What changed in this filing

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Item 1. Financial Statements

2020-11-02 compared with 2020-08-05 · 474 added, 267 removed, 599 unchanged (55% of the section changed)

3 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

2020 DECEMBER 31

(In thousands, except share data)

2 unchanged sentences

Accounts receivable from affiliates 3,722 6,411

Inventories 42,433 40,465

Refundable federal income taxes 25,379 8,928

6 unchanged sentences

Other non-current assets 39,108 32,133

Total assets $ 465,902 $ 444,773

LIABILITIES AND EQUITY

29 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED

SIX MONTHS ENDED

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30 SEPTEMBER 30

2020 2019 2020 2019

(In thousands, except per share data)

Revenues $ 32,295 $ 32,603 $ 105,294 $ 114,052

Cost of sales 25,475 26,416 89,553 85,812

Gross profit 6,820 6,187 15,741 28,240

Earnings of unconsolidated operations 15,145 17,438 44,926 47,851

3 unchanged sentences

Gain on sale of assets

— ( 94 ) ( 247 ) ( 131 )

12,567 14,962 39,207 41,894

Operating profit 9,398 8,663 21,460 34,197

5 unchanged sentences

Gain on equity securities ( 35 ) ( 108 ) ( 351 ) ( 1,067 )

Income before income tax (benefit) provision

Income tax (benefit) provision

Other, net ( 1,064 ) ( 1,258 ) ( 1,181 ) ( 1,236 )

( 481 ) ( 2,958 ) ( 99 ) ( 4,525 )

Income before income tax provision 9,879 11,621 21,559 38,722

Income tax provision 1,857 1,357 1,321 5,465

Net income $ 8,022 $ 10,264 $ 20,238 $ 33,257

Earnings per share:

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED

SIX MONTHS ENDED

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30 SEPTEMBER 30

2020 2019 2020 2019

(In thousands)

Reclassification of pension and postretirement adjustments into earnings, net of $28 and $73 tax benefit in the three months and six months ended June 30, 2020, respectively, net of $21 and $45 tax benefit in the three and six months ended June 30, 2019, respectively.

Net income $ 8,022 $ 10,264 $ 20,238 $ 33,257

Reclassification of pension and postretirement adjustments into earnings, net of $ 29 and $ 102 tax benefit in the three and nine months ended September 30, 2020, respectively, net of $ 21 and $ 66 tax benefit in the three and nine months ended September 30, 2019, respectively.

99 70 355 242

Total other comprehensive income 99 70 355 242

4 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED

NINE MONTHS ENDED

(In thousands)

Operating activities

Net cash (used for) provided by operating activities

Net cash provided by operating activities $ 2,760 $ 47,264

Investing activities

2 unchanged sentences

Purchase of equity securities ( 2,000 ) —

Other 72 ( 20 )

Net cash used for investing activities ( 21,180 ) ( 8,809 )

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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)

1 unchanged sentence

Stock-based compensation

102 — 795 — — 897

Purchase of treasury shares

( 36 ) — ( 1,264 ) — — ( 1,300 )

— — — 15,018 — 15,018

Cash dividends on Class A and Class B common stock:

$ 0.1650 per share

— — — ( 1,153 ) — ( 1,153 )

Reclassification adjustment to net income, net of tax

— — — — 101 101

Balance, March 31, 2019 $ 5,418 $ 1,569 $ 6,573 $ 264,217 $ ( 13,510 ) $ 264,267

Stock-based compensation

5 — 1,244 — — 1,249

Purchase of treasury shares

( 2 ) — ( 83 ) — — ( 85 )

— — — 7,975 — 7,975

Cash dividends on Class A and Class B common stock:

$ 0.1900 per share

— — — ( 1,327 ) — ( 1,327 )

Reclassification adjustment to net income, net of tax

— — — — 71 71

Balance, June 30, 2019

$ 5,421 $ 1,569 $ 7,734 $ 270,865 $ ( 13,439 ) $ 272,150

Stock-based compensation

5 — 2,119 — — 2,124

Purchase of treasury shares

( 1 ) — ( 24 ) — — ( 25 )

— — — 10,264 — 10,264

Cash dividends on Class A and Class B common stock:

$ 0.1900 per share

— — — ( 1,328 ) — ( 1,328 )

Reclassification adjustment to net income, net of tax

— — — — 70 70

Balance, September 30, 2019 $ 5,425 $ 1,569 $ 9,829 $ 279,801 $ ( 13,369 ) $ 283,255

Balance, January 1, 2020 $ 5,397 $ 1,569 $ 8,911 $ 284,852 $ ( 11,337 ) $ 289,392

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Purchase of treasury shares ( 32 ) — ( 970 ) — — ( 1,002 )

Net income — — — 6,166 — 6,166

Cash dividends on Class A and Class B common stock:

$ 0.1900 per share

— — — ( 1,339 ) — ( 1,339 )

Reclassification adjustment to net income, net of tax — — — — 155 155

1 unchanged sentence

Stock-based compensation

10 — 624 — — 634

— — — 6,050 — 6,050

Cash dividends on Class A and Class B common stock:

$ 0.1925 per share

— — — ( 1,351 ) — ( 1,351 )

Reclassification adjustment to net income, net of tax

— — — — 101 101

Balance, June 30, 2020 $ 5,463 $ 1,569 $ 8,942 $ 294,378 $ ( 11,081 ) $ 299,271

Stock-based compensation 13 — 439 — — 452

Conversion of Class B to Class A shares 1 ( 1 ) — — — —

Net income — — — 8,022 — 8,022

Cash dividends on Class A and Class B common stock:

$ 0.1925 per share

— — — ( 1,355 ) — ( 1,355 )

Reclassification adjustment to net income, net of tax — — — — 99 99

Balance, September 30, 2020 $ 5,477 $ 1,568 $ 9,381 $ 301,045 $ ( 10,982 ) $ 306,489

See notes to Unaudited Condensed Consolidated Financial Statements.

2 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

SEPTEMBER 30, 2020

(In thousands, except as noted and per share amounts)

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Coal Mining Segment

During the six months ended June 30, 2020 , the operating coal mines are:

Bisti Fuels LLC (“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”).

The contract mining agreement between Camino Real and its customer, Dos Republicas Coal Partnership (“DRCP”), terminated effective July 1, 2020 as a result of the unexpected termination by Comisión Federal de Electricidad (“CFE”) of its coal supply contract with an affiliate of DRCP.

The termination of the contract between CFE and DRCP eliminated DRCP’s need for coal from Camino Real's Eagle Pass Mine, and will result in mine closure.

Camino Real issued a Notice of Payment Default on June 17, 2020.

During the third quarter of 2020, the Company received certain inventory as well as a securitized note in settlement of the outstanding receivable balance as of June 30, 2020 and additional costs incurred through the July 9, 2020 mine closure date.

During the nine months ended September 30, 2020, the operating coal mines were:

Bisti Fuels LLC (“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”).

On September 30, 2020, Caddo Creek’s customer, a division of Cabot Corporation, entered into a long-term supply agreement with a subsidiary of Advanced Emissions Solutions (“AES”) as well as an agreement for the sale of the Marshall Mine, operated by Caddo Creek, to a subsidiary of AES.

AES announced its intent to close the Marshall Mine.

Caddo Creek entered into a contract with a subsidiary of AES to perform the required mine reclamation.

In 2019, total tons delivered by the Coal Mining segment was 34.6 million tons, of which 0.2 million tons related to Caddo Creek.

All production from the Sabine Mine is delivered to Southwestern Electric Power Company's Henry W.

Pirkey Plant.

The Pirkey power plant has been dispatched at a lower rate during the first nine months of 2020 compared with the first nine months of 2019, resulting in a 43 % reduction in tons delivered in 2020 compared with 2019.

During the third quarter of 2020, Sabine’s customer reduced its expected future annual deliveries to be between 1.4 million and 1.7 million tons of lignite coal.

Sabine historically has delivered between 2.5 million and 3.5 million tons of lignite coal annually, including 2.6 million tons in 2019 and 3.8 million tons in 2018.

The contract mining agreement between Camino Real Fuels, LLC (“Camino Real”) and its customer, Dos Republicas Coal Partnership (“DRCP”), terminated effective July 1, 2020 as a result of the unexpected termination by Comisión Federal de Electricidad (“CFE”) of its coal supply contract with an affiliate of DRCP.

The termination of the contract between CFE and DRCP eliminated DRCP’s need for coal from Camino Real's Eagle Pass Mine, and resulted in mine closure.

Mine reclamation is the responsibility of DRCP.

Camino Real has no legal obligation to perform mine reclamation but is in negotiations with DRCP to potentially perform mine reclamation activities under a new contractual arrangement.

Closure of the mine does not materially impact NACCO’s outlook for 2020.

The contract mining agreement between Camino Real and DRCP was previously expected to terminate in 2021.

As of June 30, 2020 , all of the Liberty Fuels Company, LLC mine areas have been reclaimed and final mine reclamation activities, primarily monitoring, will continue until final bond release.

Camino Real has no legal obligation to perform mine reclamation.

The Company received certain inventory as well as a securitized note in settlement of the outstanding receivable balance due from DRCP.

During the fourth quarter of 2020, the Company received payment for the outstanding balance on the securitized note, which was $ 2.3 million as of September 30, 2020, and is included within Other current assets on the Unaudited Condensed Consolidated Balance Sheet.

At all operating coal mines other than MLMC, the Company is paid a management fee per ton of coal or heating unit (MMBtu) delivered.

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Instead, these contracts are accounted for as equity method investments.

The income before income taxes associated with these VIE's is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in unconsolidated subsidiaries in the Consolidated Balance Sheets.

unconsolidated subsidiaries in the 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.

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See Note 7 for further discussion.

Camino Real previously met the definition of a variable interest entity of which the Company was not the primary beneficiary and therefore NACCO did not consolidate Camino Real’s results of operations within its financial statements.

The Notice of Payment Default and subsequent termination of the contract mining agreement resulted in a reconsideration event, which required reassessment of the Company’s VIE conclusion.

As a result of this reconsideration, Camino Real is no longer a VIE and its financial position is consolidated within NACCO’s financial statements as of June 30, 2020.

The consolidation of Camino Real did not materially change the Company’s balance sheet.

The results of operations for the six months ended June 30, 2020 are reported under the equity method with income before income taxes reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations.

Camino Real and Caddo Creek previously met the definition of a variable interest entity of which the Company was not the primary beneficiary and therefore NACCO did not consolidate the results of operations within its financial statements.

