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 JUNE 30, 1996
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 9, 1996, there were 13,517,158 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
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,571 $1,752
Trade accounts receivable 51,470 76,442
Other receivables 2,796 6,890
Inventories 33,104 26,038
Prepaid royalties 18,820 16,622
Deferred income taxes 3,406 3,512
Other 3,183 3,349
115,350 134,605
OTHER ASSETS
Prepaid royalties 69,138 61,979
Coal supply agreements 29,734 31,498
Other 21,234 21,613
120,106
115,090
PROPERTY, PLANT, AND EQUIPMENT
Cost 896,194 905,842
Less accumulated depreciation, depletion,
and amortization 315,681 320,135
580,513 585,707
$815,969 $835,402
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $29,548 $30,595
Accrued expenses 31,265 37,279
Income taxes payable 1,233 -
Current portion of debt 45,041 42,000
107,087 109,874
LONG-TERM DEBT 154,246 172,975
ACCRUED POSTRETIREMENT BENEFITS
OTHER THAN PENSION 81,089 78,951
OTHER LONG-TERM LIABILITIES 53,919 50,493
DEFERRED INCOME TAXES 22,452 25,230
STOCKHOLDERS' EQUITY
Convertible preferred stock 67,841 67,841
Common stock 138 138
Paid-in capital 109,617 109,257
Retained earnings 225,016 224,574
Treasury stock, at cost (5,436) (3,931)
397,176 397,879
$815,969 $835,402
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
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Coal sales $136,810 $147,919 $276,003 $300,328
Operating revenues 1,990 3,695 6,121 7,910
138,800 151,614 282,124 308,238
COSTS AND EXPENSES
Cost of coal sold 121,990 123,415 248,721 255,002
Operating expenses 2,782 2,865 5,179 5,536
Selling, general, and
administrative expenses 6,388 7,119 14,368 14,310
131,160 133,399 268,268 274,848
OPERATING INCOME 7,640 18,215 13,856 33,390
OTHER INCOME (EXPENSE)
Interest income 213 46 227 57
Interest expense (4,818) (5,333) (9,616) (10,473)
INCOME BEFORE
INCOME TAXES 3,035 12,928 4,467 22,974
Income tax expense
(benefit) (55) 1,362 (138) 2,367
NET INCOME $3,090 $11,566 $4,605 $20,607
Earnings per common share
Primary $.16 $.62 $.24 $1.10
Fully diluted $.16 $.60 $.24 $1.07
Dividends declared per
common share $.115 $.115 $.23 $.23
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
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $4,605 $20,607
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion, and amortization 35,521 34,948
Prepaid royalties expensed 10,237 10,681
Deferred income taxes (2,483) (5,186)
Gain on disposition of assets (619) (399)
Partnership costs in excess of cash
advances 236 417
Changes in operating assets and
liabilities 21,125 (1,018)
CASH PROVIDED BY
OPERATING ACTIVITIES 68,622 60,050
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (29,418) (20,975)
Proceeds from sales 1,447 1,359
Advances on prepaid royalties (18,752) (18,242)
CASH USED IN
INVESTING ACTIVITIES (46,723) (37,858)
FINANCING ACTIVITIES
Proceeds from borrowings 596,660 605,244
Payments on borrowings (612,432) (619,197)
Dividends paid (4,163) (4,214)
Proceeds from sale of common stock 360 273
Purchase of common stock (1,505) -
CASH USED IN
FINANCING ACTIVITIES (21,080) (17,894)
Increase in cash and cash equivalents 819 4,298
Cash and cash equivalents at beginning
of period 1,752 1,120
Cash and cash equivalents at end of period $2,571 $5,418
See notes to condensed consolidated financial statements.
</TABLE>
4<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(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, 1995. Results of
operations for the periods ended June 30, 1996, are not necessarily
indicative of results to be expected for the year ending December 31, 1996.
