SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-9993
ASHLAND COAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-0880012
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2205 FIFTH STREET ROAD, HUNTINGTON, WEST VIRGINIA 25701
(Address of principal executive offices) (Zip Code)
P. O. BOX 6300, HUNTINGTON, WEST VIRGINIA 25771
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code (304)526-3333
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At November 9, 1994, there were 13,722,984 shares of registrant's
common stock outstanding.
1<PAGE>
Part I - Financial Information
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30 December 31
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,713 $556
Trade accounts receivable 58,771 45,513
Other receivables 6,733 4,467
Inventories 27,422 22,304
Prepaid royalties 16,321 15,098
Deferred income taxes 3,748 2,116
Other 4,441 4,829
119,149 94,883
OTHER ASSETS
Prepaid royalties 61,695 53,557
Coal supply agreements 38,307 47,032
Other 26,358 29,328
126,360 129,917
PROPERTY, PLANT, AND EQUIPMENT
Cost 845,222 829,089
Less accumulated depreciation, depletion,
and amortization 251,095 217,898
594,127 611,191
$839,636 $835,991
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $30,910 $27,302
Accrued expenses 30,944 28,036
Income taxes payable 2,768 -
Current portion of long-term debt 45,141 37,260
109,763 92,598
LONG-TERM DEBT 218,336 244,342
ACCRUED POSTRETIREMENT BENEFITS 73,433 67,845
OTHER LONG-TERM LIABILITIES 43,600 41,571
DEFERRED INCOME TAXES 34,012 42,584
DEFERRED GAIN ON SALE AND LEASEBACK OF ASSETS 3,194 3,624
STOCKHOLDERS' EQUITY
Convertible Class B preferred stock 33,050 33,050
Convertible Class C preferred stock 34,791 34,791
Common stock 137 136
Paid-in capital 108,515 107,087
Retained earnings 180,805 168,363
357,298 343,427
$839,636 $835,991
</TABLE>
See notes to condensed consolidated financial statements.
2<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
REVENUES
Coal sales $150,027 $111,389 $433,608 $375,015
Operating revenues 7,398 2,362 15,955 11,893
157,425 113,751 449,563 386,908
COSTS AND EXPENSES
Cost of coal sold 130,346 109,884 379,733 347,336
Operating expenses 2,842 2,566 8,612 7,912
Selling, general, and
administrative expenses 8,862 8,342 25,95 26,124
142,050 120,792 414,298 381,372
OPERATING INCOME (LOSS) 15,375 (7,041) 35,265 5,536
OTHER INCOME (EXPENSE)
Interest income 206 307 264 780
Interest expense (5,658) (6,691) (16,810) (19,061)
INCOME (LOSS) BEFORE
INCOME TAXES AND THE
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING 9,923 (13,425) 18,719 (12,745)
Income tax expense (benefit) (240) (57,124) 94 (59,702)
INCOME BEFORE THE
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING 10,163 43,699 18,625 46,957
Cumulative effect of
changes in accounting - - - (18,836)
NET INCOME $10,163 $43,699 $18,625 $28,121
Earnings per common share
Primary:
Earnings before cumulative
effect adjustments $.54 $2.45 $.99 $2.62
Cumulative effect
adjustments - - - (1.09)
Net Income $.54 $2.45 $.99 $1.53
Fully diluted:
Earnings before cumulative
effect adjustments $.53 $2.31 $.97 $2.46
Cumulative effect
adjustments - - - (1.01)
Net Income $.53 $2.31 $.97 $1.45
Dividends declared per
common share $.10 $.10 $.30 $.30
</TABLE>
See notes to condensed consolidated financial statements.