As a result of the events described above, Camino Real and Caddo Creek are no longer VIEs.

Camino Real’s financial position was consolidated within NACCO’s financial statements beginning on June 30, 2020.

Camino Real’s results of operations for the three months ended September 30, 2020 did not materially change the Company's Unaudited Condensed Consolidated Statements of Operations.

Caddo Creek’s financial position will be consolidated within NACCO’s financial statements beginning in the fourth quarter of 2020.

The consolidation of these entities will not materially change the Company’s Unaudited Condensed Consolidated Balance Sheet.

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;

2 unchanged sentences

inflation rates.

As of September 30, 2020, all of the Liberty Fuels Company, LLC mine areas have been reclaimed and final mine reclamation activities, primarily monitoring, will continue until final bond release.

Centennial Natural Resources (“Centennial”), located in Alabama, ceased coal production at the end of 2015.

Since 2015, the Company has sold or transferred certain Centennial equipment and mineral reserves.

The Company continues to evaluate strategies for the remaining mineral reserves and a dragline, which have no remaining book value.

Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.

Centennial is a consolidated entity within the Coal Mining segment as the Company is responsible for carrying costs and final mine reclamation.

NAMining Segment

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NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone.

During 2019, the Company entered into a mining agreement to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada.

During 2019, the Company entered into a mining agreement, through a new subsidiary, Sawtooth Mining, to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada.

The Thacker Pass Project is 100% owned by Lithium Nevada Corp.

Sawtooth Mining will provide comprehensive mining services and certain equipment during the 20-year contract term.

During the development of the project, Sawtooth Mining will provide Lithium Nevada $ 3.5 million in cash to assist in project development, of which $ 3.0 million and $ 1.5 million has been provided as of September 30, 2020 and December 31, 2019, respectively, and included within Other non-current assets on the Unaudited Condensed Consolidated Balance Sheets.

Lithium Nevada is in the process of securing permits and currently expects to commence construction in 2021 and production of lithium products in 2023.

NAMining utilizes both fixed price and cost plus management fee contract structures.

Certain of the entities within NAMining segment are VIEs and are accounted for under the equity method as Unconsolidated Subsidiaries.

Certain of the entities within the NAMining segment are VIEs and are accounted for under the equity method as Unconsolidated Subsidiaries.

See Note 7 for further discussion.

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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 June 30, 2020 , the results of its operations, comprehensive income, cash flows and changes in equity for the six months ended June 30, 2020 and 2019 have been included.

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, 2020, the results of its operations, comprehensive income, cash flows and changes in equity for the nine months ended September 30, 2020 and 2019 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, 2019.

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The following table disaggregates revenue by major sources:

THREE MONTHS ENDED

SIX MONTHS ENDED

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30 SEPTEMBER 30

Major Goods/Service Lines 2020 2019 2020 2019

Coal Mining $ 20,395 $ 18,799 $ 62,896 $ 58,119

NAMining 9,443 8,993 33,115 30,496

Minerals Management 2,722 5,022 9,950 25,950

Unallocated Items 904 52 1,257 726

Eliminations ( 1,169 ) ( 263 ) ( 1,924 ) ( 1,239 )

Total revenues $ 32,295 $ 32,603 $ 105,294 $ 114,052

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Contract balances

Trade accounts receivable, net

Contract liability (current)

Contract liability (long-term)

Trade accounts receivable, net Contract liability (current) Contract liability (long-term)

Balance, January 1, 2020 $ 15,444 $ 944 $ 2,153

Balance, June 30, 2020

Balance, September 30, 2020 16,507 941 1,448

Increase (decrease) $ 1,063 $ ( 3 ) $ ( 705 )

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The difference between the opening and closing balance of this contract liability, which is shown above, primarily results from the difference between new lease bonus payments received and amortization of up-front lease bonus payments received in previous periods.

The amount of revenue recognized in the three months ended June 30, 2020 and June 30, 2019 that was included in the opening contract liability was $ 0.3 million and $ 0.2 million , respectively.

The amount of revenue recognized in the six months ended June 30, 2020 and June 30, 2019 that was included in the opening contract liability was $ 0.5 million and $ 0.4 million , respectively.

The amount of revenue recognized in the three months ended September 30, 2020 and September 30, 2019 that was included in the opening contract liability was $ 0.2 million and $ 0.1 million, respectively.

The amount of revenue recognized in the nine months ended September 30, 2020 and September 30, 2019 that was included in the opening contract liability was $ 0.7 million and $ 0.5 million, respectively.

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 five years .

The Company expects to recognize an additional $ 0.5 million in the remainder of 2020, $ 0.9 million in 2021, $ 0.7 million in 2022, $ 0.3 million in 2023, and $ 0.1 million in 2024 related to the contract liability remaining at June 30, 2020 .

The Company expects to recognize an additional $ 0.2 million in the remainder of 2020, $ 0.9 million in 2021, $ 0.7 million in 2022, $ 0.3 million in 2023, and $ 0.1 million in 2024 related to the contract liability remaining at September 30, 2020.

The difference between the opening and closing balances of the Company’s accounts receivable and contract liabilities results from the timing difference between the Company’s performance and the customer’s payment.

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Inventories are summarized as follows:

2020 DECEMBER 31

Coal $ 12,161 $ 15,700

Mining supplies 30,272 24,765

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Leased assets and liabilities include the following:

Operating lease right-of-use assets

Property, plant and equipment, net (a)

Other current liabilities

Current maturities of long-term debt

Operating lease liabilities

Long-term debt

(a) Finance leased assets are recorded net of accumulated amortization of less than $ 0.1 million and $ 1.9 million as of June 30, 2020 and December 31, 2019 , respectively.

Description Location SEPTEMBER 30

2020 DECEMBER 31

Operating Operating lease right-of-use assets $ 10,448 $ 11,398

Finance Property, plant and equipment, net (a) $ 144 $ 544

Operating Other current liabilities $ 1,296 $ 1,318

Finance Current maturities of long-term debt $ 44 $ 558

Operating Operating lease liabilities $ 11,494 $ 12,448

Finance Long-term debt $ 103 $ 85

(a) Finance leased assets are recorded net of accumulated amortization of less than $ 0.1 million and $ 1.9 million as of September 30, 2020 and December 31, 2019, respectively.

The components of lease expense were as follows:

THREE MONTHS ENDED

SIX MONTHS ENDED

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30 SEPTEMBER 30

Description Location 2020 2019 2020 2019

Lease expense

Operating lease cost

Selling, general and administrative expenses

Operating lease cost Selling, general and administrative expenses $ 499 $ 569 $ 1,513 $ 1,783

Finance lease cost:

Amortization of leased assets

Cost of sales

Interest on lease liabilities

Interest expense

Variable lease expense

Selling, general and administrative expenses

Short-term lease expense

Selling, general and administrative expenses

Amortization of leased assets Cost of sales 10 104 113 300

Interest on lease liabilities Interest expense

Variable lease expense Selling, general and administrative expenses 157 141 444 416

Short-term lease expense Selling, general and administrative expenses 89 79 248 242

Total lease expense $ 757 $ 897 $ 2,326 $ 2,751

Future minimum finance and operating lease payments were as follows at June 30, 2020 :

Future minimum finance and operating lease payments were as follows at September 30, 2020:

Leases Operating

Remainder of 2020 $ 13 $ 532 $ 545

2021 49 2,113 2,162

2022 49 2,162 2,211

2023 28 1,685 1,713

2024 12 1,660 1,672

Subsequent to 2024 7 9,421 9,428

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The assumptions used in accounting for ASC 842 were as follows:

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SEPTEMBER 30 SEPTEMBER 30

Lease term and discount rate 2020 2019 2020 2019

Weighted average remaining lease term (years)

Operating 9.19 9.76 9.19 9.76

Finance 3.47 1.95 3.47 1.95

Weighted average discount rate

Operating 7.01 % 6.99 % 7.01 % 6.99 %

Finance 3.96 % 5.36 % 3.96 % 5.36 %

The following table details cash paid for amounts included in the measurement of lease liabilities:

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THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30 SEPTEMBER 30

Cash paid for amounts included in the measurement of lease liabilities 2020 2019 2020 2019

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As a result of the uncertainty surrounding the COVID-19 pandemic, the Company suspended repurchasing shares under the 2019 Stock Repurchase Program in March 2020.

Prior to the decision to cease share repurchases, the Company repurchased 32,286 shares of Class A Common Stock under the 2019 Stock Repurchase Program for an aggregate purchase price of $ 1.0 million during the six months ended June 30, 2020 .

During the three and six months ended June 30, 2019 , the Company repurchased 2,230 and 38,524 shares, respectively, of Class A Common Stock under the 2018 Stock Repurchase Program for an aggregate purchase price of $ 0.1 million and $ 1.4 million , respectively.

During the three and nine months ended September 30, 2019, the Company repurchased 525 and 39,049 shares, respectively, of Class A Common Stock under the 2018 Stock Repurchase Program for an aggregate purchase price of less than $ 0.1 million and $ 1.4 million, respectively.

The timing and amount of any repurchases under the 2019 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 2019 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.

The 2019 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 2019 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.

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Fair Value Measurements at Reporting Date Using

Quoted Prices in

Active Markets for

Significant Other

Identical Assets

Observable Inputs

June 30, 2020

Quoted Prices in Significant

Active Markets for Significant Other Unobservable

Identical Assets Observable Inputs Inputs

Description Date (Level 1) (Level 2) (Level 3)

September 30, 2020

Equity securities $ 12,238 $ 12,238 $ — $ —

$ 12,238 $ 12,238 $ — $ —

December 31, 2019

Equity securities $ 10,120 $ 10,120 $ — $ —

$ 10,120 $ 10,120 $ — $ —

Bellaire Corporation (“Bellaire”) is a non-operating subsidiary of the Company with legacy liabilities relating to closed mining operations, primarily former Eastern U.S.

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therefore, they are classified as Level 1 within the fair value hierarchy.

The Company recognized a gain of $ 1.1 million and a loss of $ 0.1 million in the three and six months ended June 30, 2020 , respectively, and a gain of $ 0.3 million and $ 1.0 million in the three and six months ended June 30, 2019 , respectively, related to the Mine Water Treatment Trust.

The Company recognized a gain of $ 0.5 million and $ 0.4 million in the three and nine months ended September 30, 2020, respectively, and a gain of $ 0.1 million and $ 1.1 million in the three and nine months ended September 30, 2019, respectively, related to the Mine Water Treatment Trust.

