928

2

	December 31
	2014	2013
Liabilities and equity
Current liabilities:
Accounts payable	$ 28,904	$ 24,336
Accounts payable to affiliated companies	57,752	33,281
Current maturities of long-term obligations	70,736	65,416
Current mine closing accrual	311	4,281
Other current liabilities	20,138	19,966
Total current liabilities	177,841	147,280
Long-term obligations:
Advances from customers	191,992	180,632
Notes payable	78,827	81,875
Capital lease obligations	246,043	281,229
	516,862	543,736
Noncurrent liabilities:
Deferred income taxes	29,512	30,820
Mine closing accrual	128,782	122,388
Pension and post-retirement benefits	55,452	28,296
Other accrued liabilities	5,340	2,950
	219,086	184,454
Equity:
Common stock and membership units	199	199
Capital in excess of stated value	791	791
Retained earnings	3,230	3,468
	4,220	4,458
Total liabilities and equity	$ 918,009	$ 879,928

See accompanying notes to Combined Financial Statements

3

The Unconsolidated Mines of

The North American Coal Corporation

Combined Statements of Net Income

(Amounts in Thousands)

	Years Ended December 31
	2014	2013	2012
Lignite tons sold	26,676	25,910	25,044
Income:
Sales	$ 572,680	$ 570,864	$ 535,848
Other	1,300	1,038	1,584
	573,980	571,902	537,432
Cost and expenses:
Cost of sales	442,419	435,056	399,674
Depreciation, depletion, and amortization	58,759	63,491	64,790
	501,178	498,547	464,464
Operating Profit	72,802	73,355	72,968
Other income (expense)
Interest	(24,811)	(27,403)	(27,584)
Gain (loss) on sale of assets	406	477	(142)
	(24,405)	(26,926)	(27,726)
Income before income taxes	48,397	46,429	45,242
Income taxes:
Current	12,624	12,868	(3,319)
Deferred	(1,556)	(2,891)	14,088
	11,068	9,977	10,769
Net income	$ 37,329	$ 36,452	$ 34,473

See accompanying notes to Combined Financial Statements

4

The Unconsolidated Mines of

The North American Coal Corporation

Combined Statements of Equity

(Amounts in Thousands)

	Years Ended December 31
	2014	2013	2012
Common stock and membership units:
Beginning balance	$ 199	$ 199	$ 198
Issuance of LLC membership units	–	–	1
	199	199	199
Capital in excess of stated value	791	791	791
Retained earnings:
Beginning balance	3,468	1,375	4,964
Net income	37,329	36,452	34,473
Dividends paid	(37,567)	(34,359)	(38,062)
	3,230	3,468	1,375
Total equity	$ 4,220	$ 4,458	$ 2,365

See accompanying notes to Combined Financial Statements

5

The Unconsolidated Mines of

The North American Coal Corporation

Combined Statements of Cash Flows

(Amounts in Thousands)

	Years Ended December 31
	2014			2013	2012
Operating activities
Net income	$	37,329		$ 36,452	$ 34,473
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, and amortization	58,759			63,491	64,790
Amortization of deferred financing costs	31			31	31
(Gain) loss on sale of assets	(406		)	(477)	142
Equity income in cooperatives	(858		)	(565)	(573)
Mine closing accrual	2,424			(1,142)	(677)
Deferred lease costs	3,899			2,220	1,016
Deferred income taxes	(1,556		)	(2,891)	14,088
Post-retirement benefits and other accrued liabilities	(1,393		)	(7,608)	(10,635)
Amortization of advance minimum royalties	49			238	149
Other noncurrent assets	(16,002		)	(7,383)	(16,114)
	82,276			82,366	86,690
Working capital changes:
Accounts receivable	6,850			18,020	(5,560)
Inventories	(6,047		)	2,204	(13,040)
Accounts payable and other accrued liabilities	29,050			7,084	146
Other changes in working capital	(136		)	328	520
	29,717			27,636	(17,934)
Net cash provided by operating activities	111,993			110,002	68,756
Investing activities
Expenditures for property, plant, and equipment	(51,747		)	(15,330)	(31,440)
Additions to advance minimum royalties	(80		)	(151)	(98)
Proceeds from sale of property, plant, and equipment	2,771			1,048	2,995
Net cash used for investing activities	(49,056		)	(14,433)	(28,543)
Financing activities
Additions to advances from customer, net	15,048			1,602	5,150
Payments received (made) on note from Parent Company, net	1,540			(870)	1,332
Issuance of equity units	–			–	1
Additions to long-term obligations	–			–	65,000
Repayment of long-term obligations	(44,266		)	(46,702)	(71,877)
Financing fees paid	–			–	(306)
Dividends paid	(37,567		)	(34,359)	(38,062)
Net cash used for financing activities	(65,245		)	(80,329)	(38,762)
(Decrease) increase in cash and cash equivalents	(2,308		)	15,240	1,451
Cash and cash equivalents at beginning of year	19,864			4,624	3,173
Cash and cash equivalents at end of year	$	17,556		$ 19,864	$ 4,624

See accompanying notes to Combined Financial Statements

6

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

December 31, 2014, 2013 and 2012

1. Organization

The Coteau Properties Company, The Falkirk Mining Company, The Sabine Mining Company, Demery Resources Company, LLC, Caddo Creek Resources Company, LLC, Camino Real Fuels, LLC, Coyote Creek Mining Company LLC, and Liberty Fuels, LLC (collectively, the “Unconsolidated Mines”) are each wholly owned subsidiaries of The North American Coal Corporation (Parent Company), which is a wholly owned subsidiary of NACCO Industries, Inc. (Ultimate Parent Company).