3<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES
Net income $18,625 $28,121
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation, depletion, and amortization 53,809 54,723
Prepaid royalties expensed 15,899 22,785
Deferred income taxes (10,204) (64,856)
Gain on disposition of assets (1,443) (245)
Cumulative effect of changes in
accounting - 18,836
Partnership costs in excess of
cash advances 586 513
Changes in operating assets and
liabilities (9,138) (13,007)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 68,134 46,870
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (29,665) (14,583)
Proceeds from sales 1,711 659
Proceeds from equipment held for sale 2,250 -
Proceeds from sale and leaseback of equipment - 64,182
Advances on prepaid royalties (18,393) (10,555)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (44,097) 39,703
FINANCING ACTIVITIES
Proceeds from long-term borrowings 817,295 886,582
Payments on long-term borrowings (835,420) (974,259)
Dividends paid (6,183) (6,274)
Proceeds from sale of common stock 1,428 1,791
NET CASH USED IN
FINANCING ACTIVITIES (22,880) (92,160)
Increase (decrease) in cash and
cash equivalents 1,157 (5,587)
Cash and cash equivalents at beginning
of period 556 37,609
Cash and cash equivalents at end of period $1,713 $32,022
</TABLE>
See notes to condensed consolidated financial statements.
4<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
(Unaudited)
NOTE A - GENERAL
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission regulations, but are subject to any year-end audit adjustments
which may be necessary. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be
read in conjunction with the Annual Report of Ashland Coal, Inc. (Ashland
Coal or the Company) on Form 10-K for the year ended December 31, 1993.
Results of operations for the periods ended September 30, 1994, are not
necessarily indicative of results to be expected for the year ending
December 31, 1994.
NOTE B - INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
(In thousands)
<S> <C> <C>
Coal $10,910 $6,884
Supplies and other 16,512 15,420
$27,422 $22,304
</TABLE>
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
(In thousands)
<S> <C> <C>
9.78% senior unsecured notes payable
in four equal annual installments
beginning September 15, 1997 $100,000 $100,000
9.66% senior unsecured notes payable
in six equal annual
installments beginning May 15, 2001 52,900 52,900
8.92% senior unsecured notes
due May 15, 1996 22,100 22,100
Indebtedness to banks under
revolving credit agreement - 50,000
Indebtedness to banks under lines
of credit 88,336 56,332
Other 141 270
263,477 281,602
Less current portion 45,141 37,260
$218,336 $244,342
</TABLE>
5<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE D - CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. SFAS No. 106 requires the
accrual method of accounting for postretirement health care and life
insurance benefits based on actuarially determined costs to be recognized
over the period the employee provides service to the Company. As of
January 1, 1993, the Company recognized the full amount of its
actuarially estimated accumulated postretirement benefit obligation
(APBO) as of that date which had not been previously recognized. The
APBO represents the present value of the estimated future benefits
payable to current retirees and a pro rata portion of estimated benefits
payable to active employees after retirement. The pretax charge to
earnings in the first quarter of 1993 was $40,856,000, which was
$25,331,000 ($1.49 per share) net of tax. The latter amount has been
reflected in the consolidated statement of income as a cumulative effect
of an accounting change.
Also effective January 1, 1993, the Company adopted the provisions of
SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires a
liability approach for measuring deferred taxes based on temporary
differences between the financial statement and tax bases of assets and
liabilities existing at each balance sheet date using enacted tax rates
for years during which taxes are expected to be paid or recovered.
Adoption of SFAS No. 109 required the adjustment of the carrying value of
certain assets, which had been acquired in prior business combinations,
to their pretax amounts. That adjustment increased income in the first
quarter of 1993 by $10,476,000, which was $6,495,000 ($.38 per share) net
of tax. The latter amount has been reflected in the consolidated
statement of income as a cumulative effect of an accounting change.