During the second quarter of 2020, the Company invested $ 2.0 million in equity securities of a public company with a diversified portfolio of royalty producing mineral interests.

1 unchanged sentence

therefore, it is classified as Level 1 within the fair value hierarchy.

The Company recognized a gain of $ 0.4 million in both the three and six months ended June 30, 2020 related to the investment in these equity securities.

The Company recognized a loss of $ 0.5 million and $ 0.1 million in the three and nine months ended September 30, 2020, respectively, related to the investment in these equity securities.

The gains and losses related to equity securities are reported on the line Gain on equity securities in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.

There were no transfers into or out of Levels 1, 2 or 3 during the three and six months ended June 30, 2020 and 2019 .

There were no transfers into or out of Levels 1, 2 or 3 during the three and nine months ended September 30, 2020 and 2019.

NOTE 7— Unconsolidated Subsidiaries

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See Note 1 for a discussion of these entities.

The Investment in the unconsolidated subsidiaries and related tax positions totaled $ 25.3 million and $ 24.6 million at June 30, 2020 and December 31, 2019 , respectively.

The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $ 5.3 million and $ 5.0 million at June 30, 2020 and December 31, 2019 , respectively.

The Investment in the unconsolidated subsidiaries and related tax positions totaled $ 25.5 million and $ 24.6 million at September 30, 2020 and December 31, 2019, respectively.

The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $ 4.4 million and $ 5.0 million at September 30, 2020 and December 31, 2019, respectively.

NACoal is a party to certain guarantees related to Coyote Creek.

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Summarized financial information for the Unconsolidated Subsidiaries is as follows:

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SEPTEMBER 30 SEPTEMBER 30

2020 2019 2020 2019

Gross profit $ 18,046 $ 20,059 $ 49,792 $ 53,826

Income before income taxes $ 15,629 $ 17,827 $ 45,673 $ 49,080

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The following tables present revenue, operating profit, depreciation expense and capital expenditures:

THREE MONTHS ENDED

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SEPTEMBER 30 SEPTEMBER 30

2020 2019 2020 2019

Coal Mining $ 20,395 $ 18,799 $ 62,896 $ 58,119

NAMining 9,443 8,993 33,115 30,496

Minerals Management 2,722 5,022 9,950 25,950

Unallocated Items 904 52 1,257 726

Eliminations ( 1,169 ) ( 263 ) ( 1,924 ) ( 1,239 )

Total $ 32,295 $ 32,603 $ 105,294 $ 114,052

Operating profit (loss)

Coal Mining $ 11,174 $ 10,492 $ 25,857 $ 27,761

NAMining 244 ( 358 ) 1,519 ( 743 )

Minerals Management 1,673 3,900 6,450 22,358

Unallocated Items ( 3,623 ) ( 5,470 ) ( 12,341 ) ( 15,336 )

Eliminations ( 70 ) 99 ( 25 ) 157

Total $ 9,398 $ 8,663 $ 21,460 $ 34,197

Expenditures for property, plant and equipment

Coal Mining $ 3,150 $ 2,291 $ 7,817 $ 6,542

NAMining 3,220 4,971 10,406 6,213

Minerals Management 633 — 1,372 291

Unallocated Items — 35 207 218

Total $ 7,003 $ 7,297 $ 19,802 $ 13,264

Depreciation, depletion and amortization

Coal Mining $ 3,793 $ 3,102 $ 10,951 $ 9,252

NAMining 723 588 2,021 1,699

Minerals Management 327 324 981 1,057

Unallocated Items 33 30 91 87

Total $ 4,876 $ 4,044 $ 14,044 $ 12,095

NOTE 10— 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 quarterly income tax provision is generally comprised of tax expense on income or a benefit on a loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic.

The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses.

The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The 2020 estimated annual effective tax rate includes the benefit of utilizing the current year forecasted tax basis net operating loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in years that were taxed at a 35% rate.

The Company expects to generate a net operating loss in 2020 primarily due to the realization of certain deferred tax assets.

The Company is currently assessing aspects of the CARES Act, including the Company’s ability to utilize the extended carryback provisions.

The Company recorded income tax expense of $ 1.9 million for the three months ended September 30, 2020, or 18.8 %, on income before income tax of $ 9.9 million, compared to income tax expense of $ 1.4 million, or 11.7 %, on income before income tax of $ 11.6 million for the three months ended September 30, 2019.

The three months ended September 30, 2020 include $ 4.2 million of discrete tax charges primarily related to settlement of tax examinations and changes in uncertain tax positions partially offset by a discrete tax benefit of $ 2.2 million, primarily due to return to provision adjustments.

Discrete tax items in the three months ended September 30, 2019 were not material.

The Company recorded income tax expense of $ 1.3 million for the nine months ended September 30, 2020, or 6.1 %, on income before income tax of $ 21.6 million, compared to income tax expense of $ 5.5 million, or 14.1 %, on income before income tax of $ 38.7 million for the nine months ended September 30, 2019.

The nine months ended September 30, 2020 include $ 4.2 million of discrete tax charges primarily related to settlement of tax examinations and changes in uncertain tax positions partially offset by a benefit of $ 1.8 million, primarily due to return to provision adjustments.

Discrete tax items in the nine months ended September 30, 2019 were not material.

The return to provision adjustments recognized in 2020 include the utilization of the net operating loss carry back provisions allowed under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") enacted in response to the COVID-19 pandemic.

The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the utilization of net operating losses.

The CARES Act allows net operating tax losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The Company’s estimated annual effective income tax rate, excluding discrete items, was ( 5.2 %) and 14.0 % for the nine months ended September 30, 2020 and 2019, respectively.

The estimated annual effective income tax rate differs from the U.S.

federal statutory rate due to the benefit from percentage depletion and in 2020 includes the benefit of utilizing the forecasted current year net operating tax loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in years that were taxed at a 35% rate.

The Company expects to generate a net operating tax loss in 2020 primarily due to the realization of certain deferred tax assets.

NOTE 11— Asset Retirement Obligations

The Company’s obligations associated with the retirement of long-lived assets are recognized at fair value at the time the legal obligations are incurred.

Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying value of the related long-lived asset and is depreciated either by the straight-line method or the units-of-production method.

The liability is accreted each period until the liability is settled or the asset is sold, at which time the liability is removed.

If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized.

The Company's asset retirement obligations are principally for costs to close its surface mines and reclaim the land it has disturbed as a result of its normal mining activities as well as for costs to dismantle certain mining equipment at the end of the life of the mine.

Management’s estimate involves a high degree of subjectivity.

In particular, the obligation’s fair value is determined using a discounted cash flow technique and is based upon mining permit requirements and various assumptions including credit adjusted risk-free-rates, estimates of disturbed acreage, life of the mine, reclamation costs, the application of various environmental laws and regulation and assumptions regarding equipment productivity.

The Company reviews its asset retirement obligations at each mine site at least annually and makes necessary adjustments for permit changes and for revisions of estimates of the timing and extent of reclamation activities and cost estimates.

The accretion of the liability is being recognized over the estimated life of each individual asset retirement obligation and is recorded in the line “Cost of sales” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

The associated asset is recorded in “Property, Plant and Equipment, net” in the accompanying Unaudited Condensed Consolidated Balance Sheets.

The depreciation of the asset is recorded in the line “Cost of sales” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

A reconciliation of the Company's beginning and ending aggregate carrying amount of the asset retirement obligations is as follows:

Coal Mining NAMining Unallocated Items NACCO

Balance at December 31, 2019 $ 19,015 $ 604 $ 17,240 $ 36,859

Liabilities incurred during the period 9,809 — — 9,809

Liabilities settled during the period ( 5,957 ) — ( 562 ) ( 6,519 )

Accretion expense 1,296 28 1,023 2,347

Revision of estimated cash flows 600 — — 600

Balance at September 30, 2020 $ 24,763 $ 632 $ 17,701 $ 43,096

Asset retirement obligations are incurred at the time development of a new mine or mine area commences.

During the third quarter of 2020, MLMC began development of a new mine area and as such, recorded an additional $ 9.8 million asset retirement obligation and a corresponding $ 9.8 million asset was capitalized as a component of Property, plant and equipment, net.

The asset retirement obligation’s fair value was determined using a discounted cash flow technique and is based upon permit requirements and various estimates and assumptions that would be used by market participants, including estimates of disturbed acreage, reclamation costs and assumptions regarding equipment productivity.

During the third quarter of 2020, the Company transferred the mine permits for certain Centennial mines to an unrelated third party.

As of September 30, 2020, the Company has $ 10.7 million of surety bonds outstanding related to the mines associated with the transferred mine permits.

The third party that acquired the mine permits is required as part of the transaction to transfer or replace $ 4.9 million of the Company's outstanding surety bonds during the fourth quarter of 2020 and transfer or replace the remaining $ 5.8 million of outstanding surety bonds as soon thereafter as it is able.

If there is a claim under these surety bonds prior to the transfer or replacement of such bonds, the Company would be responsible to the surety company for any amounts it pays with respect to such claim, up to the amount of the outstanding surety bonds.

As a result of the transfer of the mine permits, the Company was relieved of the associated mine reclamation obligations and therefore recorded a $ 4.8 million reduction to Centennial's asset retirement obligation, included in "Liabilities settled during the period" in the table above.

In addition, as part of the transfer of the mine permits, the Company paid $ 1.9 million of cash, recorded $ 1.4 million in Other current assets for amounts owed to Centennial from the third-party acquirer, and recognized $ 1.9 million in Accounts payable and $ 2.4 million in Other long-term liabilities in the Unaudited Condensed Consolidated Balance Sheets.

The liabilities are associated with amounts due to the third-party acquirer upon transfer or replacement of the surety bonds and a liability for the guarantee to stand ready to perform in the event there is a claim under the surety bonds.

No payments have been required since the inception of these guarantees.

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.

These legacy liabilities include obligations for water treatment and other environmental remediation that arose as part of the normal course of closing these underground mining operations.

The accretion of the liability is recognized over the estimated life of the asset retirement obligation and is recorded in the line “Closed mine obligations” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

Since Bellaire's properties are no longer active operations, no associated asset has been capitalized.

The fair value of Bellaire's Mine Water Treatment assets, which are recognized as a component of Other non-current assets on the Unaudited Condensed Consolidated Balance Sheets, are $ 10.3 million and $ 10.1 million at September 30, 2020 and December 31, 2019, respectively, and are legally restricted for purposes of settling the Bellaire asset retirement obligation.

