SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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 August 8, 1994, there were 13,711,734 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> June 30 December 31
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,719 $556
Trade accounts receivable 56,276 45,513
Other receivables 4,421 4,467
Inventories 30,860 22,304
Prepaid royalties 15,974 15,098
Deferred income taxes 3,451 2,116
Other 4,292 4,829
117,993 94,883
OTHER ASSETS
Prepaid royalties 64,130 53,557
Coal supply agreements 41,488 47,032
Other 27,108 29,328
132,726 129,917
PROPERTY, PLANT, AND EQUIPMENT
Cost 836,938 829,089
Less accumulated depreciation,
depletion, and amortization 238,603 217,898
598,335 611,191
$849,054 $835,991
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $29,605 $27,302
Accrued expenses 33,573 28,036
Income taxes payable 4,857 -
Current portion of long-term debt 48,182 37,260
116,217 92,598
LONG-TERM DEBT 230,066 244,342
ACCRUED POSTRETIREMENT BENEFITS 71,559 67,845
OTHER LONG-TERM LIABILITIES 41,908 41,571
DEFERRED INCOME TAXES 36,614 42,584
DEFERRED GAIN ON SALE AND LEASEBACK OF ASSETS 3,338 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 108,202 107,087
Retained earnings 173,172 168,363
349,352 343,427
$849,054 $835,991
See notes to condensed consolidated financial statements.
</TABLE>
2<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
REVENUES
Coal sales $150,706 $129,767 $283,581 $263,626
Operating revenues 3,944 5,223 8,557 9,531
154,650 134,990 292,138 273,157
COSTS AND EXPENSES
Cost of coal sold 125,702 116,775 249,387 237,452
Operating expenses 2,917 2,487 5,770 5,346
Selling, general, and
administrative expenses 8,600 8,678 17,091 17,782
137,219 127,940 272,248 260,580
OPERATING INCOME 17,431 7,050 19,890 12,577
OTHER INCOME (EXPENSE)
Interest income 50 129 58 473
Interest expense (5,667) (5,939) (11,152) (12,370)
INCOME BEFORE INCOME
TAXES AND THE
CUMULATIVE EFFECT
OF CHANGES IN
ACCOUNTING 11,814 1,240 8,796 680
Income tax expense
(benefit) 295 (484) 334 (2,578)
INCOME BEFORE THE
CUMULATIVE EFFECT
OF CHANGES IN
ACCOUNTING 11,519 1,724 8,462 3,258
Cumulative effect of
changes in accounting - - - (18,836)
NET INCOME (LOSS) $11,519 $1,724 $8,462 $(15,578)
Earnings (loss) per
common share
Primary:
Earnings before
cumulative effect
adjustments $.62 $.07 $.44 $.12
Cumulative effect
adjustments - - - (1.11)
Net Income (Loss) $.62 $.07 $.44 $(.99)
Fully diluted:
Earnings before
cumulative effect
adjustments $.60 $.07 $.44 $.12
Cumulative effect
adjustments - - - (1.11)
Net Income (Loss) $.60 $.07 $.44 $(.99)
Dividends declared per
common share $.10 $.10 $.20 $.20
See notes to condensed consolidated financial statements.
</TABLE>
3<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended June 30
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $8,462 $(15,578)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation, depletion, and amortization 35,955 37,845
Prepaid royalties expensed 10,604 9,430
Deferred income taxes (7,305) (6,881)
Gain on disposition of assets (20) (253)
Cumulative effect of changes in accounting - 18,836
Partnership costs in excess of cash
advances 425 375
Changes in operating assets and
liabilities (4,802) (3,722)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 43,319 40,052
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (18,714) (9,939)
Proceeds from sales 1,137 652
Proceeds from sale and leaseback of
equipment - 64,182
Advances on prepaid royalties (17,688) (9,966)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (35,265) 44,929
FINANCING ACTIVITIES
Proceeds from long-term borrowings 376,887 726,582
Payments on long-term borrowings (380,241) (814,143)
Dividends paid (3,652) (3,405)
Proceeds from sale of common stock 1,115 1,066
NET CASH USED IN
FINANCING ACTIVITIES (5,891) (89,900)
Increase (decrease) in cash and cash
equivalents 2,163 (4,919)
Balance at beginning of period 556 37,609
Cash and cash equivalents at end of period $2,719 $32,690
See notes to condensed consolidated financial statements.