6<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E - COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Income before the cumulative effect
of changes in accounting $10,163 $43,699 $18,625 $46,957
Less: Common stock dividends 1,372 1,361 4,107 4,073
Preferred stock dividends 635 681 1,899 1,894
Accretion of discount on
preferred stock (subject
to redemption) - 111 - 770
Undistributed earnings less
accretion before cumulative
effect adjustments 8,156 41,546 12,619 40,220
Cumulative effect of changes
in accounting - - - (18,836)
Undistributed earnings less
accretion $8,156 $41,546 $12,619 $21,384
Primary
Average shares and equivalents
outstanding:
Shares outstanding 13,712 13,607 13,690 13,578
Shares issuable upon
Conversion of preferred stock 4,587 4,000 4,587 3,641
Exercise of stock options 71 107 45 102
Total 18,370 17,714 18,322 17,321
Per share amounts:
Undistributed earnings less
accretion before cumulative effect
adjustments $.44 $2.35 $.69 $2.32
Dividends (except preference
dividends) .10 .10 .30 .30
Earnings before cumulative effect
adjustments .54 2.45 .99 2.62
Cumulative effect adjustments - - - (1.09)
Net income $.54 $2.45 $.99 $1.53
Fully Diluted
Average shares and equivalents
outstanding:
Shares outstanding 13,712 13,607 13,690 13,578
Shares issuable upon
Conversion of preferred stock 5,212 5,048 5,212 4,949
Exercise of stock options 78 133 47 110
Total 19,002 18,788 18,949 18,637
Per share amounts:
Undistributed earnings less
accretion before cumulative
effect adjustments $.43 $2.21 $.67 $2.16
Dividends (except preference
dividends) .10 .10 .30 .30
Earnings before cumulative effect
adjustments .53 2.31 .97 2.46
Cumulative effect adjustments - - - (1.01)
Net income $.53 $2.31 $.97 $1.45
</TABLE>
7<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE F - CONTINGENCIES
Ashland Coal is a party to numerous claims and lawsuits with respect to
various matters. The Company provides for costs related to contingencies
when a loss is probable and the amount is reasonably determinable. The
Company estimates that its probable aggregate loss as a result of such
claims is $3.2 million (included in other long-term liabilities) and
believes that probable insurance recoveries of $2.7 million (included in
other assets) related to these claims will be realized. The Company
estimates that its reasonably possible aggregate losses from all
currently pending litigation could be as much as $4.1 million (before
tax) in excess of the probable loss previously recognized. However, the
Company believes it is probable that substantially all of such losses, if
any occur, will be insured. After conferring with counsel, it is the
opinion of management that the ultimate resolution of these claims, to
the extent not previously provided for, will not have a material adverse
effect on the consolidated financial condition, results of operations, or
liquidity of the Company.
In the quarter ended March 31, 1994, Ashland Coal recovered $1.0 million
from a contractor for business interruption losses related to the
collapse of a silo in 1992. Another claim is outstanding against the
same contractor for business interruption losses sustained in 1993, when
a second silo was unavailable during repairs. Because of the
uncertainties related to recovery of this claim, Ashland Coal is not
presently able to evaluate the claim's potential materiality relative to
net income.
8<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Results of Operations
Quarter Ended September 30, 1994, Compared
to Quarter Ended September 30, 1993
Net income for the quarter ended September 30, 1994, was $10.2 million
compared to $43.7 million for the quarter ended September 30, 1993. There
were three significant factors which affected the 1993 quarter. First,
there was a reduction in income tax expense of $50.2 million principally as
a result of the Company's electing to deduct for federal tax purposes the
amortization of goodwill associated with the April 1992 acquisition of Dal-
Tex Coal Corporation. This amortization, which was not previously
deductible, became deductible over 15 years as a result of the Omnibus
Budget Reconciliation Act of 1993 (OBRA). The second factor was a charge
of $9.9 million ($6.0 million after tax) to increase the valuation
allowance for certain prepaid royalties, the recoverability of which had
become doubtful. Finally, the strike by the United Mine Workers of America
(UMWA) against Hobet Mining, Inc. and subsidiaries of Dal-Tex affected the
entire third quarter of 1993.
Coal sales volume and revenue for the third quarter of 1994 were 5.2
million tons and $150.0 million, respectively, increases of 1.6 million
tons and $38.6 million from the same quarter a year ago. These increases
were mainly attributable to the effects of the strike by the UMWA on 1993's
production. Average selling prices decreased $1.98 per ton compared to the
same quarter a year ago. This decrease is primarily attributable to
changes in the sales mix as well as lower selling prices on sales to a
contract customer resulting from a contract renegotiation completed in
1993.
The unit cost of coal sold decreased $5.38 per ton largely due to the
impact of the UMWA strike on costs in 1993.