See Note 6 for further discussion of the Mine Water Treatment Trust.

- Management's Discussion and Analysis of Financial Condition and Results of Operations

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Coal Mining, North American Mining ("NAMining") and Minerals Management.

The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and activated carbon producers pursuant to a service-based business model.

The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and an activated carbon producer pursuant to a service-based business model.

The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals.

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Coal Mining Segment

The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and activated carbon producers pursuant to a service-based business model.

The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and an activated carbon producer pursuant to a service-based business model.

Coal is surface-mined in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico.

Each mine is fully integrated with its customer operations.

During the six months ended June 30, 2020 , the operating coal mines were:

Bisti Fuels LLC ("Bisti"), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”).

The termination of the contract between CFE and DRCP eliminated DRCP’s need for coal from Camino Real's Eagle Pass Mine, and will result in mine closure.

Camino Real issued a Notice of Payment Default on June 17, 2020.

During the third quarter of 2020, the Company received certain inventory as well as a securitized note in settlement of the outstanding receivable balance as of June 30, 2020 and

additional costs incurred through the July 9, 2020 mine closure date.

During the nine months ended September 30, 2020, the operating coal mines were:

AES announced its intent to close the Marshall Mine.

Caddo Creek entered into a contract with a subsidiary of AES to perform the required mine reclamation.

In 2019, total tons delivered by the Coal Mining segment was 34.6 million tons, of which 0.2 million tons related to Caddo Creek.

All production from the Sabine Mine is delivered to Southwestern Electric Power Company's Henry W.

Pirkey Plant.

The Pirkey power plant has been dispatched at a lower rate during the first nine months of 2020 compared with the first nine months of 2019, resulting in a 43% reduction in tons delivered in 2020 compared with 2019.

During the third quarter of 2020, Sabine’s customer reduced its expected future annual deliveries to be between 1.4 million and 1.7 million tons of lignite coal.

Sabine historically has delivered between 2.5 million and 3.5 million tons of lignite coal annually, including 2.6 million tons in 2019 and 3.8 million tons in 2018.

The termination of the contract between CFE and DRCP eliminated DRCP’s need for coal from Camino Real's Eagle Pass Mine, and resulted in mine closure.

Mine reclamation is the responsibility of DRCP.

Camino Real has no legal obligation to perform mine reclamation but is in negotiations with DRCP to potentially perform mine reclamation activities under a new contractual arrangement.

Closure of the mine does not materially impact NACCO’s outlook for 2020.

The contract mining agreement between Camino Real and DRCP was previously expected to terminate in 2021.

As of June 30, 2020 , all of the Liberty Fuels Company, LLC mine areas have been reclaimed and final mine reclamation activities, primarily monitoring, will continue until final bond release.

Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation.

Bisti supplies sub-bituminous coal for power generation.

Caddo Creek and Demery supply lignite coal for the production of activated carbon.

Each of these mines deliver their coal production to adjacent or nearby power plants, synfuels plants or activated carbon processing facilities under long-term supply contracts.

Each operating mine is the exclusive supplier of coal to its customers' facilities.

This segment has a strong history of customer retention due to the long-term nature of its contracts and the proximity of the Company’s mines to its customers’ facilities.

The operating mines' contract expiration dates range from 2022 through 2045.

The contract that expires in 2022 may be extended for three additional periods of five years each, or until 2037, at the Company’s option.

Camino Real has no legal obligation to perform mine reclamation.

On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer, and the Company's second largest customer, announced its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas.

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The terms of the contract between the Company and GRE specify that GRE is responsible for all costs related to mine closure, including but not limited to, final mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.

Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation.

Bisti supplies sub-bituminous coal for power generation.

Demery supplies lignite coal for the production of activated carbon.

Each of these mines deliver their coal production to adjacent or nearby power plants, synfuels plants or an activated carbon processing facility under long-term supply contracts.

Each operating mine is the exclusive supplier of coal to its customers' facilities.

At all operating coal mines other than MLMC, the Company is paid a management fee per ton of coal or heating unit (MMBtu) delivered.

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Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to NACCO and NACoal.

See Note 7 of the accompanying Unaudited Condensed Consolidated Financial Statements for further discussion of Coyote Creek's guarantees.

See Note 7 for further discussion of Coyote Creek's guarantees.

All operating coal mines other than MLMC meet the definition of a variable interest entity (“VIE”).

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therefore, the income tax expense line on the Consolidated Statements of Operations includes income taxes related to these entities.

The contracts for certain of the Company's Unconsolidated Subsidiaries permit or obligate the customer under some conditions to acquire the assets or stock of the subsidiary for an amount roughly equal to book value.

The Notice of Payment Default and subsequent termination of the contract mining agreement resulted in a reconsideration event, which required reassessment of the Company’s VIE conclusion.

As a result of this reconsideration, Camino Real is no longer a VIE and its financial position is consolidated within NACCO’s financial statements as of June 30, 2020.

The consolidation of Camino Real did not materially change the Company’s balance sheet.

All of the Unconsolidated Subsidiaries are accounted for under the equity method.

See Note 7 for further discussion.

As a result of the events described above, Camino Real and Caddo Creek are no longer VIEs.

Camino Real’s financial position was consolidated within NACCO’s financial statements beginning on June 30, 2020.

Camino Real’s results of operations for the three months ended September 30, 2020 did not materially change the Company's Unaudited Condensed Consolidated Statements of Operations.

Caddo Creek’s financial position will be consolidated within NACCO’s financial statements

beginning in the fourth quarter of 2020.

The consolidation of these entities will not materially change the Company’s Unaudited Condensed Consolidated Balance Sheet.

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;

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The decision of which power plants to dispatch is determined by TVA.

As of September 30, 2020, all of the Liberty Fuels Company, LLC mine areas have been reclaimed and final mine reclamation activities, primarily monitoring, will continue until final bond release.

Centennial Natural Resources (“Centennial”), located in Alabama, ceased coal production at the end of 2015.

Since 2015, the Company has sold or transferred certain Centennial equipment and mineral reserves.

The Company continues to evaluate strategies for the remaining mineral reserves and a dragline, which have no remaining book value.

Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.

Centennial is a consolidated entity within the Coal Mining segment as the Company is responsible for carrying costs and final mine reclamation.

The coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial are owned or controlled by the Company.

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NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone.

During 2019, the Company entered into a mining agreement to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada.

NAMining utilizes both fixed price and management fee contract structures.

During 2019, the Company entered into a mining agreement, through a new subsidiary, Sawtooth Mining, to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada.

The Thacker Pass Project is 100% owned by Lithium Nevada Corp.

Sawtooth Mining will provide comprehensive mining services and certain equipment during the 20-year contract term.

Lithium Nevada is in the process of securing permits and currently expects to commence construction in 2021 and production of lithium products in 2023.

NAMining utilizes both fixed price and cost plus 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 7 for further discussion.

Minerals Management Segment

The Minerals Management segment promotes the development of the Company’s gas, oil and coal reserves, generating income primarily from royalty-based lease payments from third parties.

The Company’s gas, oil and undeveloped coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal and coalbed methane and natural gas) and North Dakota (coal).

The Company’s gas, oil and undeveloped coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Permian basin oil and natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal and coalbed methane and natural gas) and North Dakota (coal).

The majority of the Company’s existing reserves were acquired as part of its historical coal mining operations.

The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to

explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal.

The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal.

Specialized employees in the Minerals Management segment also provide surface and mineral acquisition and lease maintenance services related to Company operations.

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CONSOLIDATED FINANCIAL SUMMARY

The results of operations for NACCO were as follows for the three and six months ended June 30 :

The results of operations for NACCO were as follows for the three and nine months ended September 30:

THREE MONTHS NINE MONTHS

2020 2019 2020 2019

Coal Mining $ 20,395 $ 18,799 $ 62,896 $ 58,119

NAMining 9,443 8,993 33,115 30,496

Minerals Management 2,722 5,022 9,950 25,950

Unallocated Items 904 52 1,257 726

Eliminations (1,169) (263) (1,924) (1,239)

Total revenue $ 32,295 $ 32,603 $ 105,294 $ 114,052

Operating profit (loss):

Coal Mining $ 11,174 $ 10,492 $ 25,857 $ 27,761

NAMining 244 (358) 1,519 (743)

Minerals Management 1,673 3,900 6,450 22,358

Unallocated Items (3,623) (5,470) (12,341) (15,336)

Eliminations (70) 99 (25) 157

Total operating profit $ 9,398 $ 8,663 $ 21,460 $ 34,197

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Gain on equity securities (35) (108) (351) (1,067)

Other, net (1,064) (1,258) (1,181) (1,236)

Other (income) expense, net (481) (2,958) (99) (4,525)

Income before income tax (benefit) provision

Income tax (benefit) provision

Income before income tax provision 9,879 11,621 21,559 38,722

Income tax provision 1,857 1,357 1,321 5,465

Net income $ 8,022 $ 10,264 $ 20,238 $ 33,257

Effective income tax rate 18.8 % 11.7 % 6.1 % 14.1 %

The components of the change in revenues and operating profit are discussed below in "Segment Results."

Second Quarter of 2020 Compared with Second Quarter of 2019 and First Six Months of 2020 Compared with First Six Months of 2019

Other expense (income), net

Interest expense increased in the second quarter and the first six months of 2020 compared with the 2019 periods by $0.1 million and $0.3 million, respectively, due to higher average borrowings under NACoal's revolving credit facility.

Interest income decreased in the second quarter and the first six months of 2020 compared with the 2019 periods by $0.5 million and $0.6 million, respectively, primarily due to lower interest rates despite a higher invested cash balance.

Third Quarter of 2020 Compared with Third Quarter of 2019 and First Nine Months of 2020 Compared with First Nine Months of 2019

Other (income) expense, net

North American Coal Corporation India Private Limited ("NACC India") was formed to provide technical business advisory services to the third-party owner of a coal mine in India.

During 2014, NACC India's customer defaulted on its contractual payment obligations and as a result of this default, NACC India terminated its contract with the customer and began pursuing contractual remedies.

During the third quarter of 2019, the Company received payment of $2.7 million from NACC India's customer, of which $1.4 million related to past invoices and has been reported on the line Other, net, and $1.3 million represented interest income and has been reported on the line Interest income.

During the third quarter of 2020, the Company received an additional payment of $1.0 million from NACC India's customer which has been reported on the line, Other, net.

Both of these lines are in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.

The Company does not expect to receive any additional payments from NACC India’s customer.