</TABLE>
4<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 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>
June 30, 1994 December 31, 1993
(In thousands)
<S> <C> <C>
Coal $13,955 $6,884
Supplies and other 16,905 15,420
$30,860 $22,304
</TABLE>
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 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 83,000 50,000
Indebtedness to banks under lines
of credit 20,056 56,332
Other 192 270
278,248 281,602
Less current portion 48,182 37,260
$230,066 $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 Six Months Ended
June 30 June 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 $11,519 $1,724 $8,462 $3,258
Less: Common stock dividends 1,369 1,357 2,735 2,712
Preferred stock dividends 633 608 1,264 1,213
Accretion of discount on
preferred stock (subject
to redemption) - 331 - 659
Undistributed earnings (loss)
less accretion before cumulative
effect adjustments 9,517 (572) 4,463 (1,326)
Cumulative effect of changes
in accounting - - - (18,836)
Undistributed earnings (loss)
less accretion $9,517 $(572) $4,463 $(20,162)
Primary
Average shares and equivalents
outstanding:
Shares outstanding 13,694 13,575 13,679 13,564
Shares issuable upon
Conversion of preferred stock 4,587 3,461 4,587 3,461
Exercise of stock options 65 - 33 -
Total 18,346 17,036 18,299 17,025
Per share amounts:
Undistributed earnings (loss)
less accretion before
cumulative effect adjustments $.52 $(.03) $.24 $(.08)
Dividends (except preference
dividends) .10 .10 .20 .20
Earnings before cumulative effect
adjustments .62 .07 .44 .12
Cumulative effect adjustments - - - (1.11)
Net income (loss) $.62 $.07 $.44 $(.99)
Fully Diluted
Average shares and equivalents
outstanding:
Shares outstanding 13,694 13,575 13,679 13,564
Shares issuable upon
Conversion of preferred stock 5,212 4,899 5,212 4,899
Exercise of stock options 65 - 33 -
Total 18,971 18,474 18,924 18,463
Per share amounts:
Undistributed earnings (loss)
less accretion before
cumulative effect adjustments $.50 $(.03) $.24 $(.08)
Dividends (except preference
dividends) .10 .10 .20 .20
Earnings before cumulative effect
adjustments .60 .07 .44 .12
Cumulative effect adjustments - - - (1.11)
Net income (loss) $.60 $.07 $.44 $(.99)<F1>
<FN>
<F1> Because the calculation of primary loss per share yields a more
dilutive result for the six months ended June 30, 1993, that result is
shown here.
</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 $3.1 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 $4.0 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. Recoveries under this
claim are not expected to be material.
8<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Results of Operations
Quarter Ended June 30, 1994, Compared
to Quarter Ended June 30, 1993
Net income for the quarter ended June 30, 1994, was $11.5 million compared
to $1.7 million for the quarter ended June 30, 1993. Last year's earnings
were negatively affected by the strike by the United Mine Workers of
America (UMWA), which commenced on May 18 against Hobet Mining, Inc. and
two subsidiaries of Dal-Tex Coal Corporation.
Coal sales volume and revenue for the current quarter were 5.1 million tons
and $150.7 million, respectively, increases of .7 million tons and $20.9
million compared to the same quarter a year ago. These increases are
mainly attributable to the effects of the strike by the UMWA on 1993's
production. Average selling prices increased $.37 per ton compared to the
same quarter a year ago.
The unit cost of coal sold decreased $1.60 per ton primarily because of the
impact of the strike in 1993. In addition, increased production from the
Mingo Logan Coal Company longwall mine and the resultant lower fixed cost
per ton had a significant favorable impact on average cost in the current
quarter.
Operating revenues decreased $1.3 million. Last year's operating revenues
included payments received pursuant to an assistance agreement among
members of the Bituminous Coal Operators' Association (BCOA) in connection
with the UMWA strike.
Selling, general, and administrative expenses were comparable to those of
the same quarter a year ago. A $1.0 million reduction in the amortization
of the carrying value of one of Dal-Tex's sales contracts was offset by
increased general and administrative expense largely due to higher West
Virginia franchise tax expense and increased compensation expense. The
decrease in the amortization of the Dal-Tex contract resulted from a change
in contract amortization rates as a result of the contract renegotiations
described below. Interest expense decreased $.3 million, reflecting lower
average debt levels.
Income tax expense in the second quarter of 1994 reflects an increase in
the estimated effective tax rate for the full year from a negative 1.3% as
of March 31 to a positive 3.8% as of June 30. The increase in the
estimated effective tax rate for 1994 reflects greater projected
profitability coupled with lower percentage depletion relative to income.
The effective tax rate is sensitive to changes in profitability because of
the effects of percentage depletion.