Operating revenues net of operating expenses increased $4.8 million over
the same quarter a year ago. In 1994, compensation for an easement which
rendered certain coal unminable, the sale of surplus mining equipment, and
an insurance settlement accounted for $3.2 million of this increase.
Operating revenues in 1993 were depressed by strike-related factors.
Interest expense decreased $1.0 million, reflecting lower average debt
levels.
The income tax benefit recorded in the third quarter of 1994 was the result
of a decrease in the estimated effective tax rate for the full year from
3.8% as of June 30 to .5% as of September 30. This decrease resulted from
a decrease in the Company's estimated profitability for 1994, which
resulted in higher percentage depletion relative to income. The effective
tax rate is sensitive to changes in profitability because of the effects of
percentage depletion. The income tax benefit recorded in the third quarter
of 1993 was mainly the result of the aforementioned effect of OBRA.
Nine Months Ended September 30, 1994, Compared
to Nine Months Ended September 30, 1993
For the nine months ended September 30, 1994, net income was $18.6 million.
For the same period last year, income before adjustments for the cumulative
effect of changes in accounting was $47.0 million. After the cumulative
effect of accounting changes, the Company earned $28.1 million in the first
nine months of 1993. Earnings last year were affected by OBRA, the
increase in the valuation allowance for prepaid royalties in the third
quarter, and the UMWA strike, all of which were discussed above.
For the first nine months of 1994, coal sales volume of 14.8 million tons
and coal sales revenue of $433.6 million were above 1993 levels by 2.2
million tons and $58.6 million, respectively. These increases were
attributable to the effects of the strike during the second and third
quarters of last year. The average selling price decreased slightly from
the level of a year ago.
9<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
The unit cost of coal sold in the first nine months of 1994 decreased $1.84
per ton from the level of the first nine months of 1993. Last year's unit
costs were negatively affected by the UMWA strike and the third-quarter
charge relative to prepaid royalties. Current year costs were increased by
the severe winter weather and the aftereffects of the UMWA strike
experienced earlier in the year.
Operating revenues net of operating expenses increased $3.4 million. This
increase mainly resulted from the same items discussed above for the
quarter. In addition, a $1.0 million recovery from a contractor for
business interruption losses related to the 1992 silo collapse at Mingo
Logan Coal Company's preparation plant had a favorable impact on 1994's
operating revenues. Last year's operating revenues included payments
received by the Company pursuant to a mutual assistance agreement with
other coal companies also involved in the contract negotiations with the
UMWA.
Interest expense decreased $2.3 million, reflecting lower average debt
levels.
The income tax expense recorded for the nine months ended September 30,
1994, reflects the decrease in 1994's estimated effective tax rate
discussed above. The income tax benefit recorded for the same period last
year was primarily the result of OBRA coupled with a decrease in the
Company's profitability as a result of the strike by the UMWA.
Balance Sheet
The balance of trade accounts receivable at September 30, 1994, was $13.3
million higher than the balance at December 31, 1993. Ashland Coal's trade
accounts receivable balance generally represents four to five weeks of coal
sales, dependent upon the specific customer accounts and payment terms
thereon. The balances of trade receivables at December 31, 1993, and
September 30, 1994, reflect the levels of coal sales in December 1993 and
September 1994, respectively. Coal sales in December 1993 were markedly
lower because of the strike by the UMWA and the aftereffects of the strike
once it was settled.
Inventories at September 30, 1994 were $5.1 million higher than at December
31, 1993. This increase resulted from normal fluctuations in inventory
levels and low levels at December 31, 1993, resulting from the drawdown of
coal stockpiles during the UMWA strike.
The noncurrent balance of prepaid royalties increased $8.1 million from the
balance at December 31, 1993. This increase was largely due to an annual
royalty payment of $16 million made at the end of March 1994.
Outlook
The Company's 1994 results of operations will be adversely affected by high
costs experienced in the early months of the year, as discussed above.
However, during the second and third quarters of this year costs decreased
significantly, and the Company expects to achieve further reductions in the
cost of sales per ton during the final quarter of 1994 principally because
of lower overburden ratios to be encountered at Hobet and Dal-Tex.