Interest expense increased in the third quarter and the first nine months of 2020 compared with the 2019 periods by $0.1 million and $0.4 million, respectively, due to higher average borrowings.

Interest income decreased in the third quarter and the first nine months of 2020 compared with the 2019 periods by $1.8 million and $2.4 million, respectively, primarily due to the interest income related to the NACC India customer payment the Company received in 2019 and lower interest rates despite a higher average invested cash balance.

Income from other unconsolidated affiliates represents the financial results of NoDak.

NoDak operated and maintained a coal drying system at a customer’s power plant.

The NoDak contract expired on January 31, 2020, resulting in decreases of $0.2 million and $0.4 million, respectively, in Income from other unconsolidated affiliates during the second quarter and the first six months of 2020 compared with the 2019 periods.

The NoDak contract expired on January 31, 2020, resulting in decreases of $0.3 million and $0.7 million, respectively, in Income from other unconsolidated affiliates during the third quarter and the first nine months of 2020 compared with the 2019 periods.

Income from NoDak was $1.3 million for the year ended December 31, 2019.

Gain on equity securities represents changes in the market price of invested assets reported at fair value.

The change in the gains during the second quarter of 2020 and the first six months of 2020 compared with the gains during the 2019 periods was due to higher returns on invested assets during the second quarter of 2020 but lower returns on invested assets in the first quarter of 2020.

The change in the gains during the third quarter and the first nine months of 2020 compared with the gains during the 2019 periods was due to lower returns on invested assets.

See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion of equity securities.

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic.

The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses.

The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The Company expects to generate a net operating loss in 2020 primarily due to the realization of certain deferred tax assets.

The Company is currently assessing aspects of the CARES Act, including the Company’s ability to utilize the extended carryback provisions.

The Company recorded income tax expense of $1.9 million for the three months ended September 30, 2020, or 18.8%, on income before income tax of $9.9 million, compared to income tax expense of $1.4 million, or 11.7%, on income before income tax of $11.6 million for the three months ended September 30, 2019.

The three months ended September 30, 2020 include $4.2 million of discrete tax charges primarily related to settlement of tax examinations and changes in uncertain tax positions partially offset by a discrete tax benefit of $2.2 million, primarily due to return to provision adjustments.

Discrete tax items in the three months ended September 30, 2019 were not material.

The Company recorded income tax expense of $1.3 million for the nine months ended September 30, 2020, or 6.1%, on income before income tax of $21.6 million, compared to income tax expense of $5.5 million, or 14.1%, on income before income tax of $38.7 million for the nine months ended September 30, 2019.

The nine months ended September 30, 2020 include $4.2 million of discrete tax charges primarily related to settlement of tax examinations and changes in uncertain tax positions partially offset by a benefit of $1.8 million, primarily due to return to provision adjustments.

Discrete tax items in the nine months ended September 30, 2019 were not material.

The CARES Act contains numerous income tax provisions, including among other items, temporary changes

regarding the utilization of net operating losses.

The CARES Act allows net operating tax losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The Company’s estimated annual effective income tax rate, excluding discrete items, was (5.2%) and 14.0% for the nine months ended September 30, 2020 and 2019, respectively.

The estimated annual effective income tax rate differs from the U.S.

The Company expects to generate a net operating tax loss in 2020 primarily due to the realization of certain deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES OF NACCO

The following tables detail NACCO's changes in cash flow for the six months ended June 30 :

The following tables detail NACCO's changes in cash flow for the nine months ended September 30:

2020 2019 Change

Operating activities:

Net cash (used for) provided by operating activities

Net cash provided by operating activities $ 2,760 $ 47,264 $ (44,504)

Investing activities:

Expenditures for property, plant and equipment (19,802) (13,264) (6,538)

Other (1,378) 4,455 (5,833)

Net cash used for investing activities (21,180) (8,809) (12,371)

Cash flow before financing activities $ (18,420) $ 38,455 $ (56,875)

The $34.6 million change in net cash (used for) provided by operating activities was primarily due to payments made for deferred compensation and long-term incentive compensation plans and lower net income during the first six months of 2020.

In addition, an increase in accounts receivable in the first six months of 2020 compared to a decrease in the first six months of 2019 was partially offset by a reduction in inventory in the first six months of 2020 compared with the 2019 period, both primarily due to higher sales at Coal Mining and NAMining during the first six months of 2020.

The $44.5 million decrease in net cash provided by operating activities was primarily due to working capital changes, including:

• Increased payments made under deferred compensation and long-term incentive compensation plans during the first nine months of 2020 compared with the first nine months of 2019.

• An increase in Refundable income taxes related to the carry back of net operating tax loss claims under the CARES Act during the first nine months of 2020.

• A smaller decrease in Accounts receivables during the first nine months of 2020 compared to the decrease during the first nine months of 2019.

The large decrease in the first nine months of 2019 was primarily due to the timing of sales at MLMC.

• An increase in Other current assets due to the recognition of a $2.3 million note receivable in settlement of DRCP's outstanding receivable balance associated with the closure of Camino Real's Eagle Pass Mine during 2020 and a change in prepaid expenses.

The change in net cash used for investing activities was primarily attributable to an increase in expenditures for property, plant and equipment at the NAMining and Coal Mining segments.

2020 2019 Change

Financing activities:

Net additions to long-term debt and revolving credit agreement

Net reductions to long-term debt and revolving credit agreement $ (1,858) $ (3,433) $ 1,575

Cash dividends paid (4,045) (3,808) (237)

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Net cash used for financing activities $ (6,905) $ (8,651) $ 1,746

The change in net cash used for financing activities was primarily due to increased borrowings during the first six months of 2020 compared with the first six months of 2019 .

The change in net cash used for financing activities was primarily due to fewer repayments during the first nine months of 2020 compared with the first nine months of 2019.

Financing Activities

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NACoal has an unsecured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in August 2022.

Borrowings outstanding under the NACoal Facility were $14 million at June 30, 2020 .

At June 30, 2020 , the excess availability under the NACoal Facility was $133.0 million , which reflects a reduction for outstanding letters of credit of $3.1 million .

Borrowings outstanding under the NACoal Facility were $9 million at September 30, 2020.

At September 30, 2020, the excess availability under the NACoal Facility was $138.0 million, which reflects a reduction for outstanding letters of credit of $3.0 million.

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 June 30, 2020 , for base rate and LIBOR loans were 0.75% and 1.75% , respectively.

The applicable margins, effective September 30, 2020, for base rate and LIBOR loans were 1.00% and 2.00%, respectively.

The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios.

The commitment fee was 0.30% on the unused commitment at June 30, 2020 .

The weighted average interest rate applicable to the NACoal facility at June 30, 2020 was 1.93% including the floating rate margin.

The commitment fee was 0.35% on the unused commitment at September 30, 2020.

The weighted average interest rate applicable to the NACoal Facility at September 30, 2020 was 2.11% including the floating rate margin.

The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum debt to EBITDA ratio of 3.00 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 2.00 to 1.00, or if greater than 2.00 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 June 30, 2020 , NACoal was in compliance with all financial covenants in the NACoal Facility.

At September 30, 2020, NACoal was in compliance with all financial covenants in the NACoal Facility.

Capital Expenditures

Expenditures for property, plant and equipment were $12.8 million during the first six months of 2020 .

Planned expenditures for the remainder of 2020 are expected to be approximately $34 million, primarily consisting of $18 million in the Coal Mining segment, $10 million in the Minerals Management Segment and $6 million in the NAMining segment.

Capital expenditures are expected to be funded from internally generated funds and/or bank borrowings.

Expenditures for property, plant and equipment and mineral interests were $19.8 million during the first nine months of 2020.

Planned expenditures for the remainder of 2020 are expected to be approximately $30 million, primarily consisting of $12 million in the Coal Mining segment, $3 million in the NAMining segment and $15 million in the Minerals Management segment.

In the Coal Mining segment, elevated levels of expected capital expenditures through 2021 are primarily related to spending at MLMC as it develops a new mine area.

In the Minerals Management segment, capital expenditures in 2020 are primarily for the acquisition of mineral interests and other purchases.

In the NAMining segment, capital expenditures in 2020 are primarily for the acquisition, relocation and refurbishment of draglines.

In the Minerals Management segment, expenditures in 2020 are primarily for the acquisition of mineral interests.

Planned expenditures for 2021 are expected to be approximately $41 million, primarily consisting of $24 million in the Coal Mining segment, $7 million in the NAMining segment and $10 million in the Minerals Management segment.

Capital expenditures are expected to be funded from internally generated funds and/or bank borrowings.

Capital Structure

NACCO's consolidated capital structure is presented below:

2020 DECEMBER 31

Cash and cash equivalents $ 97,567 $ 122,892 $ (25,325)

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Intangible assets, net 35,599 37,902 (2,303)

Net assets 350,520 335,259 15,261

Total debt (23,142) (24,943) 1,801

Bellaire closed mine obligations (20,889) (20,924) 35

Total equity $ 306,489 $ 289,392 $ 17,097

Debt to total capitalization 7% 8% (1)%

The increase in other net tangible assets was primarily due to payments made for deferred compensation and accrued incentive compensation as well as an increase in accounts receivable at June 30, 2020 compared with December 31, 2019.

The increase in other net tangible assets was partially offset by the decrease in cash and cash equivalents.

The increase in other net tangible assets was primarily due to increases in Property, plant and equipment as well as payments made for deferred compensation and accrued incentive compensation at September 30, 2020 compared with December 31, 2019.

Contractual Obligations, Contingent Liabilities and Commitments

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FINANCIAL REVIEW

Tons of coal delivered by the Coal Mining segment were as follows for the three and six months ended June 30 (in millions):

Tons of coal delivered by the Coal Mining segment were as follows for the three and nine months ended September 30 (in millions):

THREE MONTHS NINE MONTHS

2020 2019 2020 2019

Unconsolidated operations 7.6 8.7 21.2 24.2

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Total tons delivered 8.3 9.4 23.5 26.4

The results of operations for the Coal Mining segment were as follows for the three and six months ended June 30 :

The results of operations for the Coal Mining segment were as follows for the three and nine months ended September 30:

THREE MONTHS NINE MONTHS

2020 2019 2020 2019

Revenues $ 20,395 $ 18,799 $ 62,896 $ 58,119

Cost of sales 16,379 16,383 57,514 53,561

Gross profit 4,016 2,416 5,382 4,558

Earnings of unconsolidated operations (a)

14,277 16,211 42,104 45,521

Selling, general and administrative expenses 6,385 7,502 19,326 20,187

3 unchanged sentences

(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.