NOTE B - INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(In thousands)
<S> <C> <C>
Coal $16,259 $8,536
Supplies 16,845 17,502
$33,104 $26,038
</TABLE>
NOTE C - DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(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
Indebtedness to banks under revolving
credit agreement - 30,000
Indebtedness to banks under lines
of credit 44,279 7,315
Other 2,108 2,660
199,287 214,975
Less current portion 45,041 42,000
Long-term debt $154,246 $172,975
</TABLE>
5<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
NOTE D - COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $3,090 $11,566 $4,605 $20,607
Less: Common stock dividends 1,555 1,580 3,108 3,159
Preferred stock dividends 702 702 1,403 1,402
Undistributed earnings $833 $9,284 $94 $16,046
Primary
Average shares and equivalents
outstanding:
Shares outstanding 13,519 13,742 13,520 13,734
Shares issuable upon
Conversion of preferred
stock 4,587 4,587 4,587 4,587
Exercise of stock options 36 57 30 59
Total 18,142 18,386 18,137 18,380
Per share amounts:
Undistributed earnings $.04 $.50 $.01 $.87
Dividends (except preference
dividends) .12 .12 .23 .23
Net income $.16 $.62 $.24 $1.10
Fully Diluted
Average shares and equivalents
outstanding:
Shares outstanding 13,519 13,742 13,520 13,734
Shares issuable upon
Conversion of preferred
stock 5,212 5,212 5,212 5,212
Exercise of stock options 55 57 43 63
Total 18,786 19,011 18,775 19,009
Per share amounts:
Undistributed earnings $.04 $.48 $.01 $.84
Dividends (except preference
dividends) .12 .12 .23 .23
Net income $.16 $.60 $.24 $1.07
</TABLE>
6<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E - 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 $2.9 million (included in other long-term liabilities) and
believes that probable insurance recoveries of $1.5 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 $4.2 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 August 6, 1996, the Company, its Hobet Mining, Inc. subsidiary and an
officer of the Company were served with the complaint of Addington
Enterprises, Inc. ("Addington"), certain of its affiliates, and an
individual contractor of one of the Addington affiliates alleging various
causes of action (including breach of contract, fraud and conversion) and
related damages of $72 million plus punitive damages. The damage claims
arose in connection with highwall mining operations by Addington at the
Hobet 07 and Hobet 21 mining complexes, which operations were terminated by
Addington at Hobet 07 on or about December 27, 1995, and at Hobet 21 on or
about February 20, 1996. Such damage claims are presently pending in the
Circuit Court of Boone County, West Virginia. The contractor for Addington
is also seeking declaratory relief in connection with a security agreement
covering certain equipment belonging to such contractor. The parties
defendant intend to vigorously defend the claims, and the Company believes
the claims are without merit.
7<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Reference is made to the "Contingencies," "Certain Risk Factors" and
"Factors Routinely Affecting Results of Operations" sections below in this
Management s Discussion and Analysis for discussion of important factors
that could cause actual results to differ from the projections,
expectations, and other nonhistorical information contained herein. The
earnings projection for 1997 assumes (among other factors) that a dragline
relocation at the Hobet 21 mining complex occurs as planned in the fourth
quarter of 1996 and that expected cost savings at the Hobet 21 and Dal-Tex
mining complexes are realized.
Results of Operations
Quarter Ended June 30, 1996, Compared
to Quarter Ended June 30, 1995
Net income for the quarter ended June 30, 1996, was $3.1 million, compared
to net income of $11.6 million for the quarter ended June 30, 1995.
Gross profit on coal sales (selling price less cost of sales) on a per ton
basis declined significantly from the level achieved in the quarter ended
June 30, 1995. That decline was chiefly the result of the expiration at
the end of 1995 of contracts with Cincinnati Gas & Electric Company (CG&E)
providing for the sale of coal at prices considerably above current market
prices and the reduction of selling prices at the beginning of 1996 under
three other contracts as a result of price reopener provisions in those
contracts. In addition, the cost per ton of coal sold rose slightly from
the very low costs achieved in the second quarter of 1995. This increase
is attributable to increased contract mining costs at the Mingo Logan Coal
Company (Mingo Logan) mining complex, a three-day cessation of operations
at all union mining complexes in West Virginia during a memorial period
declared by the United Mine Workers of America, increased use of
higher-cost purchased coal resulting from production shortfalls at the
mines of Hobet Mining, Inc. (Hobet), and adverse localized mining
conditions at one of the Kentucky mines. Coal sales volume declined .2
million tons (3%), to 5.3 million tons.
Operating revenues declined $1.7 million. This decrease was primarily
attributable to lower throughput at the Company's Dominion Terminal
Associates coal loading facility and a reduction in railroad freight
contract revenue resulting from lower shipments from Hobet 07 and lower
export volume.
Selling, general, and administrative expenses declined $.7 million
principally because of lower professional fees. Interest expense decreased
$.5 million because of lower average debt levels.
The Company s income tax expense declined from $1.4 million in 1995 to a
negative $.1 million in the 1996 quarter. The estimated effective tax rate
for 1996 reflects lower 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.
Six Months Ended June 30, 1996, Compared
to Six Months Ended June 30, 1995
Net income was $4.6 million for the six months ended June 30, 1996, and
$20.6 million for the six months ended June 30, 1995.