Overall, the Company expects that its cost of sales per ton for the full
year will approximate the 1992 level. In addition, with higher sales
volume than in 1993, relatively stable selling prices, and lower costs per
ton, the Company expects 1994 operating income to be substantially improved
over 1993's level.
10<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
In general, spot market prices have fallen since the settlement of the UMWA
strike, but still remain above the level that prevailed prior to the
strike. The Company believes that the approach of the January 1, 1995,
effective date of the 1990 Clean Air Act Amendments will further increase
demand for low-sulfur coal of the type that the Company sells. Some of
this increased demand for low-sulfur fuels in the Company's market area
may, however, be satisfied with coals from the western United States and
foreign sources and by other energy sources. Sales to a major contract
customer are expected to be above normal contract levels during the
remainder of 1994 as shortfalls in shipments that were scheduled for the
strike-affected period are made up. The price on these contract sales is
above the Company's average selling price.
In 1993, the Company completed negotiations with two customers, including
the Company's largest customer, concerning the price, extension of the
term, and the quality and quantity of future deliveries under existing coal
sales contracts with these customers. These new agreements have reduced
coal sales revenues and cash flow in 1994. A substantial part of these
decreases will be offset by additional sales volumes in later years. In
addition, adjustments have been made in the rates of amortization of the
carrying value of certain of these contracts, reducing amortization expense
in 1994. Contracts with another major customer are expected to expire at
the end of 1995. Because these contracts are priced above current market
prices, these expirations will have a significant adverse effect on
earnings in 1996 and subsequent years.
Ashland Coal's export sales volume continues at a low level because of
weakness in the European economy and increased competition from both other
fuels and other exporting countries. The Company expects its export sales
to show gradual growth from current levels, but does not expect that export
sales will have any significant effect on its results of operations. The
Company sells some metallurgical coal, which is used in the manufacture of
steel. Although metallurgical coal sales may result in somewhat better
profitability than similar sales of steam coal sold to electric utilities,
Ashland Coal does not expect that sales of metallurgical coal will become a
significant part of its total marketing strategy. Both export and
metallurgical coal sales do, however, enhance Ashland Coal's market
flexibility.
The Company does not now expect that coal prices will be as high during the
remainder of this decade as was anticipated in the mid-1980's, when the
dragline development at Hobet 07 commenced. To compensate for these
expected lower prices, it may be necessary, if costs at Hobet's 07 mine are
not reduced, for Hobet to suspend operations at such mine by the end of the
decade. At the Hobet 21 mine, costs are expected to be reduced by an
expansion which includes the development late in 1994 of contract
underground mines and the construction, scheduled to be completed early in
1995, of a raw coal handling and blending facility.
The National Bituminous Coal Wage Agreement of 1993 (Wage Agreement), which
covers the UMWA employees of Hobet and of Dal-Tex's subsidiaries, provides
for wage increases totaling $1.30 per hour over the first three years,
changes in the health care plan intended to reduce costs, and improvements
in work rules. Wage levels are subject to renegotiation after both the
third and fourth years of the contract. In connection with the Wage
Agreement, a Memorandum of Understanding was entered into that provides for
positions at mines of Ashland Coal's nonunion subsidiaries to be offered to
UMWA miners under certain conditions. The Company believes that the
provisions of the new Wage Agreement and the Memorandum, taken as a whole,
will not have an adverse effect on costs.
The Company continues to investigate acquisition opportunities involving
companies or projects having low-cost operations, low-sulfur coal, a good
contract position, and the potential for synergies or margin improvement.
Such acquisitions, if they occur, may be in the central Appalachian coal
fields, which is currently the Company's primary area of operations, or in
coal fields in other regions of the U.S.
