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, 1995
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 10, 1995, there were 13,750,358 shares of registrant's common
stock outstanding.
<PAGE>
Part I - Financial Information
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 December 31
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,451 $ 1,120
Trade accounts receivable 65,831 62,362
Other receivables 4,361 9,124
Inventories 35,884 30,211
Prepaid royalties 14,588 15,568
Deferred income taxes 3,405 3,158
Other 4,959 4,020
130,479 125,563
OTHER ASSETS
Prepaid royalties 67,442 58,779
Coal supply agreements 32,665 35,527
Other 21,633 25,108
121,740 119,414
PROPERTY, PLANT, AND EQUIPMENT
Cost 898,870 858,138
Less accumulated depreciation,
depletion, and amortization 308,763 264,723
590,107 593,415
$842,326 $838,392
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 35,334 $ 35,988
Accrued expenses 32,680 33,657
Current portion of debt 39,000 43,963
107,014 113,608
LONG-TERM DEBT 187,540 200,000
ACCRUED POSTRETIREMENT BENEFITS 78,787 75,196
OTHER LONG-TERM LIABILITIES 51,283 48,217
DEFERRED INCOME TAXES 25,487 32,388
STOCKHOLDERS' EQUITY
Convertible preferred stock 67,841 67,841
Common stock 138 137
Paid-in capital 109,172 108,711
Retained earnings 215,093 192,294
Treasury stock, at cost (29) -
392,215 368,983
$842,326 $838,392
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Coal sales $154,403 $150,027 $454,731 $433,608
Operating revenues 4,163 7,398 12,073 15,955
158,566 157,425 466,804 449,563
COSTS AND EXPENSES
Cost of coal sold 133,351 130,346 388,353 379,733
Operating expenses 2,896 2,842 8,432 8,612
Selling, general, and
administrative expenses 6,678 8,862 20,988 25,953
142,925 142,050 417,773 414,298
OPERATING INCOME 15,641 15,375 49,031 35,265
OTHER INCOME (EXPENSE)
Interest income 20 206 77 264
Interest expense (5,165) (5,658) (15,638) (16,810)
INCOME BEFORE
INCOME TAXES 10,496 9,923 33,470 18,719
Income tax expense (benefit) 1,281 (240) 3,648 94
NET INCOME $ 9,215 $10,163 $29,822 $18,625
Earnings per common share
Primary $ .49 $ .54 $ 1.59 $ .99
Fully diluted $ .48 $ .53 $ 1.55 $ .97
Dividends declared per
common share $ .115 $ .10 $ .345 $ .30
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $29,822 $18,625
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion, and amortization 52,191 53,809
Prepaid royalties expensed 15,880 15,899
Deferred income taxes (7,148) (10,204)
Gain on disposition of assets (355) (1,443)
Partnership costs in excess of cash advances 650 586
Changes in operating assets and liabilities 286 (9,138)
CASH PROVIDED BY
OPERATING ACTIVITIES 91,326 68,134
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (45,707) (29,665)
Proceeds from sales 1,476 1,711
Proceeds from equipment held for sale - 2,250
Advances on prepaid royalties (20,187) (18,393)
CASH USED IN
INVESTING ACTIVITIES (64,418) (44,097)
FINANCING ACTIVITIES
Proceeds from borrowings 800,679 817,295
Payments on borrowings (820,665) (835,420)
Dividends paid (7,023) (6,183)
Proceeds from sale of common stock 432 1,428
CASH USED IN
FINANCING ACTIVITIES (26,577) (22,880)
Increase in cash and cash equivalents 331 1,157
Cash and cash equivalents at
beginning of period 1,120 556
Cash and cash equivalents at end of period $1,451 $1,713
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(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, 1994. Results
of operations for the periods ended September 30, 1995, are not necessarily
indicative of results to be expected for the year ending December 31, 1995.
NOTE B - RECLASSIFICATIONS
Certain amounts in the 1994 financial statements have been reclassified to
conform with the classifications in the 1995 financial statements.