During 2003, the Parent Company adopted authoritative guidance issued by the Financial Accounting Standards Board (FASB) on Consolidation of Variable Interest Entities. The guidance clarifies the application of authoritative guidance on Consolidated Financial Statementsfor certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. As a result of the adoption, the Parent Company is not the primary beneficiary of the Unconsolidated Mines and does not consolidate these entities’ financial position or results of operations. The Unconsolidated Mines are still considered under common management of the Parent Company and, therefore, are reflected collectively in the Unconsolidated Mines’ audited combined financial statements.

The Coteau Properties Company: The Coteau Properties Company (Coteau), an Ohio corporation, was organized on May 23, 1972, pursuant to an agreement between the Parent Company and a wholly owned subsidiary of a diversified energy company (Buyer). Coteau is principally engaged in lignite mining through the operation of a surface mine in North Dakota.

On April 22, 1977, the Buyer exercised its option to enter into a coal sales agreement, as restated June 1, 1979. As of November 1, 1988, all of the Buyer’s rights, interests, and obligations under the coal sales agreement were assigned to Dakota Coal Company (Coteau’s Customer), a wholly owned subsidiary of Basin Electric Power Cooperative (Basin). This coal sales agreement was subsequently replaced with a coal sales agreement, as amended, between Coteau and Coteau’s Customer (Coteau Agreement) and provides Coteau with the option to extend Coteau’s agreement up to the year 2037 and provides for reimbursement of administrative and general expenses, included in cost of sales in the combined statements of net income and comprehensive income, from actual costs to reimbursement at a fixed rate per ton.

Under the terms and conditions of the Coteau Agreement, Coteau is to supply coal to an electric generating station and a coal gasification plant, as well as to other third parties. The terms of a related option agreement, as amended, provide that, under certain conditions of default, Coteau’s Customer may acquire the assets, subject to the liabilities, for an amount equal to the equity of Coteau.

The Falkirk Mining Company: The Falkirk Mining Company (Falkirk), an Ohio corporation, was organized on August 22, 1974, to enter into a coal sales agreement (Falkirk Agreement) with an electric generation and transmission cooperative (Falkirk’s Customer). Falkirk’s agreement was restated effective January 1, 2007, to extend the agreement to 2045. Falkirk is principally engaged in lignite mining through the operation of a surface mine in North Dakota.

7

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Under the terms of the Falkirk Agreement, Falkirk’s Customer has agreed to provide, or procure from others, the financing required to develop, equip, and operate Falkirk’s mine for the life of the Falkirk Agreement. The Falkirk Agreement provides that, under certain conditions of Falkirk’s default, Falkirk’s Customer may acquire the assets, subject to the liabilities, for an amount equal to the equity of Falkirk.

Falkirk’s Customer has entered into an operating agreement with Falkirk whereby a dragline to be used in the production of coal (original cost of approximately $40,000) leased by Falkirk’s Customer has been made available to Falkirk without rent.

The Sabine Mining Company: The Sabine Mining Company (Sabine), a Nevada corporation, was organized on November 6, 1980, and entered into a lignite mining agreement, as restated, (Sabine Agreement) with a public utility (Sabine’s Customer) in 1981, which was subsequently amended and restated on January 1, 1996, December 1, 2001 and January 1, 2008. Sabine is principally engaged in lignite mining through the operation of a surface mine in Texas.

The Sabine Agreement provides that, under certain conditions of default, Sabine’s Customer may acquire the issued and outstanding common stock of Sabine for an amount equal to the equity of Sabine.

Other entities: Demery Resources Company, LLC (Demery), Caddo Creek Resources Company, LLC (Caddo), Camino Real Fuels, LLC (Camino Real), Coyote Creek, LLC (Coyote) and Liberty Fuels Company, LLC (Liberty) were all formed during 2008, 2009, and 2012 to develop, construct, and operate lignite surface mines under long-term contracts for their respective customers. The contracts with the customers allow for reimbursement of all costs plus a management fee.Demery and Caddo have had some minimal deliveries during the year. Camino Real, Coyote, and Liberty are building mines or developing plans to build mines and therefore do not currently mine or deliver coal.

Since each of the Unconsolidated Mines has an agreement to provide coal to their respective customers, a significant portion of each of the Unconsolidated Mines’ revenue is derived from a single source. The financial position of the Unconsolidated Mines and the Parent Company would be materially affected if the existing contractual relationship with any of the Unconsolidated Mines’ customers were terminated or significantly altered.

Management performed an evaluation of the Unconsolidated Mines’ activities through March 9, 2015 which is the date these financial statements were issued. No significant subsequent events have occurred that required recognition or disclosure in these financial statements.

2. Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

8

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Revenue Recognition and Accounts Receivable

Under their respective mining agreements, the Unconsolidated Mines recognize revenue and a related receivable as coal is delivered. The sales price of the coal is based on costs, plus a profit or management fee per ton of coal delivered. As is customary in the coal industry, these agreements provide for monthly settlements. The Unconsolidated Mines’ significant credit concentration is uncollateralized; however, historically, no credit losses have been incurred. Management has reviewed the carrying value of its accounts receivable and has determined that a reserve for credit losses is not necessary based on amounts subsequently realized.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and highly liquid investments with initial maturities of three months or less. After considering the right of offset, outstanding checks net of their associated funding accounts, are classified as accounts payable.

Inventories

Coal and supply inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method.

Property, Plant and Equipment

Property, plant, and equipment are recorded at cost. Depreciation, depletion, and amortization are provided in amounts sufficient to amortize the cost of related assets (including assets recorded under capitalized lease obligations) over their estimated useful lives or lease terms and are calculated by either the straight-line method or the units-of-production method based on estimated recoverable tonnage. In the course of preparing a mine for production, the Unconsolidated Mines incur mine development costs prior to initial production, as well as throughout the life of the mine. The Unconsolidated Mines capitalize these costs as a part of plant and equipment in the accompanying combined balance sheets. The Unconsolidated Mines amortize the development costs over their estimated useful life, which is generally a units-of-production method. Repairs and maintenance costs are expensed when incurred, unless such costs extend the estimated useful life of the asset, in which case such costs are capitalized and depreciated.

Advance Minimum Royalties

Advance minimum royalties are advance payments made to lessors under terms of mineral lease agreements that are recoupable against future production. These advanced payments are capitalized when paid and charged against income as the coal reserves are mined.

Long-Lived Assets

Upon identification of indicators of impairment, management compares the carrying value of its long-lived assets to the undiscounted cash flows of such assets. When the undiscounted cash flows are less than the related assets’ carrying value, the long-lived assets are adjusted to fair value (based on active market quotes, third-party appraisals, or discounted cash flows).

9

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Accounting for Asset Retirement Obligations

Under certain federal and state regulations, the Unconsolidated Mines are required to reclaim land disturbed as a result of mining. Reclamation of disturbed land is a continuous process throughout the terms of the mining agreements. Current reclamation costs are charged to expense in the period incurred and are being recovered as a cost of coal tonnage sold. Costs to complete reclamation after mining has been completed are to be reimbursed under the respective mining agreements.

Authoritative guidance on accounting for asset retirement obligationsprovides accounting requirements for retirement obligations associated with tangible long-lived assets, including: (i) the timing of liability recognition; (ii) initial measurement of the liability; (iii) allocation of asset retirement cost to expense; (iv) subsequent measurement of the liability; and (v) financial statement disclosures. The guidance requires that an asset’s retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method.

The Unconsolidated Mines’ asset retirement obligations are for costs to close its surface mines and reclaim the land it has disturbed as a result of its normal mining activities. The Unconsolidated Mines have estimated these costs and recognized a liability and associated asset in accordance with authoritative guidance. The Unconsolidated Mines determined these obligations based on estimates adjusted for inflation, projected to the estimated closure dates, and then discounted using a credit-adjusted, risk-free interest rate. The accretion of the liability is being recognized over the estimated life of the individual asset retirement obligations. The associated asset is recorded in property, plant, and equipment in theaccompanying balance sheets.

Since the cost of reclamation is reimbursable under the provisions of the mining agreements, the difference between the capitalized asset retirement obligation and the reclamation liability is recorded as a long-term receivable from the customers. Additionally, the annual costs related to amortization of the asset and accretion of the liability of $9,983, $11,002, and $18,786 in 2014, 2013, and 2012, respectively, are included in cost of sales, and increases the sales to, and the long-term receivable from, the customers. The long-term receivable (see Note 4) will be reimbursed to the Unconsolidated Mines as the costs of reclamation are actually incurred.

There are currently no assets legally restricted for purposes of settling these asset retirement obligations. A reconciliation of the beginning and ending aggregate carrying amount of the asset retirement obligations is as follows:

	December 31
	2014			2013
Beginning balance	$	126,669		$	131,601
Liabilities incurred during the period	—			1,230
Liabilities settled during the period	(3,970		)	(7,529		)
Accretion expense	6,394			6,390
Revision in cash flows	—			(5,023		)
	$	129,093		$	126,669

10

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Financial Instruments and Derivative Financial Instruments

Financial instruments held by the Unconsolidated Mines include cash and cash equivalents, accounts receivable, accounts receivable from an affiliate, accounts payable and long-term debt. The Unconsolidated Mines do not hold or issue financial instruments or derivative financial instruments for trading purposes.

3. Inventories

Inventories are as follows:

	December 31
	2014		2013
Coal	$	29,970	$	25,662
Supplies	67,084		65,345
	$	97,054	$	91,007

4. Other Investments and Receivables

Other investments and receivables consist of the following:

	December 31
	2014		2013
Long-term receivable from Unconsolidated Mine customers related to:
Asset retirement obligation	$	49,627	$	44,016
Pension and retiree medical obligation	57,459		25,872
Reclamation bond	17,922		17,922
Investment in cooperatives	16,378		15,520
Other	11,531		6,031
	152,917		109,361
Less asset retirement obligation included in current
accounts receivable	311		4,682
	$	152,606	$	104,679

The long-term receivables will be reimbursed to the Unconsolidated Mines as the costs of reclamation, pension and retiree medical obligations are actually incurred or paid.

One of the Unconsolidated Mines holds investments in cooperatives that provide electrical service to the mine site. Patronage dividends from cooperatives are recorded as declared. The dividends declared are consistently paid out, but routinely several years after the declaration. These patronage dividends when declared are reflected as a reduction in the cost of coal under the mining agreements. In the event the cooperatives should become unable to pay the patronage dividends previously declared, the Unconsolidated Mines would be required at that time to record an impairment charge against the investment asset, which would be reimbursable under the mining agreement.

11

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

5. Accrued Liabilities

Other current liabilities consist of the following:

	December 31
	2014		2013
Accrued payroll	$	13,578	$	13,607
Other	6,560		6,359
	$	20,138	$	19,966

6. Advances From Customers and Notes Payable

Advances from Customers

Advances from customers represent amounts advanced to Coteau and Falkirk from their customers or their affiliates to provide working capital and to develop and operate the mines. These advances, which are not guaranteed by either the Parent Company or the Ultimate Parent Company, are secured by substantially all owned assets and assignment of all rights under the agreements. Coteau’s advances incur an average weighted interest rate of 4.0%. No repayment schedule has been established for Falkirk’s advances, which are noninterest-bearing, due to the funding agreement with the customer.

Estimated maturities for Coteau for the next five years, including current maturities, and Falkirk’s customer advances with unspecified repayment schedules are as follows:

2015	$	14,065
2016	5,158
2017	5,119
2018	5,119
2019	5,119
Thereafter	77,749
	112,329
Advances with unspecified repayment schedule	102,591
Total advances from customers	214,920
Less current maturities	22,928
Total long-term advances from customers	$	191,992

12

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Notes Payable

Notes payable primarily represents financing which customers arranged and guaranteed for Sabine. Neither the Parent Company nor the Ultimate Parent Company has guaranteed these borrowings. Certain notes payable of Sabine include a fixed charge coverage covenant. Sabine was in compliance with this covenant at December 31, 2014. Notes payable consist of the following:

	December 31
	2014		2013
Promissory note payable due July 31, 2015 to a bank under a revolving agreement providing for borrowings up to $10,000. Interest is based on the bank’s daily cost of funds plus 1.75% (1.80 and 1.78% at December 31, 2014 and 2013, respectively)	$	—	$	—
Secured note payable due August 21, 2031, with semiannual principle and interest payments at an interest rate of 4.58% on the unpaid balance	56,875		60,125
Secured note payable due October 31, 2024, with semiannual interest payments at an interest rate of 6.37% on the unpaid balance	25,000		25,000
Other	404		—
Total notes payable	82,279		85,125
Less current portion	3,452		3,250
Long-term portion of notes payable	$	78,827	$	81,875

Under the terms of all note agreements, substantially all assets of Sabine are pledged and all rights under the mining agreements are assigned.

Notes payable maturities for the next five years are as follows:

2015	3,452
2016	3,452
2017	3,250
2018	3,250
2019	3,250
Thereafter	65,625
	$	82,279

Commitment fees paid to banks were approximately $79, $76 and $116 in 2014, 2013 and 2012, respectively, and are included in interest expense in the accompanying combined statements of net income and comprehensive income.

13

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

In 2012, one of the Unconsolidated Mines issued new debt in the amount of $65,000 in a private placement offering. The proceeds from this transaction were used to retire the secured note payable due in 2012, pay the balance outstanding in the revolving agreement, and provide additional capital for expansion. Under the terms of the new notes, interest at 4.58% is payable semiannually, and principal is due in even semiannual installments over the 20 year life of the notes. As with the debt it replaced, neither the Parent Company nor the Ultimate Parent Company have guaranteed this borrowing.