Six Months Ended June 30, 1994, Compared
to Six Months Ended June 30, 1993
For the six months ended June 30, 1994, net income was $8.5 million. For
the same period last year the Company earned $3.3 million before
adjustments for the cumulative effect of changes in accounting. After the
cumulative effect of those accounting changes, the Company lost $15.6
million. Last year's earnings were negatively affected by the UMWA strike
discussed above.
Coal sales volume of 9.6 million tons and coal sales revenue of $283.6
million for the first six months of 1994 were higher than for the same
period last year by .6 million tons and $20.0 million. These increases are
attributable to the strike-impaired levels of coal sales volume and revenue
at Hobet and Dal-Tex during 1993. Average selling prices increased $.29
per ton when compared to the same period a year ago.
9<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
The cost of coal sold in 1994 was $.37 per ton below the cost for the first
six months of 1993. Current year costs at Hobet and Dal-Tex have been
negatively affected by the severe winter weather and the aftereffects of
the UMWA strike experienced earlier in the year. With those conditions now
behind the Company, second quarter costs improved substantially. In
addition, Mingo Logan's costs continued to improve, primarily because of
increased production from the longwall mine.
Operating revenues net of operating expenses declined $1.4 million largely
due to the BCOA assistance payments received in 1993. Operating revenues
in 1994 include a $1.0 million recovery from a contractor for business
interruption losses related to the 1992 silo collapse at Mingo Logan's
preparation plant.
Selling, general, and administrative expenses decreased $.7 million
primarily due to a reduction in the Dal-Tex sales contract amortization,
partially offset by generally higher general and administrative expenses.
Interest expense decreased $1.2 million because of lower average debt
levels.
The effective tax rate for the first six months of 1994 is significantly
higher than last year's rate because of an improve-ment in the Company's
estimated profitability for 1994. The effective tax rate is sensitive to
changes in profitability because of the effects of percentage depletion.
Balance Sheet
The balance of trade accounts receivable at June 30, 1994, was $10.8
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 June
30, 1994, reflect the levels of coal sales in December 1993 and June 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 June 30, 1994 were $8.6 million higher than at December 31,
1993. This increase was primarily due to higher levels of coal inventory,
because of normal fluctuations in inventory levels and unusually low levels
at December 31, 1993, resulting from the drawdown of coal stockpiles during
the UMWA strike.
The noncurrent balance of prepaid royalties increased $10.6 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.
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, costs were much reduced in the second quarter, and the Company
expects to achieve further reductions in the cost of sales per ton during
the second half of 1994 because of lower overburden ratios to be
encountered at Hobet and Dal-Tex. Mingo Logan's cost of sales per ton in
the third quarter of 1994 is expected to rise significantly from the levels
achieved in the second quarter, but for the second half of 1994 is expected
to approximate the cost per ton for the first half. Overall, the Company
expects that its cost of sales per ton in the second half will be
significantly lower than in the first half and that the full year cost per
ton for 1994 will approximate the 1992 level. Because of the price
reductions resulting from the contract negotiations discussed below and a
somewhat higher proportion of lower priced spot coal, the Company expects
that its average selling price will be somewhat lower in the second half
than in the first half of 1994. 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
During the third quarter of 1994, the Company expects to realize net gains
in excess of $1 million primarily from the disposal of certain surplus
mining equipment. In addition, the Company expects that a subsidiary will
reach agreement with a utility whose transmission line crosses a leased
property and makes certain coal unminable for that utility to pay in excess
of $1 million as compensation for the coal rendered unminable.
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. Current spot market prices are being supported by rebuilding of
utility stockpiles, which stockpiles had been substantially depleted by the
strike, and by increasing electric demand arising from both recent weather
conditions and economic growth, which has increased electric generation,
much of it by utilities utilizing coal as a fuel. 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
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 will result in
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, but could be renegotiated prior to then, with a new price
based on current market prices. Because these contracts are priced above
current market prices, these expirations will have a significant 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 is expected to include the development late in 1994 of
contract underground mines and the construction, to be completed early in
1995, of a raw coal handling and blending facility.
The National Bituminous Coal Wage Agreement of 1993, 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 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 Agreement and the Memorandum, taken as a whole, will not have an
adverse effect on costs.
11<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
The Company expects to continue 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.
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 six months ended June 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 $48,121 $43,774
Changes in operating assets and liabilities (4,802) (3,722)
43,319 40,052
Investing activities . . . . . . . . . . . . (35,265) 44,929
Financing activities . . . . . . . . . . . . (5,891) (89,900)
Increase (decrease) in cash and cash
equivalents $2,163 $(4,919)
</TABLE>
Cash provided by operating activities before changes in operating assets
and liabilities increased somewhat in 1994 from 1993 primarily because of
higher sales volume (discussed above) and slightly higher prices. Cash
used in changes in operating assets and liabilities increased slightly in
1994 from 1993 primarily reflecting growth in accounts receivable and
inventory balances in 1994, largely offset by growth in the balances of
accrued expenses and income taxes payable during the same period.