Second Quarter of 2020 Compared with Second Quarter of 2019

Revenues decreased 4.4% in the second quarter of 2020 compared with the second quarter of 2019 due to a reduction in tons delivered.

This was partially offset by an increase in the per ton sales price at MLMC.

Third Quarter of 2020 Compared with Third Quarter of 2019

Revenues increased 8.5% in the third quarter of 2020 compared with the third quarter of 2019 primarily due to an increase in reimbursable costs at MLMC.

The sales price at MLMC is index-based and includes adjustments for coal quality and reimbursable costs.

The following table identifies the components of change in operating profit for the second quarter of 2020 compared with the second quarter of 2019 :

The following table identifies the components of change in operating profit for the third quarter of 2020 compared with the third quarter of 2019:

Operating Profit

2019 $ 10,492

Increase (decrease) from:

Gross profit 1,600

Selling, general and administrative expenses 1,117

Amortization of intangibles

Earnings of unconsolidated operations (1,934)

Net gain on sale of assets (82)

Operating profit increased $0.2 million in the second quarter of 2020 compared with the second quarter of 2019 primarily due to a decrease in selling, general and administrative expenses and an increase in gross profit, partially offset by a decrease in earnings of unconsolidated operations.

The decrease in selling, general and administrative expenses was primarily attributable to lower employee-related expenses partially offset by an increase in outside service fees.

The improvement in gross profit was primarily due to an increase in the profit per ton delivered at MLMC.

The increase in profit per ton delivered was primarily due to the increase in the per ton sales price partially offset by an increase in the cost per ton delivered.

The decrease in earnings of unconsolidated operations was mainly due to lower customer demand at Sabine, Bisti and Camino, partially offset by an increase in customer demand at Coyote Creek and Falkirk.

Sabine delivers coal to Southwestern Electric Power Company's Henry W.

Pirkey Plant.

The Pirkey power plant was dispatched at a lower rate during the second quarter of 2020 compared with the second quarter of 2019.

The reduction in coal tons delivered at Bisti was due to an extended plant outage during the second quarter of 2020.

The reduction in tons delivered at Camino was primarily due to a decrease in customer demand.

First Six Months of 2020 Compared with First Six Months of 2019

Revenues increased 8.1% in the first six months of 2020 compared with the first six months of 2019 due to an increase in MLMC's sales price and tons delivered.

Amortization of intangibles (19)

2020 $ 11,174

Operating profit increased $0.7 million in the third quarter of 2020 compared with the third quarter of 2019 primarily due to an increase in gross profit and a decrease in selling, general and administrative expenses, partially offset by a decrease in earnings of unconsolidated operations.

The improvement in gross profit was mainly due to an increase in the profit per ton delivered at MLMC.

The decrease in selling, general and administrative expenses was primarily attributable to lower employee-related expenses.

The decrease in earnings of unconsolidated operations was mainly due to a reduction in tons delivered due to decreases in customer demand and the termination of the Camino Real contract mining agreement effective July 1, 2020.

Camino Real delivered 0.3 million tons in the first six months of 2020 and 1.6 million tons in full-year 2019.

First Nine Months of 2020 Compared with First Nine Months of 2019

Revenues increased 8.2% in the first nine months of 2020 compared with the first nine months of 2019 due to an increase in reimbursable costs and tons delivered at MLMC.

The sales price at MLMC is index-based and includes adjustments for coal quality and reimbursable costs.

MLMC delivers coal to the Red Hills Power Plant, which supplies electricity to TVA under a long-term Power Purchase Agreement.

The decision of which power plants to dispatch is determined by TVA.

The Red Hills power plant experienced an increase in dispatch during the first six months of 2020 compared with the first six months of 2019 , resulting in the increase in tons delivered.

The following table identifies the components of change in operating profit for the first six months of 2020 compared with the first six months of 2019 :

The following table identifies the components of change in operating profit for the first nine months of 2020 compared with the first nine months of 2019:

Operating Profit

2019 $ 27,761

Increase (decrease) from:

Earnings of unconsolidated operations (3,417)

Selling, general and administrative expenses

Amortization of intangibles

Net gain on sale of assets (112)

Operating profit decreased $2.6 million in the first six months of 2020 compared with the first six months of 2019 primarily due to a decrease in 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 mainly due to lower customer demand, primarily at Sabine, Camino and Bisti, partially offset by an increase in customer demand at Coyote Creek and Falkirk.

For more information about the unconsolidated operations, see the Second Quarter discussion above.

The decrease in gross profit was primarily due to an increase in the cost per ton delivered at MLMC, including the recognition of a portion of costs previously capitalized into inventory.

The increase in selling, general and administrative expenses was primarily attributable to higher outside service fees partially offset by lower employee-related expenses.

Amortization of intangibles (60)

Selling, general and administrative expenses 861

Gross profit 824

2020 $ 25,857

Operating profit decreased $1.9 million in the first nine months of 2020 compared with the first nine months of 2019 primarily due to a decrease in earnings of unconsolidated operations, partially offset by a decrease in selling, general and administrative expenses and an increase in gross profit.

The decrease in earnings of unconsolidated operations was mainly due to a reduction in tons delivered, primarily at Sabine, Camino Real, Coteau and Bisti, partially offset by an increase in tons delivered at Coyote Creek.

The power plants served by Sabine and Coteau were dispatched at lower rates during the first nine months of 2020 compared with the first nine months of 2019.

The reduction in tons delivered at Camino Real was due to a decrease in customer demand in the first six months of 2020 and the termination of the Camino Real contract mining agreement effective July 1, 2020.

The reduction in coal tons delivered at Bisti was due to an extended plant outage during the first nine months of 2020.

The decrease in selling, general and administrative expenses was primarily attributable to lower employee-related expenses partially offset by higher outside service fees.

The improvement in gross profit was primarily due to an increase in the profit per ton delivered at MLMC.

NORTH AMERICAN MINING ("NAMining") SEGMENT

FINANCIAL REVIEW

Tons of limestone delivered by the NAMining segment were as follows for the three and six months ended June 30 (in millions):

Tons of limestone delivered by the NAMining segment were as follows for the three and nine months ended September 30 (in millions):

THREE MONTHS NINE MONTHS

2020 2019 2020 2019

Unconsolidated operations 2.4 1.7 6.8 6.1

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Total tons delivered 11.6 10.2 34.9 33.7

The results of operations for the NAMining segment were as follows for the three and six months ended June 30 :

The results of operations for the NAMining segment were as follows for the three and nine months ended September 30:

THREE MONTHS NINE MONTHS

2020 2019 2020 2019

Revenues $ 9,443 $ 8,993 $ 33,115 $ 30,496

Cost of sales 8,808 9,407 30,797 29,880

Gross profit (loss) 635 (414) 2,318 616

Earnings of unconsolidated operations (a)

868 1,227 2,822 2,330

Selling, general and administrative expenses 1,259 1,183 3,868 3,708

2 unchanged sentences

(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.

Second Quarter of 2020 Compared with Second Quarter of 2019

Despite a reduction in tons delivered, revenues increased 12.3% in the second quarter of 2020 compared with the second quarter of 2019 primarily due to new operations added since June 30, 2019, including work related to the Thacker Pass lithium project, and favorable changes in the mix of customer requirements.

The following table identifies the components of change in operating profit (loss) for the second quarter of 2020 compared with the second quarter of 2019 :

Third Quarter of 2020 Compared with Third Quarter of 2019

Revenues increased 5.0% in the third quarter of 2020 compared with the third quarter of 2019 primarily due to an increase in tons delivered and work related to the Thacker Pass lithium project.

The following table identifies the components of change in operating profit (loss) for the third quarter of 2020 compared with the third quarter of 2019:

Operating Profit (Loss)

Increase (decrease) from:

Gross profit 1,049

Earnings of unconsolidated operations (359)

Net gain on sale of assets

Selling, general and administrative expenses (76)

Operating profit increased $1.0 million in the second quarter of 2020 compared with the second quarter of 2019 primarily due to increases in gross profit and earnings of unconsolidated operations from new operations added since June 30, 2019 and favorable changes in the mix of customer requirements.

First Six Months of 2020 Compared with First Six Months of 2019

Despite a reduction in tons delivered, revenues increased 10.1% in the first six months of 2020 compared with the first six months of 2019 primarily due to new operations added since June 30, 2019, including work related to the Thacker Pass lithium project, and favorable changes in the mix of customer requirements.

The following table identifies the components of change in operating profit (loss) for the first six months of 2020 compared with the first six months of 2019 :

Net gain on sale of assets (12)

Operating profit increased $0.6 million in the third quarter of 2020 compared with the third quarter of 2019 primarily due to an increase in gross profit partially offset by a decrease in earnings of unconsolidated operations.

Both variances are due to changes in the mix of customer requirements.

First Nine Months of 2020 Compared with First Nine Months of 2019

Revenues increased 8.6% in the first nine months of 2020 compared with the first nine months of 2019 primarily due to favorable changes in the mix of customer requirements and work related to the Thacker Pass lithium project.

The following table identifies the components of change in operating profit (loss) for the first nine months of 2020 compared with the first nine months of 2019:

Operating Profit (Loss)

Increase (decrease) from:

Gross profit 1,702

Earnings of unconsolidated operations 492

1 unchanged sentence

Selling, general and administrative expenses (160)

Operating profit increased $1.7 million in the first six months of 2020 compared with the first six months of 2019 primarily due to increases in earnings of unconsolidated operations and gross profit from new operations added since June 30, 2019 and favorable changes in the mix of customer requirements.

Operating profit increased $2.3 million in the first nine months of 2020 compared with the first nine months of 2019 primarily due to increases in gross profit and earnings of unconsolidated operations from favorable changes in the mix of customer requirements.

MINERALS MANAGEMENT SEGMENT

FINANCIAL REVIEW

The results of operations for the Minerals Management segment were as follows for the three and six months ended June 30 :

The results of operations for the Minerals Management segment were as follows for the three and nine months ended September 30:

THREE MONTHS NINE MONTHS

2020 2019 2020 2019

Revenues $ 2,722 $ 5,022 $ 9,950 $ 25,950

Cost of sales 537 814 1,793 2,902

Gross profit 2,185 4,208 8,157 23,048

Selling, general and administrative expenses 512 308 1,707 690

Operating profit $ 1,673 $ 3,900 $ 6,450 $ 22,358

Revenues and operating profit decreased in the three and six months ended June 30 , 2020 compared with the 2019 periods.