7. Pension and Other Postretirement Benefits

Defined Benefit Plans

Substantially all the Unconsolidated Mines’ salaried employees hired prior to January 1, 2000, participate in The North American Coal Corporation Salaried Employees Pension Plan (the Plan), a noncontributory defined benefit plan sponsored by the Parent Company. Pension benefits for certain management level employees were frozen effective December 31, 2004. During 2013, the Company amended the Combined Defined Benefit Plan for the Ultimate Parent and its subsidiaries (the “Combined Plan”) to freeze pension benefits for all employees effective as of the close of business on December 31, 2013. Employees whose benefits were frozen receive retirement benefits under defined contribution retirement plans. As a result of this amendment, the Company remeasured the Combined Plan and recorded a $1,622 pre-tax curtailment loss.

The Company also approved freezing all pension benefits under its Supplemental Retirement Benefit Plan (the “SERP”). In years prior to 2013, benefits other than COLA’s were frozen for all SERP participants. Effective as of the close of business on December 31, 2013, all COLA benefits under the SERP were eliminated for all plan participants.

Benefits under the defined benefit pension plans are based on years of service and average compensation during certain periods. The Unconsolidated Mines made contributions to this plan of $2,213 in 2014. The Unconsolidated Mines expect to make supplemental payments and pay benefits from the assets of the Plan of $7,069 in 2015, $7,750 in 2016, $8,508 in 2017, $9,244 in 2018, $9,918 in 2019, and $58,094 in the five years thereafter.

The following is a detail of the net periodic pension expense of the Unconsolidated Mines, using an assumed discount rate of 4.75% and 3.90% /4.70% in 2014 and 2013, respectively:

	Year Ended December 31
	2014			2013		2012
Service cost	$	—		$	3,988	$	4,342
Interest cost	7,983			8,202		8,482
Expected return on plan assets	(11,739)			(10,950)		(9,514)
Amortization of actuarial loss	105			4,592		5,324
Amortization of prior service cost	26			423		702
Curtailment loss	—			1,622		—
Net periodic pension (income) expense	$	(3,625	)	$	7,877	$	9,336

14

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

The following is a detail of the changes in plan assets and benefit obligations recognized in long-term receivable from customers:

	Year Ended December 31
	2014		2013			2012
Current year actuarial loss (gain)	$	31,590	$	(60,533	)	$	14,500
Current year prior service credit	—		(540)			—
Amortization of actuarial loss	(105)		(4,592)			(5,324)
Amortization of prior service cost	(26)		(423)			(702)
Recognition of curtailment cost	—		(1,622)			—
Asset transfer	(174)		—			—
Amount recognized in long-term receivable	$	31,285	$	(67,710	)	$	8,474

The following sets forth the Unconsolidated Mines portion of the changes in the benefit obligation and plan assets of the defined benefit plans of the Unconsolidated Mines at:

	December 31
	2014			2013
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	171,190		$	211,471
Service cost	—			3,988
Interest cost	7,983			8,202
Plan amendment	—			(432		)
Actuarial loss (gain)	32,282			(26,020		)
Benefits paid	(6,171		)	(5,448		)
Curtailment	—			(20,530		)
SERP transfer to Parent	(508		)	(41		)
Projected benefit obligation at end of year	$	204,776		$	171,190
Change in plan assets:
Fair value of plan assets at beginning of year	$	165,349		$	134,418
Actual return on plan assets	12,666			25,764
Employer contributions	2,213			11,337
Benefits paid	(6,171		)	(5,448		)
Asset transfers	(234		)	(722		)
Fair value of plan assets at end of year	$	173,823		$	165,349
Funded status at end of year	$	(30,953	)	$	(5,841	)

15

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Amounts recognized in the combined balance sheets consist of:

	December 31
	2014			2013
Current liabilities	$	(25	)	$	(50	)
Noncurrent liabilities	(30,928		)	(5,791		)
	$	(30,953	)	$	(5,841	)

Components of long-term receivables from customers consist of:

	December 31
	2014		2013
Actuarial loss	$	40,340	$	8,667
Prior service cost	155		542
	$	40,495	$	9,209

The actuarial loss and prior service cost included in long-term receivables from customers expected to be recognized in net periodic benefit cost in 2015 are $1,066 ($693 net of tax) and $8 ($5 net of tax), respectively.

The projected benefit obligation included in the table above represents the actuarial present value of benefits attributable to employee service rendered to date.

The expected long-term rate of return on defined benefit plan assets reflects management's expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. In establishing the expected long-term rate of return assumption for plan assets, the Ultimate Parent considers the historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans as well as a forward-looking rate of return. The historical and forward-looking rates of return for each of the asset classes used to determine the Ultimate Parent’s estimated rate of return assumption were based upon the rates of return earned or expected to be earned by investments in the equivalent benchmark market indices for each of the asset classes.

The Plan maintains an investment policy that, among other things, establishes a portfolio asset allocation methodology with percentage allocation bands for individual asset classes. The investment policy provides that investments are reallocated between asset classes as balances exceed or fall below the appropriate allocation bands.