NOTE C - INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
(In thousands)
<S> <C> <C>
Coal $18,398 $14,198
Supplies 17,486 16,013
$35,884 $30,211
</TABLE>
NOTE D - DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
(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 40,000 25,000
Indebtedness to banks under lines of credit 8,927 43,858
Other 2,613 105
226,540 243,963
Less current portion 39,000 43,963
Long-term debt $187,540 $200,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E - COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $ 9,215 $10,163 $29,822 $18,625
Less: Common stock dividends 1,581 1,372 4,740 4,107
Preferred stock dividends 704 635 2,106 1,899
Undistributed earnings $ 6,930 $ 8,156 $22,976 $12,619
Primary
Average shares and equivalents
outstanding:
Shares outstanding 13,747 13,712 13,738 13,690
Shares issuable upon
Conversion of preferred stock 4,587 4,587 4,587 4,587
Exercise of stock options 66 71 62 45
Total 18,400 18,370 18,387 18,322
Per share amounts:
Undistributed earnings $ .37 $ .44 $ 1.24 $ .69
Dividends (except preference
dividends) .12 .10 .35 .30
Net income $ .49 $ .54 $ 1.59 $ .99
Fully Diluted
Average shares and equivalents
outstanding:
Shares outstanding 13,747 13,712 13,738 13,690
Shares issuable upon
Conversion of preferred stock 5,212 5,212 5,212 5,212
Exercise of stock options 69 78 65 47
Total 19,028 19,002 19,015 18,949
Per share amounts:
Undistributed earnings $ .36 $ .43 $ 1.20 $ .67
Dividends (except preference
dividends) .12 .10 .35 .30
Net income $ .48 $ .53 $ 1.55 $ .97
</TABLE>
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE F - CHANGE IN ACCOUNTING ESTIMATE
As the result of a revised actuarial estimate of the Company's accumulated
postretirement benefit obligations, postretirement benefit expense for 1995
has been reduced from the amount originally estimated. Postretirement
benefit expense was reduced $2.3 million in the third quarter of 1995.
This change increased net income for the three months and the nine months
ended September 30, 1995, by $1.4 million, or $.07 per share on a fully
diluted basis.
NOTE G - NONRECURRING OPERATING REVENUES
In the quarter ended September 30, 1994, the Company recognized
compensation for an easement which rendered certain coal unminable, gains
on the sale of surplus mining equipment, and an insurance settlement
related to a silo failure at Mingo Logan Coal Company. In the aggregate,
these revenues were $3.2 million.
NOTE H - 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 $2.6 million (included in other long-term liabilities) and
believes that probable insurance recoveries of $1.7 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 $3.4 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.
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Results of Operations
Quarter Ended September 30, 1995, Compared
to Quarter Ended September 30, 1994
Net income for the quarter ended September 30, 1995, was $9.2 million. In
the comparable quarter of 1994, net income was $10.2 million.
Gross profit on coal sales (selling price less cost of sales) on a per ton
basis was essentially unchanged from the third quarter of 1994 to the third
quarter of 1995, but would have been approximately $.42 per ton lower if
not for a reduction of $2.3 million in postretirement benefit expense
arising from a revised actuarial estimate. Gross profit per ton was
reduced primarily by the effects of scheduled price and volume reductions
on an important sales contract and the expiration of another contract at
the end of 1994. Largely offsetting those effects was a lower average cost
per ton, which was an outgrowth of recent cost reduction initiatives and
higher production levels (without appreciable changes in the amounts of
labor and equipment) at some of the mines. Sales volume rose 7%.
Operating revenues were $3.2 million lower in 1995 than in 1994. The third
quarter of 1994 included compensation for an easement which rendered
certain coal unminable, the gain on the sale of surplus mining equipment,
and an insurance settlement aggregating $3.2 million.
Selling, general, and administrative expenses declined $2.2 million,
primarily because of a reduction in sales contract amortization resulting
from the sales contract expiration at the end of 1994. Interest expense
decreased $.5 million, because of lower average debt levels.