The first half of 2019 included significant royalty income generated by a large number of new gas wells put into commission during 2018 and early 2019.

Revenues and operating profit decreased in the three and nine months ended September 30, 2020 compared with the 2019 periods.

The first nine months of 2019 included significant royalty income generated by a large number of new gas wells put into commission during 2018 and early 2019.

These wells are operated by third parties to extract natural gas from the Company's Ohio Utica shale mineral reserves.

Since new wells have high initial production rates and follow a natural decline before settling into relatively stable, long-term production, royalty income in 2020 decreased substantially from 2019 levels.

The increase in selling, general and administrative expenses is due to a $0.5 million charge in the second quarter of 2020 to write-off certain leasehold interests.

Lower commodity prices in 2020 compared with 2019 also contributed to the reduction in revenues and operating profit.

The increase in selling, general and administrative expenses is due to a $0.5 million charge in the first nine months of 2020 to write-off certain leasehold interests.

UNALLOCATED ITEMS AND ELIMINATIONS

FINANCIAL REVIEW

Unallocated Items and Eliminations were as follows for the three and six months ended June 30 :

Unallocated Items and Eliminations were as follows for the three and nine months ended September 30:

THREE MONTHS NINE MONTHS

2020 2019 2020 2019

Operating loss $ (3,693) $ (5,371) $ (12,366) (15,179)

Operating loss decreased in the three and six months ended June 30 , 2020 compared with the 2019 periods primarily due to lower employee-related expenses.

Operating loss decreased in the three and nine months ended September 30, 2020 compared with the 2019 periods primarily due to lower employee-related expenses.

NACCO Industries, Inc.

Coal Mining Outlook - 2020

In the second half and for the full year of 2020, the Company expects coal deliveries and Coal Mining operating profit to decrease from the respective prior year periods.

In the prior year fourth quarter, the Company recorded a $2.0 million unfavorable adjustment to mine reclamation liabilities at Centennial.

Excluding the impact of this item, operating profit in the second half of 2020 is expected to decrease substantially from the second half of 2019.

This decrease is a result of an anticipated decrease in earnings at the unconsolidated mining operations due to reduced customer requirements and an expected increase in operating expenses, mainly due to higher professional fees.

In the second half of 2020, earnings at MLMC are expected to be comparable to the second half of 2019.

An anticipated improvement in customer demand resulting from an expected increase in the dispatch of the customer's power plant is expected to be offset by an increase in the cost per ton delivered.

If customer demand at MLMC decreases from expected levels, it could unfavorably affect the Company's 2020 earnings outlook.

Excluding the unfavorable 2019 mine reclamation adjustment, 2020 full-year operating profit is expected to decrease from 2019 due to a reduction in earnings at the unconsolidated mining operations and the expected increase in operating expenses.

Operating expenses are expected to increase moderately for the full year.

Changes in dispatch, including changes due to historically low natural gas prices and the continued increase in renewable generation, particularly wind, could reduce customer demand below anticipated levels which would unfavorably affect the Company’s second half and full-year 2020 outlook.

Capital expenditures are expected to be approximately $23 million in 2020.

The Company expects high levels of capital expenditures in 2020 and 2021 primarily related to MLMC's development of a new mine area.

These capital expenditures will result in an increase in depreciation that will unfavorably affect operating profit in future periods.

On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer and the Company's second largest customer, announced its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas.

Coal deliveries for the fourth quarter of 2020 are expected to be comparable to the fourth quarter of 2019.

Despite comparable deliveries, fourth-quarter 2020 operating profit is expected to decrease compared with the 2019 fourth quarter.

The decrease in operating profit is mainly due to an anticipated reduction in results at MLMC and a reduction in earnings at the unconsolidated mining operations.

Results at MLMC are expected to decline significantly from the fourth quarter of 2019 primarily due to an increase in the cost per ton delivered.

Overall, full-year 2020 coal deliveries and operating profit are expected to be lower than 2019, mainly as a result of a decrease in earnings at the unconsolidated mining operations due to reduced customer requirements and the termination of the Camino Real contract mining agreement.

As mentioned above, the contract between Camino Real and its customer, DRCP was unexpectedly terminated effective July 1, 2020 and the mine was closed.

During the third quarter of 2020, Sabine’s customer, American Electric Power, reduced its annual lignite coal requirements to be between 1.4 million and 1.7 million tons compared with 2.6 million tons delivered in 2019.

The customer reduced its expected future requirements because the plant served by the Sabine Mine was dispatched at a much lower rate in 2020 than in 2019, and that trend is expected to continue.

On September 30, 2020, the Company's Caddo Creek's customer entered into an agreement for the sale of their activated carbon manufacturing business, including its Marshall Mine operated by Caddo Creek, to a subsidiary of AES.

AES announced its intent to close the mine, which delivered 0.2 million tons in 2019.

Caddo Creek has entered into a contract to perform the required mine reclamation.

Changes in customer power plant dispatch, including changes due to historically low natural gas prices and the continued increase in renewable generation, particularly wind, could reduce customer demand below anticipated levels, which could further unfavorably affect the Company’s fourth quarter and full-year 2020 results, as well as its 2021 outlook.

Coal Mining Outlook - 2021

In 2021, the Company expects coal deliveries to be comparable to 2020 based on current expectations of customer requirements.

Coal Mining operating profit in 2021 is expected to decrease compared with 2020, mainly in the first half of the year.

This decrease is primarily the result of an expected increase in operating expenses and an anticipated reduction in earnings at the unconsolidated Coal Mining operations primarily due to a contractually agreed reduction in fee-based earnings at the Liberty Mine as the scope of final mine reclamation activities is reduced.

Results at the consolidated mining operations are expected to be comparable between years, as a decrease in earnings at MLMC is expected to be offset by a lower operating loss at Centennial.

At MLMC, results are expected to be lower due to an increase in the cost per ton of coal delivered in 2021 compared with 2020.

In general, cost per ton delivered is lowest when the power plant requires a consistently high level of coal deliveries, primarily because costs are spread over more tons.

On May 7, 2020, GRE, Falkirk Mine's customer and the Company's second largest customer, announced its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas.

GRE is willing to consider opportunities to sell Coal Creek Station, and NACCO is actively engaged in the exploration of options that could, if successful, allow for transfer of ownership of the power plant to one or more third parties, which would preserve jobs at both Coal Creek Station and the Falkirk Mine.

2 unchanged sentences

The closure of Coal Creek Station will have a material adverse effect on the long-term earnings of NACCO Industries.

As mentioned above, the contract between Camino Real and DRCP was unexpectedly terminated effective July 1, 2020.

Camino Real delivered 1.5 million tons of coal during 2019.

Closure of the mine does not materially impact NACCO’s outlook for 2020.

The contract mining agreement between Camino Real and DRCP was previously expected to terminate in 2021.

The terms of the contract between the Company and GRE specify that

GRE is responsible for all costs related to mine closure, including but not limited to, final mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.

Capital expenditures are expected to be approximately $12 million in the fourth quarter of 2020 and approximately $20 million for the 2020 full year, and approximately $24 million in 2021.

The Company expects high levels of capital expenditures in the remainder of 2020 and in 2021 primarily related to MLMC's development of a new mine area.

These capital expenditures will result in an increase in depreciation that will unfavorably affect operating profit in future periods.

NAMining Outlook

In the second half and full year of 2020, NAMining expects limestone deliveries to increase modestly from the respective prior year periods.

NAMining expects operating profit in the second half of 2020 to improve over the second half of 2019, but decrease significantly from the first half of 2020.

Operating profit is expected to benefit from earnings associated with new limestone mining contracts and favorable changes in the mix of customer requirements.

In the fourth quarter of 2020, NAMining expects limestone deliveries to increase moderately over the fourth quarter of 2019, resulting in an overall modest increase in tons delivered for the 2020 full year compared with full-year 2019.

NAMining expects operating profit in the fourth quarter of 2020 to improve substantially over the fourth quarter of 2019, but less significantly than in the previous three quarters of 2020.

Operating profit is expected to benefit from favorable changes in the mix of customer requirements.

Full-year 2020 operating profit is expected to increase significantly over 2019.

Capital expenditures are expected to be approximately $13 million in 2020, primarily for the acquisition, relocation and refurbishment of draglines.

In 2021, NAMining expects full year operating profit to be comparable to 2020 with its existing customer contracts.

NAMining is pursuing a number of growth initiatives that if successful would be accretive to future earnings.

Capital expenditures are expected to be approximately $3 million in the fourth quarter of 2020 and approximately $13 million and $7 million for the 2020 full year and 2021, respectively, primarily for the acquisition, relocation and refurbishment of draglines.

In 2019, NAMining's subsidiary, Sawtooth Mining, LLC, entered into a mining 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.

2 unchanged sentences

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 and, to a lesser extent, oil, natural gas liquids and coal, extracted primarily by third parties.

The 2019 results included a substantial increase in royalty income, particularly in the first half of 2019, generated by a large number of new gas wells put into commission during 2018 and early 2019.

Given expected lower natural gas prices, fewer expected new wells and the natural production decline that occurs early in the life of a well, full-year 2020 royalty income is expected to decrease and be substantially lower than 2019 levels.

While royalty income is expected to decrease in the second half of 2020 compared with the second half of 2019, the rate of decrease is expected to be substantially lower than the decrease in the first half of 2020 because prior year income significantly decreased between the first and the second halves of the year.

Natural gas pricing declines and reduced business activity due to the COVID-19 pandemic have resulted in higher-than-average natural gas inventory market levels.

The 2019 results included a substantial increase in royalty income, primarily in the first nine months of 2019, generated by a large number of new gas wells put into commission during 2018 and early 2019.

Given expected lower natural gas prices, fewer expected new wells, lower commodity prices and the natural production decline that occurs early in the life of a well, fourth quarter and full-year 2020 royalty income is expected to be substantially lower than 2019 levels.

Given these factors, royalty income from existing assets is also expected to be down substantially in 2021 from 2020.

A sustained decline in natural gas prices could unfavorably affect the Company’s outlook.

Decline rates for individual wells can vary due to factors like well depth, well length, formation pressure and facility design.

In addition, royalty income can fluctuate favorably or unfavorably in response to a number of factors outside of the Company's control, including the number of wells being operated by third parties, fluctuations in commodity prices (primarily natural gas), fluctuations in production rates associated with operator decisions, regulatory risks, the Company's lessees' willingness and

ability to incur well-development and other operating costs, and changes in the availability and continuing development of infrastructure.