11<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Liquidity and Capital Resources
The following is a summary of cash provided by or used in each of the
indicated types of activities during the nine months ended September 30,
1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
(In thousands)
<S> <C> <C>
Net cash provided by (used in)
Operating activities
Before changes in operating assets
and liabilities $77,272 $59,877
Changes in operating assets and liabilities (9,138) (13,007)
68,134 46,870
Investing activities . . . . . . . . . . . . (44,097) 39,703
Financing activities . . . . . . . . . . . . (22,880) (92,160)
Increase (decrease) in cash and cash equivalents $1,157 $(5,587)
</TABLE>
Cash provided by operating activities before changes in operating assets
and liabilities increased in 1994 from 1993 primarily because of higher
sales volume (discussed above). Cash used for changes in operating assets
and liabilities in 1994 reflects growth in accounts receivable balances,
largely offset by growth in the balances of accounts payable, accrued
expenses and income taxes payable. In 1993, reductions in the balances of
accounts payable, accrued expenses and income taxes payable were largely
offset by reduced accounts receivable balances. All of these changes in
1994 and 1993 were outgrowths of the UMWA strike.
Cash used during 1994 for investing activities primarily reflects capital
expenditures and a $16 million prepaid royalty payment expected to be
recovered after one year. Cash provided by investing activities in the
first nine months of 1993 resulted from the sale and leaseback of certain
mining equipment.
Dividend payments and payments on long-term borrowings constitute the cash
used in financing activities during 1994. Cash used in financing
activities during the first nine months of 1993 primarily represents
payments on long-term borrowings from funds provided by the sale and
leaseback of mining equipment and by cash flow from operations.
The Company's capital expenditures during the first nine months of 1994
were $29.7 million, which is $15.1 million higher than the comparable
period in 1993. During the first nine months of 1993, the Company deferred
capital expenditures to the extent possible in order to improve liquidity
in anticipation of and during the UMWA strike and in the event that the
Company was required to purchase its convertible Class C preferred stock,
or both. The Company estimates that capital expenditures may be as much as
$19 million during the remainder of 1994 and as much as $70 million in
1995.
Ashland Coal has a revolving credit agreement with a group of banks
providing for borrowings of up to $180 million. No borrowings were
outstanding under the facility at September 30, 1994. In November 1994, an
amended and restated revolving credit agreement is expected to replace the
current agreement. This amended facility will provide for borrowings of up
to $500 million until its termination in 1999. The Company has $175
million of indebtedness under senior unsecured notes maturing in 1996
through 2006. Ashland Coal also periodically establishes uncommitted lines
of credit with banks. These agreements generally provide for short-term
borrowings at market rates. At September 30, 1994, there were $277.9
million of such agreements in effect, and $88.3 million had been borrowed
under these agreements. The Company expects to repay approximately $45
million of indebtedness under the lines of credit during the remainder of
1994 and the first nine months of 1995.
12<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Ashland Coal believes that cash flow generated by operating activities
during the remainder of 1994 and in 1995 will be adequate to fund
anticipated capital expenditures and to reduce debt as discussed above.
Over the longer term, Ashland Coal believes that cash flow from operations
will be adequate to fund anticipated capital expenditures, to make
repayments of indebtedness under the lines of credit, and to pay scheduled
debt maturities and other commitments when due.
Contingencies
Under the 1977 Surface Mining Control and Reclamation Act, a mine operator
is responsible for postmining reclamation on every mine for at least five
years after the mine is closed. Ashland Coal performs a substantial amount
of reclamation of disturbed acreage as an integral part of its normal
mining process. All such costs are expensed as incurred. The remaining
costs of reclamation are estimated and accrued as mining progresses. The
accrual for such reclamation (included in other long-term liabilities and
in accrued expenses) was $2.3 million and $2.5 million at September 30,
1994, and December 31, 1993, respectively. In addition, the Company
accrues the costs of removal at the conclusion of mining of roads,
preparation plants, and other facilities and other costs (closing costs)
over the lives of the various mines. Closing costs, in the aggregate, are
estimated to be approximately $46.0 million. At September 30, 1994, and
December 31, 1993, the accrual for closing costs, which is included in
other long-term liabilities and in accrued expenses, was $6.7 million and
$4.7 million, respectively.
Ashland Coal is a party to numerous claims and lawsuits with respect to
various matters, such as personal injury claims, claims for property
damage, and claims by lessors, that are typical of the sorts of claims
encountered in the coal industry. The Company provides for costs related
to contingencies when a loss is probable and the amount is reasonably
determinable. The Company estimates that its probable aggregate loss as a
result of such claims is $3.2 million (included in other long-term
liabilities) and believes that probable insurance recoveries of $2.7
million (included in other assets) related to these claims will be
realized. The Company estimates that its reasonably possible aggregate
losses from all currently pending litigation could be as much as $4.1
million (before tax) in excess of the probable loss previously recognized.