Income tax expense was $1.3 million in the third quarter of 1995, but in
the same quarter of 1994 a small income tax benefit was recorded. As
discussed below, this increase relates to higher estimated profitability in
1995.
Nine Months Ended September 30, 1995, Compared
to Nine Months Ended September 30, 1994
Net income was $29.8 million for the nine months ended September 30, 1995,
and $18.6 million for the nine months ended September 30, 1994.
Gross profit on coal sales rose $.38 per ton from 1994 to 1995, as the
effects of the contract modifications and expiration discussed above were
more than offset by cost reductions. In addition to the factors affecting
third quarter comparisons, the effects of severe winter weather during the
first two months of 1994 and the operational aftereffects of the 1993
strike by the United Mine Workers of America (UMWA) on production during
the first quarter of 1994 adversely affected 1994 costs. The seven-month
strike ended in December 1993. Sales volume increased nearly 12%.
Operating revenues were $3.9 million lower in 1995 than in 1994,
principally because of the items affecting the quarterly comparison
described above and inclusion in 1994 of a $1.0 million recovery from a
contractor for business interruption losses related to the 1992 silo
collapse at the preparation plant of Mingo Logan Coal Company (Mingo
Logan).
Selling, general, and administrative expenses declined $5.0 million,
primarily because of the sales contract amortization in 1994 related to the
expired contract. Interest expense was reduced by $1.2 million,
principally because of lower average debt levels.
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Income tax expense rose to $3.6 million in 1995 from $.1 million in 1994.
The estimated annual effective tax rate for 1995 is currently 10.9%; the
effective rate at September 30, 1994, was near zero. The increase in
estimated effective tax rate reflects higher projected profitability in
1995 coupled with the effects of percentage depletion. 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 September 30, 1995, was $3.5
million more than the balance at December 31, 1994. 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 September 30, 1995, and
December 31, 1994, reflect the levels of coal sales in September 1995 and
December 1994, respectively. The Company is now exporting more coal than
was the case in the recent past. Depending on the timing and size of
individual export shipments, the number of weeks of sales in receivables
will vary and may increase because receivables from export sales typically
bear longer payment terms. All significant customer accounts are being
paid within credit terms.
Other receivables decreased from $9.1 million at December 31, 1994, to $4.4
million at September 30, 1995. The balance at December 31, 1994, was
unusually high because of amounts due for business interruption losses
related to the 1993 silo failure at Mingo Logan and a compensation
agreement for an easement which rendered certain coal unminable.
Inventories increased $5.7 million from December 31, 1994, to September 30,
1995. An increase in coal inventories accounted for $4.2 million of this
increase, and the remainder of the increase was in supplies. Coal
inventories increased because of higher inventories at export terminals in
support of increased export sales, higher inventory levels after start-up
of improvements to the coal handling facilities at the Hobet 21 complex of
Hobet Mining, Inc. (Hobet), and other normal fluctuations. Supplies
inventories increased in part because of seasonal factors and are expected
to decline somewhat over the remainder of 1995 from the levels at September
30, 1995.
The noncurrent balance of prepaid royalties increased $8.7 million from
December 31, 1994, to September 30, 1995. This increase was largely
because of an annual royalty payment of $16 million due at the end of March
1995.
Outlook
Ashland Coal expects that the fourth quarter of 1995 will be marked by a
continuation of the favorable production costs experienced in the first
three quarters, higher sales volume, and somewhat lower prices. Overall,
the quarter is expected to be comparable to the fourth quarter of 1994.
The Company believes that its earnings in 1996 will decrease significantly
from the projected high level of 1995. Contracts with Cincinnati Gas &
Electric Company (CG&E) providing for the sale of coal at prices above
current market prices are scheduled to expire at the end of 1995, and
selling prices will be reduced beginning in 1996 under three other
contracts as a result of contract provisions that permit the adjustment of
contract prices for changes in market conditions. In combination, these
expirations and price reductions will have a material adverse effect on the
Company. Current unfavorable market conditions are depressing the prices
at which the production tonnage previously committed to CG&E can be sold.