16

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

The following is the actual allocation percentage and target allocation percentage for the plan assets at the measurement date:

	Actual 2014		Actual 2013		Target Allocation Range
U.S. equity securities	55.3	%	53.6	%	41.0%-62.0%
Non-U.S. equity securities	11.3	%	13.0	%	10.0%-16.0%
Fixed income securities	32.9	%	32.9	%	30.0%-40.0%
Money market	0.5	%	0.5	%	0.0%-10.0%

The fair value of each major category of plan assets for the Unconsolidated Mines’ pension plans are valued using quoted market prices in active markets for identical assets, or Level 1 in the fair value hierarchy. Following are the values as of December 31:

	2014		2013
U.S. equity securities	$	95,327	$	88,559
Non-U.S equity securities	19,838		21,422
Fixed income securities	57,921		54,471
Money market	737		897
Total	$	173,823	$	165,349

Postretirement Health Care

The Parent Company also maintains health care plans which provide benefits to eligible retired employees, including employees of the Unconsolidated Mines. Effective December 31, 2008, postretirement health care plan amendments for the Unconsolidated Mines eliminated all post-65 welfare coverage and Medicare reimbursements. The Unconsolidated Mines expect to pay benefits of $1,751 in 2015, $2,101 in 2016, $2,346 in 2017, $2,601 in 2018, $2,942 in 2019 and $15,136 in the five years thereafter.

The following is a detail of the net periodic benefit expense for postretirement health care and life insurance for the Unconsolidated Mines, using an assumed discount rate of 3.85% and 3.05% in 2014 and 2013, respectively:

	Year Ended December 31
	2014		2013		2012
Service cost	$	674	$	733	$	727
Interest cost	1,050		826		990
Expected return on plan assets	(227)		(274)		(323)
Amortization of actuarial loss	672		741		662
Amortization of prior service credit	(417)		(825)		(825)
Net periodic postretirement expense	$	1,752	$	1,201	$	1,231

17

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

The following is a detail of the changes in plan assets and benefit obligations recognized in long-term receivable from customers:

	Year Ended December 31
	2014		2013			2012
Current year actuarial loss (gain)	$	718	$	(53	)	$	959
Amortization of actuarial loss	(672)		(741)			(662)
Amortization of prior service credit	417		825			825
Amount recognized in long-term receivable	$	463	$	31		$	1,122

The following sets forth the changes in the benefit obligations and plan assets during the year of the postretirement health care and life insurance plans:

	December 31
	2014			2013
Change in benefit obligation:
Benefit obligation at beginning of year	$	27,384		$	27,039
Service cost	674			733
Interest cost	1,050			826
Actuarial loss	685			335
Benefits paid	(1,320)			(1,549)
Benefit obligation at end of year	$	28,473		$	27,384
Change in plan assets:
Fair value of plan assets at beginning of year	$	4,293		$	4,980
Actual return on plan assets	230			661
Employer contributions	549			477
Benefits and taxes paid	(1,673)			(1,825)
Fair value of plan assets at end of year	$	3,399		$	4,293
Funded status at end of year	$	(25,074	)	$	(23,091	)
Amounts recognized in the consolidated balance sheets consist of:
Current liabilities	$	(551	)	$	(586	)
Noncurrent liabilities	(24,523		)	(22,505		)
	$	(25,074	)	$	(23,091	)
Components of long-term receivables from customers consist of:
Actuarial loss	$	7,284		$	7,237
Prior service credit	(339		)	(755		)
	$	6,945		$	6,482

18

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

The actuarial loss and prior service credit included in long-term receivables from customers expected to be recognized in net periodic benefit credit in 2015 are $705 ($458 net of tax) and $247 ($161 net of tax), respectively.

Some of the Unconsolidated Mines established Voluntary Employees’ Beneficiary Association (VEBA) trusts to provide for future retirement benefits other than pensions. The Unconsolidated Mines made cash contributions to the VEBA trust of $0 in 2014 and 2013, respectively. Contributions made to an IRS-approved VEBA trust are irrevocable and must be used for employee benefits.

Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects at December 31, 2014:

	1-Percentage- Point Increase		1-Percentage- Point Decrease
Effect on total of service and interest cost	$	130	$	(117	)
Effect on postretirement benefit obligation	$	1,736	$	(1,633	)

Assumptions used in accounting for the pension and postretirement health care and life insurance benefit plans were as follows for the years ended:

	December 31
	2014	2013	2012
Weighted-average discount rates - pension	3.95%	4.75%	3.90%
Weighted-average discount rates - postretirement	3.25%	3.85%	3.05%
Rate of increase in compensation levels	NA	NA	3.75%
Expected long-term rate of return on assets-pension	7.75%	7.75%	8.25%
Expected long-term rate of return on assets-postretirement	6.00%	6.00%	6.50%
Health care cost trend rate assumed for next year	7.00%	7.00%	7.50%
Ultimate health care cost trend rate	5.00%	5.00%	5.00%
Year that the rate reaches the ultimate trend rate	2021	2021	2018

19

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Defined Contribution Plans

For employees hired after December 31, 1999, the Parent Company established a defined contribution plan which requires the Unconsolidated Mines to make retirement contributions based on a formula using age and salary as components of the calculation. For employees hired after December 31, 2005, some of the Unconsolidated Mines contribute a set percentage of the employee’s salary. Employees are vested at a rate of 20% for each year of service and become 100% vested after five years of employment. The Unconsolidated Mines recorded contribution expense of approximately $6,469 in 2014, $3,412 in 2013, and $2,900 in 2012 related to this plan.

Substantially all the Unconsolidated Mines’ salaried employees also participate in a defined contribution plan sponsored by the Parent Company. Employee contributions are matched by the Unconsolidated Mines up to a limit of 5% of the employee’s salary. The Unconsolidated Mines’ contributions to this plan were approximately $5,750 in 2014, $5,164 in 2013, and $4,682 in 2012.

8. Leasing Arrangements and Other Commitments

The Unconsolidated Mines lease certain equipment under cancelable and non-cancelable capital and operating leases that expire at various dates through 2037. Many leases are renewable for additional periods at terms based upon the fair market value of the leased items at the renewal dates.

Future minimum lease payments as of December 31, 2014, for all capital lease obligations are as follows:

2015	$	57,789
2016	51,150
2017	48,424
2018	34,813
2019	30,733
Thereafter	144,821
Total minimum lease payments	367,730
Amounts representing interest	(77,331)
Present value of net minimum lease payments	290,399
Current maturities	(44,356)
Long-term capital lease obligations	$	246,043

As of December 31, 2014, $132,953 of the long-term capital lease obligations and $13,327 of the current maturities in the table above are due to a customer of one of the Unconsolidated Mines.

20

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

Amortization of assets recorded under capital lease obligations is included in depreciation, depletion, and amortization in the combined statement of net income and comprehensive income. Assets recorded under capital leases are included in property, plant, and equipment and consist of the following:

	December 31
	2014		2013
Plant and equipment	$	477,213	$	486,756
Accumulated amortization	(193,776)		(173,774)
	$	283,437	$	312,982

Under the provisions of the mining agreements, the customers are required to pay, as a part of the cost of coal delivered, an amount equal to the annual lease payments. Interest and amortization expense in excess of annual lease payments are deferred and recognized in years when annual lease payments exceed interest expense and amortization. These excess costs are recorded as receivables from the customers and are included in deferred lease costs in the accompanying combined balance sheets.

Future minimum lease payments on long-term cancelable operating leases at December 31, 2014, are as follows:

2015	$	365
2016	186
2017	97
2018	27
2019	—
	$	675

Rental expense for all operating leases was $4,642 in 2014, $2,523 in 2013, and $1,961 in 2012.

9. Income Taxes

The Unconsolidated Mines are included in the consolidated federal income tax return filed by the Ultimate Parent Company. The Unconsolidated Mines have entered into a tax-sharing agreement with the Ultimate Parent Company under which federal income taxes are computed by the Unconsolidated Mines on a separate return basis. The current portion of such tax is paid to the Ultimate Parent Company, except that net operating loss and tax credit carryovers that benefit the consolidated tax return are advanced to the Unconsolidated Mines and are repaid as utilized on a separate-return basis. To the extent that these carryovers are not used on a separate return basis, the Unconsolidated Mines are required, under conditions pursuant to the tax-sharing agreement, to refund to the Ultimate Parent Company the balance of carryovers advanced and not used by the Unconsolidated Mines prior to the expiration of such carryovers.

21

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

The provision for income taxes consists of the following:

	Year Ended December 31
	2014		2013		2012
Current:
Federal	$	12,624	$	12,868	$	(3,319	)
Total current tax provision (benefit)	12,624		12,868		(3,319)
Deferred:
Federal	(1,556)		(2,891)		14,088
Total deferred tax (benefit) provision	(1,556)		(2,891)		14,088
Total provision for income taxes	$11,068		$9,977		$10,769

A reconciliation of the federal statutory and effective income tax is as follows:

	Years Ended December 31
	2014		2013		2012
Income before income taxes	$	48,397	$	46,429	$	45,242
Statutory taxes at 35.0%	$	16,939	$	16,249	$	15,836
Percentage depletion	(5,480)		(5,575)		(3,892)
Other - net	(391)		(697)		(1,175)
Income tax provision	$	11,068	$	9,977	$	10,769
Effective income tax rate	22.87%		21.49%		23.80%

A summary of the primary components of the deferred tax assets and liabilities included in the accompanying combined balance sheets resulting from differences in the book and tax basis of assets and liabilities are as follows:

	December 31
	2014			2013
Deferred tax assets:
Accrued expense and reserves	$	8,597		$	7,888
Asset valuation	7,367			6,750
Inventory	3,625			1,967
Other employee benefits	1,751			1,454
Total deferred tax assets	21,340			18,059
Deferred tax liabilities:
Property, plant, and equipment	(40,103)			(40,580)
Pensions	(6,016)			(3,816)
Total deferred tax liabilities	(46,119)			(44,396)
Net deferred tax liability	$	(24,779	)	$	(26,337	)

22

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

The Unconsolidated Mines regularly review the need for a valuation allowance against deferred tax assets and recognizes these deferred tax assets to the extent that realization is more likely than not. Based on a review of earnings history and trends, forecasted earnings, and the relevant expiration of carryforwards, the Unconsolidated Mines believe that no valuation allowance was necessary at December 31, 2014 or 2013.

10. Fair Value of Financial Instruments

The carrying amounts for cash and cash equivalents, accounts receivable, accounts receivable from an affiliate, and accounts payable approximate fair value due to the short term maturities of these instruments. The fair value of notes payable and one of the Unconsolidated Mines advances from customer were determined based on the discounted value of the future cash flows and one of the Unconsolidated Mines advances from customer, which has no specified repayment schedule was determined based on the discounted value of the total payment at the end of the contract term, using borrowing rates currently available to the Unconsolidated Mines for bank loans with similar terms and maturities, taking into account company credit risk.

The fair value compared to the carrying value is summarized as follows:

	December 31
	2014			2013
Fair value:
Notes payable	$	(88,422	)	$	(81,848	)
Advances from customers	$	(149,235	)	$	(130,318	)
Carrying value:
Notes payable	$	(82,279	)	$	(85,125	)
Advances from customers	$	(214,920	)	$	(199,872	)

23

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

11. Equity

The components of common stock and capital in excess of stated value at December 31, 2014 is as follows:

	Common Stock	Capital in Excess of Stated Value
Coteau common stock, without par value (stated value $10 per share) - authorized 1,000 shares; issued and outstanding 100 shares	$1	$791
Falkirk common stock, without par value (stated value $1,919.30 a share) - authorized 1,000 shares; issued and outstanding 100 shares	192	—
Sabine common stock, $1 par value - authorized, issued and outstanding 1,000 shares	1	—
Demery membership units, $10 par value - authorized, issued and outstanding 100 shares	1	—
Caddo membership units, $10 par value - authorized, issued and outstanding 100 shares	1	—
Camino Real membership units, $10 par value - authorized, issued and outstanding 100 shares	1	—
Liberty membership units, $10 par value - authorized, issued and outstanding 100 shares	1	—
Coyote Creek membership units, $10 par value - authorized, issued and outstanding 100 shares	1	—
	$199	$791

As noted previously, Demery, Caddo, and Camino Real were all formed in 2008, Liberty Fuels was formed in 2009, and Coyote was formed in 2012. These entities have been originally structured as single member limited liability companies primarily for the reduced administrative requirements, flexible profit distribution and pass-through tax attributes available with this form of entity.

12. Supplemental Cash Flow Information

	December 31
	2014		2013		2012
Cash paid (received) during the year for:
Interest	$	24,968	$	27,500	$	26,436
Income taxes	12,087		(2,765)		9,025
Property, plant, and equipment:
Capital leases and land	4,808		10,354		99,902
Deferred lease costs	(202)		70		(28)
Lease obligations	(7,606)		(10,424)		(99,874)
Accounting for asset retirement obligations:
Change in property, plant, and equipment	—		(3,794)		30,975
Change in receivables from customers including depreciation billed	5,611		3,206		(13,810)
Change in liabilities	(2,424)		4,932		(26,120)

24

The Unconsolidated Mines of

The North American Coal Corporation

Notes to Combined Financial Statements

(Amounts in Thousands)

13. Transactions With Affiliated Companies

Costs and expenses include net payments of approximately $3,274, $2,822 and $1,632 in 2014, 2013 and 2012, respectively, for administrative and other services from the Ultimate Parent Company, the Parent Company, and their subsidiaries.

Accounts receivable and accounts payable with the Ultimate Parent Company and the Parent Company represent the timing of income taxes and dividends within the affiliated group. In addition accounts payable to affiliated companies includes a payable for a dragline sold from the Parent Company to one of the unconsolidated mines.

The note receivable from Parent Company of $2,807 and $4,347 in 2014 and 2013, respectively, is a demand note with interest of 0.38% at December 31, 2014 and 0.32% at December 31, 2013.

14. Contingencies

Various legal and regulatory proceedings and claims have been or may be asserted against the Unconsolidated Mines relating to the conduct of their businesses, including environmental and other claims. These proceedings are incidental to the ordinary course of business of the Unconsolidated Mines. Management believes that it has meritorious defenses and will vigorously defend itself 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. Although the ultimate disposition of these proceedings is not presently determinable, management believes, after consultation with its legal counsel, that the likelihood is remote that material costs will be incurred in excess of accruals already recognized and would not have a significant impact on the Unconsolidated Mines’ financial position or results of operations.

25