However, the Company believes it is probable that substantially all of such
losses, if any occur, will be insured. After conferring with counsel, it
is the opinion of management that the ultimate resolution of these claims,
to the extent not previously provided for, will not have a material adverse
effect on the consolidated financial condition, results of operations, or
liquidity of the Company.
Ashland Coal has a claim outstanding against a construction contractor for
business interruption losses sustained in 1993 when a coal silo was
unavailable during repairs. Because of the uncertainties related to
recovery of this claim, Ashland Coal is not presently able to evaluate the
claim's potential materiality relative to net income.
Certain Risk Factors
Credit risk - Ashland Coal markets its coal principally to electric
utilities in the United States and Europe. As a group, electric utilities
are stable, well capitalized entities with favorable credit ratings.
Credit is extended based on an evaluation of each customer's financial
condition, and collateral is not generally required. Credit losses have
consistently been minimal.
Price risk - Selling prices for Ashland Coal's products are determined by
long-term contracts and the spot market. Selling prices in many of Ashland
Coal's long-term contracts are adjusted for changes in certain price
indices and labor costs, including wage rates and benefits under the Wage
Agreement, or any successor agreement. Some of the long-term also provide
for price adjustment if certain federal and state levies on coal mining and
processing are changed or if new laws,
13<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
rules, or regulations are enacted that increase the cost of mining,
processing, or transporting the coal under those contracts. Spot prices
fluctuate primarily because of changes in demand for and supply of coal.
Demand for coal is primarily driven by changes in demand for electricity in
the areas serviced by the utilities purchasing the Company's coal. Demand
for electricity in turn depends on the level of economic activity and other
factors such as temperature extremes. The supply of coal in the spot
market has historically been most affected by excess productive capacity in
the industry and short-term disruptions, frequently labor-related.
Ashland Coal's operating subsidiaries purchase substantial amounts of
power, fuel, and supplies, generally under purchase orders at current
market prices or purchase agreements of relatively short duration. The
employees of some of Ashland Coal's operating subsidiaries are covered by
the Wage Agreement, which provides for certain wage rates and benefits
during the first three years. Thereafter, wages and certain benefits are
subject to renegotiation. Employees of other operating subsidiaries are
not covered by a union contract but are compensated at rates representative
of prevailing wage rates in the local area. Among factors influencing such
wage rates is the Wage Agreement.
Although the Company cannot predict changes in its costs of production and
coal prices with certainty, Ashland Coal believes that in the current
economic environment of low to moderate inflation, the price adjustment
provisions in its long-term contracts will largely offset changes in the
costs of providing coal under those contracts. Further, because levels of
general price inflation are closely linked to levels of economic activity,
it is expected that changes in costs of producing coal for the spot market
may be offset in part by changes in spot coal prices. The Company attempts
to limit its exposure to depressed spot market prices which result from
industry overcapacity by entering into long-term coal supply agreements,
which ordinarily provide for prices in excess of spot market prices. In
the event of a disruption of supply, the Company might benefit from higher
spot prices if its own mines were not affected by the disruptions.
Interest rate risk - Ashland Coal has significant debt and lease
obligations which are linked to short-term interest rates. If interest
rates rise, Ashland Coal's costs relative to those obligations would also
rise. For example, the Company estimates that currently a 1% increase in
short-term interest rates would reduce income before income taxes by
approximately $1.8 million per year. Because an increase in interest rates
is usually an outgrowth of a higher level of economic activity and because
increased economic activity would likely lead to a higher demand for
electricity and consequently to higher spot prices for coal, Ashland Coal
believes that the negative effects of higher interest rates on Ashland
Coal's earnings could be partially offset by higher spot prices.
Additionally, the Company has the capability to fix its interest rates on
borrowings under its revolving credit agreement for periods up to one year
and may from time to time utilize certain types of derivative securities to
manage its interest rate risk. Either extending the term of short-term
borrowings at fixed rates or the use of derivatives may reduce the adverse
impact of increases in interest rates upon Ashland Coal. The Company is
not currently using derivatives to manage its interest rate risk.