The Company is continuing its efforts to reduce costs, increase production,
and obtain long-term contracts to replace the expiring contracts.
Operational changes already made or planned will have a substantial
favorable effect on 1996 earnings, but realization of the full benefit of
those actions is not expected until 1997. In addition, somewhat higher
mining costs expected at Mingo Logan will offset some of the cost
reductions at other operations.
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Ashland Coal anticipates that its effective tax rate for 1996 may be
significantly higher than the rate for 1995. The Company currently expects
that it may be unable to recognize a substantial portion of its alternative
minimum tax credits (AMT credits) generated during 1996. The Company has
recognized the deferred tax benefit of all of its AMT credits generated
through 1994 and expects to recognize all of the AMT credits generated in
1995. Congress is currently considering legislation that may enhance the
ability of the Company to use its AMT credits.
The Company believes that the 1990 Clean Air Act Amendments, which became
effective January 1, 1995, have increased demand for low-sulfur coal of the
type that the Company sells. It appears, however, that any further effects
on spot market prices in the near term related to this increase in demand
will be mitigated by the effects of increased supply. The Company has very
little exposure to spot market prices for the remainder of 1995 because of
its present level of sales commitments. Because of its expected level of
spot and contract commitments for 1996, the Company does not expect that a
significant movement in spot prices during the year would have a material
effect on the Company s results of operations.
Ashland Coal s export sales volume has increased significantly in 1995
compared to 1994 as the result of a better balance of supply and demand
worldwide, but such increase in export sales has not had any significant
effect on the Company s results of operations nor is it expected to in the
near future. 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 and profit potential.
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
mountaintop removal mining using a dragline at the Hobet 07 mine in Mingo
and Logan Counties, West Virginia, commenced. As a consequence of these
expected lower prices and to improve profitability of the mine, on November
13, 1995, Hobet laid off 146 employees, approximately half the work force,
at Hobet 07 and will discontinue mountaintop removal mining at that mine.
Mining at the complex will be carried out through highwall mining, deep
mining, and small-scale surface mining. The Marion 8200 dragline that had
operated at Hobet 07 will be moved to the nearby operations of Dal-Tex Coal
Corporation (Dal-Tex) where better geologic conditions will allow a
dragline to operate profitably. The Company expects to recognize a charge
related to this layoff of approximately $.3 million before tax in the
fourth quarter of 1995.
The National Bituminous Coal Wage Agreement of 1993 (Wage Agreement), which
covers the UMWA employees of Hobet and of the subsidiaries of Dal-Tex,
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 Wage Agreement and the Memorandum, taken as a
whole, have not had and will not have an adverse effect on costs.
The labor forces at Mingo Logan and its Mountaineer Mining Company and
Bearco divisions are not currently unionized. However, in a National Labor
Relations Board (NLRB) proceeding, Mingo Logan and certain other employers
with whom Mingo Logan contracts for construction and mining services were
determined to be joint employers by the Acting Regional Director for NLRB
Region 9. As a consequence of this ruling, the bargaining unit at Mingo
Logan's Mountaineer Mine for purposes of collective bargaining has been
determined to be comprised of employees of Mingo Logan and its contractors,
and these employees voted together on January 19, 1995, on the question of
whether or not to be represented by the UMWA. The result of this vote,
which was required by the NLRB decision, is not yet known as the ballots
have been sealed pending appeal of the initial determination concerning the
appropriate bargaining unit. Mingo Logan has appealed the Acting Regional
Director's decision to the NLRB and expects to prevail in its appeal. If
Mingo Logan does prevail on appeal, the January 19, 1995, representation
election results will be invalidated.
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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 production and/or marketing
synergies and 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, in coal fields in other regions of the U.S., or
abroad.