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 half 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 six months of 1993 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 six months of 1994 were
$18.7 million, which is $8.8 million higher than the comparable period in
1993. During the first six months of 1993, the Company deferred capital
expenditures to the extent possible in order to improve liquidity in the
event that the Company either was adversely affected by a UMWA strike or
was required to purchase its convertible Class C preferred stock, or both.
The Company estimates that during the remainder of 1994, capital
expenditures may be as much as $39 million.
Ashland Coal has a revolving credit agreement with a group of banks
providing for borrowings of up to $200 million, of which $83 million was
borrowed at June 30, 1994. This commitment will be reduced in each
calendar quarter until termination in 1997. 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
12<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
generally provide for short-term borrowings at market rates. At June 30,
1994, there were $262.9 million of such agreements in effect, and $20.1
million had been borrowed under these agreements. The Company expects to
repay the borrowings under the lines of credit and to make discretionary
prepayments of approximately $28 million on indebtedness under the
revolving credit agreement during the remainder of 1994 and the first half
of 1995.
The Company expects 1994 cash flow provided by operating activities to
increase significantly from 1993 because of the conclusion of the UMWA
strike and a resultant increase in sales by Hobet and Dal-Tex during 1994.
Ashland Coal believes that 1994 cash flow generated by operating
activities 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 discretionary debt prepayments on
indebtedness under the revolving credit agreement, 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 exensed 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 June 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 June
30, 1994, and December 31, 1993, the accrual for closing costs, which is
included in other long-term liabilities and in accrued expenses, was $6.1
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 $3.1 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 $4.0
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.
On April 28, 1994, the UMWA filed with the National Labor Relations Board
(NLRB) a Petition for Certification of Representative (Petition) alleging
that Mingo Logan Coal Company and its Mountaineer Mining and Bearco
divisions, and Mahon Enterprises, Inc. (Mahon) and Golden Chance Mining,
Inc. (Golden Chance), both independent mining contractors of Mingo Logan,
are a joint employer or single integrated enterprise and certifying that
a majority of the employees of the integrated enterprise are seeking an
election. The NLRB, as is required by law, has held a hearing to
determine the appropriate bargaining unit for any election which may be
set for the appropriate employees to decide if they want to be
represented by the UMWA. The NLRB has not yet issued a ruling on this
petition. Mingo Logan has vigorously contested the issues of joint
employer and appropriateness of the bargaining unit, and the Company
believes that Mingo Logan has adequate defenses to the allegation that it
is a joint employer or single integrated enterprise with Mahon and Golden
Chance and that Mingo Logan will likely prevail on those issues.
Assuming Mingo Logan prevails and is found to be an independent
bargaining unit, Ashland Coal does not believe a majority of the
employees of Mingo Logan will vote for union representation.
13<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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. Recoveries under this claim are not expected
to be material.
Recurring Factors Affecting Results of Operations
Demand for the Company's coal primarily depends on the 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 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.
Selling prices for the Company's coal are based on long-term contracts and
the spot market. Selling prices in many of the Company's long-term
contracts are adjusted for changes in broad price indices and labor costs,
including wage rates and other benefits under the United Mine Workers-
Bituminous Coal Operators' Association National Bituminous Coal Wage
Agreement of 1993, or any successor agreement. Some of the Company's long-
term contracts also provide for price adjustment if certain federal and
state levies on coal mining and processing are changed. In addition, 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 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.
Any one or a combination of changing demand, fluctuating selling prices and
routine operational, geologic and weather-related factors may occur at
times or in a manner that causes results of operations to deviate from
expectations.
14<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 $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
The Company has entered into agreements with its directors and
officers whereby the Company agrees to indemnify such persons for any
losses incurred by them as a consequence of their service to the full
extent permitted by applicable law. The agreements also require the
Company to advance litigation expenses to a director or officer to
reimburse them for costs incurred in defending against a claim. The
Company's Bylaws provide that such indemnification is permitted in the
discretion of the Company's Board of Directors. Forms of the
indemnification agreements were previously filed with the Company's Form
10-Q for the quarter ended March 31, 1994.
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.
15<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: August 10, 1994 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting Officer)
Date: August 10, 1994 /s/ Roy F. Layman
Roy F. Layman
Administrative Vice President
and Secretary
16<PAGE>