Recurring Factors Affecting Results of Operations
The Company's customers frequently combine nuclear, natural gas and other
energy sources in their generating operations, and accordingly their demand
for coal varies depending on price and transportation, regulatory, and
other factors. Most of the Company's long-term contracts provide that the
customer may vary from the base annual quantity, usually by not more than
15%, the quantity of coal purchased under the contract in a particular
year. In addition, from time to time the Company has renegotiated
contracts after execution to extend contract term or to accommodate
changing market conditions.
The Company's coal production is subject to a variety of operational,
geologic, and weather-related factors that routinely cause production to
fluctuate. Operational factors include anticipated and unanticipated
events. For example, at Mingo Logan's longwall mine the longwall equipment
must be dismantled and moved to a new area of the mine whenever the
14<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
coal reserves in a segment of the mine--called a panel--are exhausted. The
size of a panel varies and therefore the frequency of moves can also vary.
Unanticipated events, such as the unavailability of essential equipment
because of breakdown or unscheduled maintenance, would also adversely
affect production. Geologic conditions within mines are not uniform.
Overburden ratios at the surface mines sometimes vary, as do roof and floor
conditions and seam thickness in the longwall mine. These variations can
be either positive or negative for production. Weather conditions can have
a significant effect on the Company's production, depending on the severity
and duration of the condition. For example, extremely cold weather
combined with substantial snow and ice accumulations may impede surface
operations directly and all operations indirectly by making it difficult
for workers and suppliers to reach the mine sites.
Hobet and subsidiaries of Dal-Tex are parties to the Wage Agreement. From
time to time in the past, most recently in 1993, strikes and work stoppages
have adversely affected production at the operations of Hobet and Dal-Tex,
and have caused disruptions at their mines. Currently, Mingo Logan, Mingo
Logan's Mountaineer Mining Company and Bearco divisions and certain
contract miners are parties to a National Labor Relations Board proceeding
to determine whether Mingo Logan's employees should be deemed jointly
employed with the contract miners' employees or whether the Mingo Logan and
contract miners' employees are employed by different employers. The
outcome of the proceeding would determine for purposes of voting on union
representation (if such vote is required by applicable labor law) whether
the Mingo Logan employees may vote separately, or will be required to vote
with employees of Mingo Logan's contract miners.
Any one or a combination of changing demand, fluctuating selling prices and
routine operational, geologic and weather-related factors, or labor
disruptions may occur at times or in a manner that causes results of
operations to deviate from expectations.
15<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
There is a pending suit in Circuit Court for Mingo County, West
Virginia, filed September 3, 1993, by the administrator of an estate of a
deceased employee of Mingo Logan. The employee died in an accident
involving the longwall mining equipment at the Mountaineer Mine. The suit
is based on product liability, breach of warranty, and negligence claims
against Mingo Logan and other unrelated defendants, including the equipment
manufacturer, and seeks compensatory and punitive damages of $15 million on
the product liability claim, $15 million on the breach of warranty claim,
and $15 million on the negligence claim, for a total of $45 million. The
proceedings are in the discovery stage. Mingo Logan denies responsibility
for the accident, and the Company believes that the claim will not have a
material adverse effect on its consolidated financial condition, results of
operations, or liquidity.
Item 5. Other Information
Mingo Logan conducts its operations on coal lands containing
approximately 91 million tons of proven and probable coal reserves as
of October 1, 1994. This total represents an increase of surface reserves
of 1 million tons and a decrease of deep reserves of 12 million tons,
in each case after adjustment for mining during 1994, from the total
reserves previously reported in those coal properties at December 31, 1993.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the period covered by this Report.
16<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amended report to be signed on its
behalf by the undersigned thereunto duly authorized.
ASHLAND COAL, INC.
(Registrant)
Date: November 14, 1994 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting Officer)
Date: November 14, 1994 /s/ Roy F. Layman
Roy F. Layman
Administrative Vice President
and Secretary
17<PAGE>
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