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,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Net cash provided by (used in)
Operating activities
Before changes in operating assets
and liabilities . . . . . . . . . . . . . . $ 91,040 $ 77,272
Changes in operating assets and liabilities. 286 (9,138)
91,326 68,134
Investing activities. . . . . . . . . . . . . (64,418) (44,097)
Financing activities. . . . . . . . . . . . . (26,577) (22,880)
Increase in cash and cash equivalents . . . . . $ 331 $ 1,157
</TABLE>
Cash provided by operating activities before changes in operating assets
and liabilities increased in 1995 from 1994 primarily because of higher
levels of production, which permitted higher levels of sales. In addition,
the higher production was achieved with approximately the same amounts of
labor and equipment, so the cost per ton was reduced. As noted above,
production and costs were adversely affected in the first quarter of 1994
by the aftereffects of the strike by the UMWA and by severe winter weather.
Production and costs have also improved during 1995 because of cost
reduction initiatives described above. Cash used for changes in operating
assets and liabilities decreased in 1995 from 1994 primarily as the result
of growth in accounts receivable balances in 1994. The balance of trade
receivables at December 31, 1993, reflects the level of coal sales in
December 1993, a period when coal sales were markedly lower because of the
strike by the UMWA and the aftereffects of the strike once it was settled.
The increase in cash used for investing activities in 1995 from the 1994
level primarily reflects a $16.0 million increase in capital expenditures.
The increase in cash used for financing activities in 1995 as compared to
1994 reflects somewhat higher repayment of borrowings and an increase in
dividends, partially offset by lower proceeds from the sale of common
stock.
The Company's capital expenditures during the first nine months of 1995
were $45.7 million, which compares to $29.7 million during the comparable
period of 1994. The Company estimates that during the remainder of 1995,
capital expenditures may be as much as $27 million.
Ashland Coal s Board of Directors has authorized the repurchase, from time
to time, of up to one million shares of Ashland Coal s common stock.
Shares acquired may be used for general corporate purposes. The Company
expects to fund any such share repurchases from cash flow from operations
or from borrowings under its existing borrowing facilities, or both.
On January 29, 1993, mining equipment valued at approximately $64 million
being used by Dal-Tex and Hobet was sold and leased back under an operating
lease for a three year term. In May 1995 the Company completed the
negotiation of
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
a two-year extension of that lease for most of the equipment. The
equipment not included in the extension may be repurchased at the Company's
option for approximately $4 million in January 1996. The portion of the
equipment included in the two-year extension may be repurchased at the
Company's option in January 1998 for approximately $28 million. Ashland
Coal believes that such purchase, if it should occur, would be funded under
the Company's revolving credit agreement or lines of credit.
Ashland Coal has a revolving credit agreement with a group of banks that
provides for borrowings of up to $500 million until the agreement s
termination in 1999. At September 30, 1995, the Company had $40 million
borrowed under this agreement. The Company also had $175 million of
indebtedness under senior unsecured notes maturing in 1996 through 2006.
Certain of these senior notes amounting to $22.1 million are due on May 15,
1996. The Company anticipates that it will fund this payment under its
revolving credit agreement. Ashland Coal periodically establishes
uncommitted lines of credit with banks. These agreements generally provide
for short-term borrowings at market rates. At September 30, 1995, there
were $270 million of such agreements in effect with borrowings outstanding
of $8.9 million. The Company expects to make payments on the indebtedness
under the lines of credit and discretionary prepayments on currently
existing indebtedness under the revolving credit agreement totalling
approximately $17 million from cash flow generated by operations over the
next 12 months.
The Company expects cash flow provided by operating activities to be
reduced in 1996 from the 1995 level because of the expiration of the CG&E
contracts and price adjustments under other contracts as discussed above.
Ashland Coal believes that over the next 12 months 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 reduce the level of long-term
borrowings, and to pay 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 $2.2 million at September 30,
1995, and December 31, 1994, 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 $39.0 million. At September 30, 1995, and
December 31, 1994, the accrual for closing costs, which is included in
other long-term liabilities and in accrued expenses, was $10.1 million and
$7.7 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 $2.6 million (included in other long-term
liabilities) and believes that probable insurance recoveries of $1.7
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 $3.4
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.
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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 contracts
permit adjustment in contract price for changes in market conditions. Low
market prices such as those that have prevailed recently raise the price
risk under these contracts. Some of the long-term contracts also provide
for price adjustment if certain federal and state levies on coal mining and
processing are changed or if new laws, 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 in the short term 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.
The coal industry is highly competitive, and Ashland Coal competes with a
large number of other coal producers. Ashland Coal believes that it can
compete effectively with other coal producers in the eastern United States
because of the Company s low production costs, high-quality reserves, and
ability to accommodate customers transportation requirements. Factors
such as utility deregulation and new clean air regulations, however, have
had, or will have, the effect of intensifying competition between producers
in the eastern United States and producers in other regions, including
other countries. Producers in some of those regions, because of geological
conditions, local labor costs, or access to inexpensive transportation
modes, are able to produce and deliver coal into some markets at a lower
cost than the Company. These competitive factors have an impact on the
Company s pricing.
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 its 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, except for those costs
related to changes in productivity. 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, depending on the
level of its sales commitments, benefit from higher spot prices if its own
mines were not affected by the disruption.
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
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
estimates that currently a 1% increase in short-term interest rates would
reduce income before income taxes by approximately $1.3 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 12 months 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 board of directors has authorized the use of derivatives in a
limited fashion for the management of interest rate risk. The Company has
swapped $5 million of its fixed-rate debt for floating-rate debt. The
increased exposure to interest rate fluctuations has been mitigated through
the purchase of an interest rate cap.
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, most of the Company s contracts contain a
force majeure clause, which in the event of an act of God or other event
beyond the control of the customer, allows the customer to suspend its
performance under the contract for the duration of the effect of the event.
Sometimes the contract does not require the customer to make up purchases
not made by reason of force majeure. Some contracts contain "reopener"
provisions that require the parties to reach new agreements regarding price
in order to maintain the contract, and 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 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 also
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, strikes and work stoppages have adversely
affected production at the operations of Hobet and Dal-Tex and have caused
disruptions at their mines. Any future strike or work stoppage that
affected both Hobet and the subsidiaries of Dal-Tex for a prolonged period
would have a significant adverse effect on the Company's results of
operations. If the UMWA is successful in unionizing Mingo Logan (see
discussion above), Mingo Logan also would be subject to the types of labor
disruptions described here.
Any one or a combination of changing demand, fluctuating selling prices,
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. Any event disrupting production
at Mingo Logan for a prolonged period would have a significant adverse
effect on the Company's results of operations because of the high volume of
coal produced by Mingo Logan and the relatively high contribution to
operating income by the sale of each ton of that coal.
<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 case is in discovery, and a trial has been scheduled for late 1995.
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 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the period covered by this Report:
Current Report on Form 8-K dated September 6, 1995, reporting
the issuance by Hobet Mining, Inc., an independent operating
subsidiary of Ashland Coal, of notices under the Worker
Adjustment and Retraining Notification Act at Hobet s 07
surface mine and Pine Creek Preparation Plant.
Current Report on Form 8-K dated October 19, 1995, reporting
earnings for the quarter ended September 30, 1995, and
discussing Ashland Coal s earnings expectations for the fourth
quarter of 1995 and for 1996.
Current Report on Form 8-K dated October 27, 1995, reporting
authorization by Ashland Coal s Board of Directors for the
repurchase by Ashland Coal of up to one million shares of
Ashland Coal common stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASHLAND COAL, INC.
(Registrant)
Date: November __, 1995 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting Officer)
Date: November __, 1995 /s/ Roy F. Layman
Roy F. Layman
Administrative Vice President
and Secretary
<PAGE>
Ashland Coal, Inc.
Form 10-Q for Quarter Ended September 30, 1995
INDEX TO EXHIBITS
ITEM
27 Financial Data Schedule
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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