Minerals Management capital expenditures are expected to total approximately $11 million in 2020 primarily for the acquisition of mineral interests and other investments.

Minerals Management is targeting investments in mineral and royalty interests of approximately $15 million in the fourth quarter of 2020 and $10 million in 2021, although the timing of the fourth quarter investments could slip into 2021.

These investments are expected to be accretive to earnings, but each investment's contribution to earnings is dependent on the timing, size and stage of mineral development.

The Company's strategy is to selectively acquire oil and gas mineral and royalty interests with a balance of near-term cash flow yields and long-term growth potential, in oil-rich basins offering diversification from the Company's legacy mineral interest in predominantly natural gas-rich basins.

Consolidated Outlook

NACCO expects a significant decrease in full-year 2020 consolidated net income compared with 2019, primarily due to the substantial decrease in operating profit at Minerals Management in the first half of 2020, the anticipated reduction in earnings at the Coal Mining segment and the absence of $2.7 million pre-tax income associated with a prior India venture recorded in the third quarter of 2019.

These items are expected to be partially offset by the recognition of a 2020 tax benefit as a result of the CARES Act and an improvement in earnings at the NAMining segment.

In 2020, cash flow before financing activities is expected to be a use of cash due to significant capital expenditures and payments made in the first half of the year related to deferred compensation and other payroll liabilities.

Consolidated capital expenditures are expected to be approximately $47 million in 2020.

Capital expenditures were approximately $13 million in the first half of 2020.

Overall, NACCO expects a modest increase in consolidated operating profit in the fourth quarter of 2020 over 2019, which included a $2.0 million unfavorable mine reclamation adjustment in the Coal Mining segment.

Excluding this adjustment, fourth-quarter 2020 consolidated operating profit and net income are expected to decrease significantly from the prior year, primarily as a result of anticipated lower results in the Coal Mining segment and an increase in income tax expense, partially offset by lower unallocated employee-related costs.

The Company expects a significant decrease in full-year 2020 consolidated operating profit and net income compared with 2019, primarily due to the substantial decrease in operating profit at Minerals Management in the first nine months of 2020 and the anticipated reduction in full-year earnings at the Coal Mining segment.

In addition, the Company received a final settlement associated with a prior India venture in 2020 that was less than the initial award received in 2019.

These items are expected to be partially offset by an improvement in earnings at the NAMining segment and an anticipated lower effective income tax rate in 2020 compared with 2019.

For the full year, NACCO anticipates that its 2020 effective income tax rate will be in the range of 5% to 7% based on the current forecasted mix of earnings.

Consolidated capital expenditures are expected to be approximately $30 million in the fourth quarter of 2020 and approximately $50 million for the full year.

As a result of the increase in capital expenditures and payments made in the first half of the year related to deferred compensation and other payroll liabilities, consolidated cash flow before financing activities is expected to be a significant use of cash in the 2020 full year.

In 2021, NACCO expects consolidated net income to decrease significantly from 2020.

An anticipated reduction in earnings in the Minerals Management segment and lower earnings in the Coal Mining segment are expected to be partially offset by lower income tax expense as the Company expects the full-year 2021 effective income tax rate to be between negative 5% and negative 7%.

In light of ongoing regulatory, economic and public opinion challenges facing the coal-fired power generation industry, the Company commenced a voluntary retirement program for certain corporate employees in the fourth quarter.

The program is expected to be substantially completed by December 31, 2020 and reduce general and administrative expenses in 2021 and future years.

The amount of savings, and related one-time separation costs, will depend on the level of participation in the program.

Cash flow before financing activities is expected to improve and be a solid generation of cash in 2021, as compared with a significant use of cash in 2020, but not to the level realized in 2019.

Consolidated capital expenditures are expected to be approximately $41 million in 2021, primarily consisting of $24 million in the Coal Mining segment, $10 million in the Minerals Management segment and $7 million in the NAMining segment.

Significant uncertainties exist regarding the COVID-19 pandemic, including the extent of economic disruption it may cause in the future.

While the Company's operations to date have not been materially affected by the pandemic, future developments, which are highly uncertain and unpredictable, could change the Company's status significantly and rapidly, and could have a material adverse effect on the Company’s operations, supply chain and customers.

The extent to which COVID-19 may adversely impact the Company depends on many factors, including but not limited to the extent of new outbreaks as communities reopen, the extent to which additional lockdowns may be needed, the nature of the government public health guidelines and the public's adherence to those guidelines, the success of businesses reopening, and the timing for proven treatments and vaccines for COVID-19.

The extent to which COVID-19 impacts the Company going forward will depend on numerous factors and future developments that remain uncertain.

While the Company's mining operations to date have not been directly affected by the pandemic, future developments, which are highly uncertain and unpredictable, could significantly and rapidly cause a deterioration in the Company’s results, supply chain channels and customer demand.

The extent to which COVID-19 may adversely impact the Company depends on many factors, including but not limited to the extent of new outbreaks, the extent to which additional shutdowns may be imposed, the nature of the government public health guidelines and the public's adherence to those guidelines, the success of businesses reopening fully, and the timing for proven treatments and vaccines for COVID-19.

NACCO continues to maintain procedures to limit the exposure of employees to COVID-19.

Even after the COVID-19 pandemic has subsided, the Company may experience material adverse effects due to a resulting decline in economic activity.

Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets and may continue to adversely impact NACCO's stock price.

Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets and may adversely impact NACCO's stock price.

One of the Company’s core strategies is to pursue activities which can strengthen the resiliency of its existing coal mining operations.

The Company works to drive down coal production costs and maximize efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive.

This benefits both customers and the Company's Coal Mining segment, as fuel cost is the major driver for power plant dispatch.

Increased power plant dispatch drives increased demand for coal by the Coal Mining segment's customers, just as lower dispatch reduces demand.

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.

The Company continues to evaluate opportunities to expand its coal mining business, however opportunities are likely to be very limited.

Low natural gas prices and growth in renewable energy sources, such as wind and solar, could continue to unfavorably affect the amount of electricity dispatched from coal-fired power plants.

The political and regulatory environment is not generally receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines.

However, the Company does continue to seek out and pursue opportunities where it can apply its management fee business model to replace legacy operators of existing surface coal mining operations in the United States.

Low natural gas prices and growth in renewable energy sources, such as wind and solar, are likely to continue to unfavorably affect the amount of electricity dispatched from coal-fired power plants.

The political and regulatory environment is not receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines.

However, the Company does continue to seek out and pursue opportunities where it can apply its management fee business model to assume operation of existing surface coal mining operations in the United States.

Outright acquisitions of existing coal mines or mining companies with exposure to fluctuating coal commodity markets, or structures that would create significant leverage, are outside the Company’s area of focus.

The Company is focused on building a strong portfolio of affiliated businesses for diversification.

NAMining continues to expand the scope of its business development activities to grow and diversify by targeting potential customers who require a broad range of minerals and materials.

NAMining continues to expand the scope of its business development activities to grow and diversify by targeting potential customers who require a

broad range of minerals and materials.

NAMining also continues to leverage the Company’s core mining skills to expand the range of contract mining services provided, in addition to providing comprehensive mining services to operate entire mines when appropriate, as is the case at the new lithium project in Nevada.

The Company’s efforts to grow and diversify the Minerals Management segment includes evaluating acquisitions of additional mineral interests or similar investments in the energy industry.

The Company's primary initial focus will be on diversifying acquisitions of mineral interests with a balance of near-term cash flow yields and upside potential from future development.

The Company’s efforts to grow and diversify the Minerals Management segment includes acquiring additional mineral interests or similar investments in the energy industry.

During the second quarter of 2020, the Company’s subsidiary, Catapult Mineral Partners, invested $2.0 million to acquire shares of a public company with a diversified portfolio of royalty producing mineral interests as part of this growth and diversification strategy.

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This business has achieved several early successes and is positioned for additional growth.

The Company is leveraging its core mining skills to develop a strong and diverse portfolio of service-based businesses operating in the mining and natural resources industries.

The Company is leveraging its core mining and natural resources management skills to develop a strong and diverse portfolio of service-based businesses operating in the mining and natural resources industries.

The Company is also committed to maintaining a conservative capital structure while it grows and diversifies without unnecessary risk.

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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 a long-term mining contract, or a customer default under a contract, including any actions taken related to Great River Energy's Coal Creek Station power plant, (2) the duration and severity of the COVID-19 pandemic, any preventive or protective actions taken by governmental authorities, the effectiveness of actions taken globally to contain or mitigate its effects and any unfavorable effects of the COVID-19 pandemic on the Company's suppliers' ability to provide products or replacement parts if the virus continues to spread or quarantines are reinstated, as well as other disruptions from natural or human causes, including severe weather, accidents, fires, earthquakes, terrorist acts, any of which could result in suspension of operations or harm to people or the environment, (3) changes in coal consumption patterns of U.S.

changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (7) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (8) weather or equipment problems that could affect deliveries to customers, (9) failure or delays by the Company's lessees in achieving expected production of natural gas and other hydrocarbons;

(1) changes to or termination of a long-term mining contract, or a customer default under a contract, including any actions taken related to GRE's Coal Creek Station power plant, (2) the duration and severity of the COVID-19 pandemic, any preventive or protective actions taken by governmental authorities, the effectiveness of actions taken globally to contain or mitigate its effects and any unfavorable effects of the COVID-19 pandemic on the Company's suppliers' ability to provide products or replacement parts if the virus continues to spread or quarantines are reinstated, as well as other disruptions from natural or human causes, including severe weather, accidents, fires, earthquakes, terrorist acts, any of which could result in suspension of operations or harm to people or the environment, (3) changes in coal consumption patterns of U.S.

electric power generators or the power industry that would affect demand for the Company's mineral reserves, (4) changes in tax laws or regulatory requirements, including changes in mining or power plant emission regulations and health, safety or environmental legislation, (5) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (6) regulatory actions, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (7) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (8) weather or equipment problems that could affect deliveries to customers, (9) 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, (10) changes in the costs to reclaim mining areas, (11) costs to pursue and develop new mining and value-added service opportunities, (12) delays or reductions in coal or aggregates deliveries, (13) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas and oil, (14) the ability to successfully evaluate investments and achieve intended financial results in new business and growth initiatives, (15) the effects of receiving low sustainability scores which could result in the exclusion of the Company's securities from consideration by certain investment funds, and (16) failure to obtain adequate insurance coverages.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements