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 March 31, 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 May 8, 1995, there were 13,745,649 shares of registrant's common stock
outstanding.
1<PAGE>
Part I - Financial Information
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31 December 31
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,769 $1,120
Trade accounts receivable 67,130 62,362
Other receivables 3,615 9,124
Inventories 34,926 30,211
Prepaid royalties 15,317 15,568
Deferred income taxes 2,480 3,158
Other 4,025 4,020
129,262 125,563
OTHER ASSETS
Prepaid royalties 72,208 58,779
Coal supply agreements 34,624 35,527
Other 23,943 25,108
130,775 119,414
PROPERTY, PLANT, AND EQUIPMENT
Cost 864,867 858,138
Less accumulated depreciation,
depletion, and amortization 278,148 264,723
586,719 593,415
$846,756 $838,392
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 47,202 $35,988
Accrued expenses 31,397 33,352
Income taxes payable 2,697 305
Current portion of debt 40,210 43,963
121,506 113,608
LONG-TERM DEBT 193,787 200,000
ACCRUED POSTRETIREMENT BENEFITS 77,062 75,196
OTHER LONG-TERM LIABILITIES 48,873 48,217
DEFERRED INCOME TAXES 29,560 32,388
STOCKHOLDERS' EQUITY
Convertible preferred stock 67,841 67,841
Common stock 137 137
Paid-in capital 108,761 108,711
Retained earnings 199,229 192,294
375,968 368,983
$846,756 $838,392
See notes to condensed consolidated financial statements.
</TABLE>
2<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31
1995 1994
<S> <C> <C>
REVENUES
Coal sales $152,409 $132,875
Operating revenues 4,215 4,613
156,624 137,488
COSTS AND EXPENSES
Cost of coal sold 131,587 123,685
Operating expenses 2,671 2,853
Selling, general, and
administrative expenses 7,191 8,491
141,449 135,029
OPERATING INCOME 15,175 2,459
OTHER INCOME (EXPENSE)
Interest income 11 8
Interest expense (5,140) (5,485)
INCOME (LOSS) BEFORE INCOME TAXES 10,046 (3,018)
Income tax expense 1,005 39
NET INCOME (LOSS) $9,041 $(3,057)
Earnings (loss) per common share
Primary $.49 $(.18)
Fully diluted $.48 $(.18)
Dividends declared per common share $.115 $.10
See notes to condensed consolidated financial statements.
</TABLE>
3<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $9,041 $(3,057)
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion, and amortization 16,669 17,717
Prepaid royalties expensed 5,516 4,657
Deferred income taxes (2,150) (4,156)
(Gain) loss on disposition of assets (550) 181
Partnership costs in excess of cash
advances 75 250
Changes in operating assets and liabilities (5,260) (7,622)
CASH PROVIDED BY
OPERATING ACTIVITIES 23,341 7,970
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (10,129) (8,869)
Proceeds from sales 932 450
Advances on prepaid royalties (1,473) (1,320)
CASH USED IN
INVESTING ACTIVITIES (10,670) (9,739)
FINANCING ACTIVITIES
Proceeds from borrowings 359,314 200,803
Payments on borrowings (369,280) (197,489)
Dividends paid (2,106) (1,825)
Proceeds from sale of common stock 50 974
CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES (12,022) 2,463
Increase in cash and cash equivalents 649 694
Cash and cash equivalents at beginning
of period 1,120 556
Cash and cash equivalents at end of period $1,769 $1,250
See notes to condensed consolidated financial statements.
</TABLE>
4<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 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:
March 31, 1995 December 31, 1994
(In thousands)
Coal $17,747 $14,198
Supplies and other 17,179 16,013
$34,926 $30,211
NOTE D - DEBT
Debt consists of the following:
March 31, 1995 December 31, 1994
(In thousands)
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 25,000
Indebtedness to banks under
lines of credit 8,987 43,858
Other 10 105
233,997 243,963
Less current portion 40,210 43,963
Long-term debt $193,787 $200,000
5<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
NOTE E - COMPUTATION OF EARNINGS PER SHARE
Three Months Ended March 31
1995 1994
(In thousands, except per share data)
<S> <C> <C>
Net income (loss) $9,041 $(3,057)
Less: Common stock dividends 1,579 1,366
Preferred stock dividends 700 631
Undistributed earnings (loss) $6,762 $(5,054)
Primary
Average shares and equivalents outstanding:
Shares outstanding 13,725 13,664
Shares issuable upon
Conversion of preferred stock 4,587 4,587
Exercise of stock options 62 -
Total 18,374 18,251
Per share amounts:
Undistributed earnings (loss) $.37 $(.28)
Dividends (except preference dividends) .12 .10
Net income (loss) $.49 $(.18)
Fully Diluted
Average shares and equivalents outstanding:
Shares outstanding 13,725 13,664
Shares issuable upon
Conversion of preferred stock 5,212 5,212
Exercise of stock options 70 -
Total 19,007 18,876
Per share amounts:
Undistributed earnings (loss) $.36 $(.28)
Dividends (except preference dividends) .12 .10
Net income (loss) $.48 $(.18)<F1>
<FN>
<F1> Because the calculation of primary loss per share yields a more
dilutive result, that amount is shown here.
</FN>
</TABLE>
6<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 $2.8 million (included in other long-term liabilities) and
believes that probable insurance recoveries of $2.0 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.
7<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Quarter Ended March 31, 1995, Compared
to Quarter Ended March 31, 1994
Net income for the quarter ended March 31, 1995, was $9.0 million, compared
to a loss of $3.1 million for the quarter ended March 31, 1994.
Coal sales volume and revenue for the current quarter were 5.5 million tons
and $152.4 million, respectively, increases of 1.0 million tons and $19.5
million. These increases were mainly attributable to the effects of the
severe winter weather experienced 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. The
seven-month strike ended in December of 1993. Partially offsetting the
effect of higher sales volume was a $1.96 per ton decrease in the average
selling price. This decrease largely related to the expiration of a high-
priced contract at the end of 1994 and a scheduled price reduction on
another contract.
The cost of coal sold decreased $3.70 per ton. Costs were higher in the
first quarter of 1994 for the reasons discussed above and because the
longwall mine at Mingo Logan Coal Company experienced difficult geological
conditions during the first quarter of 1994.
Operating revenues declined $.4 million. Gains associated with the sale of
surplus mining equipment were $.7 million higher in the first quarter of
1995 than in the like period of 1994. Operating revenues in 1994 included
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 $1.3 million. This
decrease was primarily attributable to a reduction in sales contract
amortization as a result of the expiration of a sales contract at the end
of 1994. Interest expense decreased $.3 million, reflecting lower average
debt levels.
The Company recorded income tax expense of $1.0 million for the first
quarter of 1995, compared to less than $.1 million for the same period a
year ago. The income tax expense for the first quarter of 1995 was based
on the estimated annual effective income tax rate for 1995 of 10.0%. The
estimated effective tax rate for 1995 reflects greater projected
profitability 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 March 31, 1995, was $4.8
million higher 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 balance of trade receivables at December 31, 1994, reflects
the level of coal sales in December 1994. The balance of trade receivables
at March 31, 1995, represents more than five weeks of coal sales. The
receivables at that date include more receivables from export sales, which
typically bear longer payment terms, than has been the usual case in the
recent past. All significant customer accounts are being paid within
credit terms. If, as the Company expects, the level of the Company's
export sales increase in 1995, the number of weeks of sales in receivables
will likely trend higher.
Other receivables decreased from $9.1 million at December 31, 1994, to $3.6
million at March 31, 1995. The balance at December 31, 1994, was unusually
high because of amounts due for business interruption losses related to the
1993
8<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
Mingo Logan silo failure and a compensation agreement for an easement which
rendered certain coal unminable. In addition, the receivable under a
railroad freight contract was higher at December 31, 1994, than at March
31, 1995, because that contract provides for an annual payment in the
first quarter of the amount earned in the preceding calendar year.
Inventories at March 31, 1995, were $4.7 million higher than at December
31, 1994. This increase primarily related to higher levels of coal
inventory after start-up of improvements to the coal handling facilities at
Hobet Mining, Inc. s Hobet 21 complex and to normal fluctuations in coal
inventory levels. The additional storage, blending and rapid-loading
capabilities of the new Hobet 21 facilities are expected to result in
significant operational efficiencies.
The noncurrent balance of prepaid royalties increased $13.4 million from
the balance at December 31, 1994. This increase was largely because of an
annual royalty payment of $16 million due at the end of March 1995. The
amount of the payment was included in accounts payable at March 31, 1995.
Outlook
Ashland Coal anticipates that its average cost of sales per ton will
decline somewhat from the first quarter to the second quarter of 1995.
Sales volume is expected to increase moderately, but average selling price
will probably decline for two reasons. First, Cincinnati Gas & Electric
Company (CG&E) has temporarily reduced purchases under its contracts with
Ashland Coal because of a partial outage at one of CG&E s power plants.
The CG&E contracts are priced above current market prices. Repairs at
CG&E s plant are expected to be completed within three weeks, and the
deferred shipments will probably be made later in 1995. Second, because of
favorable geologic conditions, Mingo Logan s longwall mine is currently
producing coal well above the level that had been anticipated. This
additional production will be sold on the spot market, which, as discussed
below, is currently weak. It is expected that the profit generated by the
additional sales by Mingo Logan will mitigate the effect of the lower sales
to CG&E in the second quarter.
For 1995 as a whole, the Company expects earnings to improve significantly
over those of 1994. The average cost of coal sold is projected to decline
from the 1994 level primarily because of improved mining conditions,
increased blending of surfaced-mined raw coal with high-quality deep-mined
coal beginning at the end of the first quarter, and other operational
efficiencies. Those same factors will contribute to somewhat higher
volumes. The improvement in cost, however, will be largely offset by a
lower average selling price principally resulting from the expiration of
one important contract at the end of 1994 and a scheduled price reduction
on another contract effective at the beginning of 1995. The adverse effect
of the contract expiration will be mitigated by a reduction in selling
expense related to that contract.
The Company expects the effective tax rate for 1995 to be significantly
higher than the rate in 1994, because percentage depletion is expected to
be lower relative to income in 1995. The Company's effective tax rate is
sensitive to changes in profitability relative to the levels of percentage
depletion. 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.
Contracts with CG&E providing for the sale of coal at prices above current
market prices are scheduled to expire at the end of 1995, and it is likely
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. These expirations and
price reductions will have a material adverse effect on the Company. The
Company is continuing its efforts to reduce costs, increase production and
obtain long-term contracts to replace the expiring contracts, and it
continues to evaluate the amount of the benefits to be derived from these
efforts, as well as the timing for receipt of those benefits. In
addition, the Company is evaluating the optimum level of production for
1996 and the expected level of the Company's selling
9<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
prices for that year in light of the CG&E contract expirations, the
expected price reductions in the three other contracts, expected market
price and the likely mix of contract and spot sales. At present, the
Company is unable to predict whether the CG&E contract expirations and
contract price reductions will cause 1996 results of operations to decline
from anticipated 1995 levels.
Selling prices in the spot market stabilized in the second half of 1994 and
under normal conditions would have been expected to remain near that level.
However, the unseasonably mild weather experienced in the winter of 1994-
1995 have weakened current demand and prices, and a continuation of mild
weather could cause further short-term weakness. 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's exposure to spot market
prices is limited in 1995 because of its present level of sales
commitments.
Ashland Coal believes its export sales volume will increase significantly
in 1995 as the result of a better balance of supply and demand worldwide.
The Company does not expect that such increase in 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 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 the
dragline development at the Hobet 07 mine in Mingo and Logan Counties, West
Virginia, commenced. As a consequence of these expected lower prices, it
may be necessary, if costs at Hobet 07 are not reduced, for Hobet to
suspend operations at such mine.
The National Bituminous Coal Wage Agreement of 1993 (Wage Agreement), which
covers the UMWA employees of Hobet and of the subsidiaries of Dal-Tex Coal
Corporation, 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 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 recent
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 decision of the Acting Regional Director to
the NLRB, and Mingo Logan expects to prevail in its appeal. If Mingo Logan
does prevail on appeal, the January 19, 1995, representation election
results will be invalidated.
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, in
coal fields in other regions of the U.S., or abroad. The Company recently
terminated discussions with Quaker Coal Company, Inc. concerning the
possible purchase of that company's Kentucky operations.
10<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 three months ended March 31, 1995
and 1994:
1995 1994
(In thousands)
Net cash provided by (used in)
Operating activities
Before changes in operating assets
and liabilities $28,601 $15,592
Changes in operating assets and liabilities. (5,260) (7,622)
23,341 7,970
Investing activities. . . . . . . . . . . . . (10,670) (9,739)
Financing activities. . . . . . . . . . . . . (12,022) 2,463
Increase in cash and cash equivalents . . . . . $649 $694
Cash provided by operating activities before changes in operating assets
and liabilities increased in the first quarter of 1995 from 1994 primarily
because of higher costs and lower sales volume in 1994 that resulted from
the aftereffects of the UMWA strike and severe winter weather. Cash used
for changes in operating assets and liabilities decreased in the first
quarter of 1995 from 1994 primarily as the result of growth in accounts
receivable balances in the first quarter of 1994, largely offset by growth
in accounts payable balances during the same period. The balances of trade
receivables and accounts payable at December 31, 1993, reflect the level of
coal sales and mining activity in December 1993. Coal sales and mining
activity in December 1993 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 the first quarter of
1995 from 1994 primarily reflects a $1.3 million increase in capital
expenditures.
Payments on long-term borrowings from cash flow generated by operations
primarily accounted for the cash used in financing activities during 1995.
Proceeds from borrowings for the purpose of funding capital expenditures
and advances on prepaid royalties not funded by cash flow from operations
account for the cash provided by financing activities during the first
quarter of 1994.
The Company's capital expenditures during the first quarter of 1995 were
$10.1 million, which is $1.3 million higher than the comparable period in
1994. Approximately $3.4 million of the 1995 capital expenditures were
related to the recently completed construction of improvements to the Hobet
21 coal handling facilities. The Company estimates that during the
remainder of 1995, capital expenditures may be as much as $72 million.
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. Ashland Coal is currently negotiating a two-
year extension of this lease for most of the equipment. If the Company
completes this extension of the lease, it estimates that a portion of the
equipment, not included in the extension, will be repurchased in January
1996 for approximately $4 million. In the event that the lease is not
extended, the Company probably will exercise its option to purchase the
equipment in January 1996 for approximately $43 million. The Company
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 March 31, 1995, the Company had $50 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
11<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
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 March 31, 1995, there were $247.9 million of such
agreements in effect and $9 million of indebtedness outstanding under those
agreements. The Company expects to repay the $9 million outstanding under
these lines of credit and to make discretionary prepayments of
approximately $31 million on indebtedness under the revolving credit
agreement during the remainder of 1995 and the first quarter of 1996.
The Company expects cash flow provided by operating activities in 1995 to
be higher than the 1994 level as a result of increased sales stemming from
higher production volumes at Hobet and Dal-Tex. 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 $2.4 million and $2.2 million at March 31, 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 March 31, 1995, and December 31, 1994, the
accrual for closing costs, which is included in other long-term liabilities
and in accrued expenses, was $8.2 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 $2.8 million (included in other long-term
liabilities) and believes that probable insurance recoveries of $2.0
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.
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.
12<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
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
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.
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. 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 estimates that currently a 1% increase in
short-term interest rates would reduce income before income taxes by
approximately $1.6 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. Although the
Company is not currently using derivatives to manage its interest rate
risk, the board of directors has authorized such use of derivatives in a
limited fashion, and management is currently considering swapping some of
its fixed rate debt to floating. The increased exposure to interest rate
fluctuations would then be mitigated through the purchase of interest rate
caps.
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
13<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
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. 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.
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. 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.
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 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 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on
April 28, 1995, at the Ashland Coal Headquarters Building, 2205 Fifth
Street Road, Huntington, West Virginia, at 10:30 a.m.
(b) At such Annual Meeting, the holders of the Company's Common
Stock elected the following nominees for director:
Votes
Nominee For Withheld
Robert A. Charpie 11,493,280 58,649
Paul W. Chellgren 11,468,688 83,241
Thomas L. Feazell 11,468,262 83,667
Robert L. Hintz 11,493,286 58,643
Thomas Marshall 11,492,388 59,541
William C. Payne 11,468,788 83,141
Robert E. Yancey, Jr. 11,468,686 83,243
The holders of the Company's Class B and C Preferred Stock elected the
following nominees for director:
Votes
Nominee For Withheld
J. A. "Fred" Brothers 250 -
J. Marvin Quin 250 -
Juan Antonio Ferrando 250 -
(c) At such Annual Meeting, the Company's stockholders by a vote
of 15,066,219 for and 682,066 against, with 296,405 abstentions and 242,441
broker non-votes, approved the Ashland Coal, Inc. 1995 Stock Incentive
Plan. One million shares of Ashland Coal $.01 par value Common Stock is
reserved for issuance under this plan. Voting on this matter assumed, as
required by the Company's Amended By-Laws, conversion of the Class B and
Class C Preferred Stock into Common Stock immediately prior to the record
date for such meeting.
(d) At such Annual Meeting, the Company's stockholders by a vote
of 16,276,116 for and 4,654 against, with 6,361 abstentions, ratified the
appointment of Ernst & Young LLP as the Company's independent auditors for
1995. Voting on this matter assumed, as required by the Company's Amended
By-laws, conversion of the Class B and Class C Preferred Stock into Common
Stock immediately prior to the record date for such meeting.
15<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
The following report on Form 8-K was filed with the Securities and
Exchange Commission during the period covered by this Report:
Current Report on Form 8-K dated February 10, 1995, reporting
Ashland Inc. s purchase of all the Ashland Coal Class B
Preferred Stock from Saarbergwerke AG.
16<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: May 12, 1995 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting Officer)
Date: May 12, 1995 /s/ Roy F. Layman
Roy F. Layman
Administrative Vice President
and Secretary
17<PAGE>
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