Gross profit on coal sales declined $1.55 per ton mainly because of the
effects of the CG&E contract expiration and the reduction of selling prices
under three other contracts discussed above. In addition, the average cost
per ton increased slightly because of approximately $3 million of charges
related to the Company's restructuring of its support functions. Absent
the effect of those charges, average cost per ton would have been level
with 1995. Sales volume decreased .4 million tons (4%), to 10.5 million
tons.
8<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
Operating revenues were $1.8 million lower in 1996 than in 1995,
principally because of the items affecting the quarterly comparison
described above partially offset by a $1.1 million payment received upon an
agreed reduction of 1996 deliveries under a sales contract.
Selling, general, and administrative expenses rose slightly as
restructuring charges of $.7 million recorded in the first quarter of 1996
were offset by decreases in a number of cost categories. Interest expense
was reduced by $.9 million, principally because of lower average debt
levels.
Income tax expense decreased to a negative $.1 million in 1996 from $2.4
million in 1995. As discussed above, this decrease relates to lower
estimated profitability in 1996.
Balance Sheet
The balance of trade accounts receivable at June 30, 1996, was $25.0
million less than the balance at December 31, 1995, primarily because of a
lower level of sales in June 1996 than in December 1995. Until recently,
Ashland Coal's trade accounts receivable balance generally had represented
four to five weeks of coal sales. The actual level at any date is
dependent upon the specific customer accounts active at that date and the
payment terms for those accounts. The expiration of the CG&E contracts,
which had payment terms particularly favorable to the Company, has affected
the balance of trade receivables. Currently, the balance of trade
receivables represents between five and six weeks of sales. All
significant customer accounts are being paid within credit terms.
The balance of other receivables has declined $4.1 million since December
31, 1995, because of lower revenues under railroad freight contracts.
Inventories were $7.1 million higher at June 30, 1996, than at December 31,
1995. This increase is primarily related to higher inventory at export
terminals in preparation for shipments in July 1996. The remainder of the
increase represented normal fluctuations in inventory levels and a recovery
from a lower-than-usual level at December 31, 1995.
The noncurrent balance of prepaid royalties increased $7.2 million from the
balance at December 31, 1995. This increase was largely because of an
annual royalty payment of $16 million due at the end of March 1996.
Accrued expenses at June 30, 1996, were $6.0 million lower than at December
31, 1995, because of seasonal and other normal fluctuations in accrued
amounts.
Outlook
The Company believes that its earnings in 1996 will decrease significantly
from the level of 1995 because of the material adverse effect of the
expiration of the CG&E contracts and the price adjustments on other
contracts at the beginning of 1996. The tonnage that had been committed to
CG&E has now been committed for sale to other customers under long-term
sales contracts at then current market prices. Operational changes already
made (including the relocation of a large dragline from the Hobet 07 mining
complex to the Dal-Tex mining complex) or planned are expected to have a
substantial favorable effect on earnings beginning in the fourth quarter of
1996, but realization of the full benefits of these actions is not expected
until 1997. In addition, somewhat higher mining costs expected at Mingo
Logan later in 1996 will offset some of the cost reductions at other
operations.
Early in 1996, the Company began a comprehensive study of the Company s
structure and processes with a view to reducing administrative expenses now
and in the future. This study has resulted in the elimination of 50
salaried positions at Ashland Coal and several of its subsidiaries, as well
as the consolidation of some of its West Virginia operations. The
9<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
study is continuing and additional changes, including additional force
reductions, are anticipated. The savings anticipated from the
restructuring are expected to be significant, but the benefits for 1996
will be offset by related restructuring charges. Such charges have
totalled approximately $4 million (before tax) through June 30, 1996.
Provided the required permits are timely issued, the Company expects that
the dragline at the Hobet 21 complex will have moved across the Mud River
by the end of 1996 to an area with much more favorable geologic conditions
than those currently being experienced. This move is anticipated to result
in higher production at lower per ton cost. Although some benefit is
expected to be derived in the fourth quarter of 1996 from the move of
equipment that mines in advance of the dragline, because of the timing of
the dragline move, significant benefit will not be experienced until 1997.
The dragline that was dismantled at Hobet 07 and re-erected at the Dal-Tex
complex, where geologic conditions are superior to those at Hobet 07, is
now in the start-up phase at Dal-Tex. Because of the operation of the
dragline, production at Dal-Tex is expected to increase significantly and
cost per ton is expected to be significantly reduced. The Company's
expectations for increased production and lower cost per ton at the Dal-Tex
and Hobet 21 operations also assume no unanticipated labor or
transportation disruptions or major equipment problems, and the absence of
certain other operational, geologic, and weather-related factors that can
adversely affect production. See "Factors Routinely Affecting Results of
Operations" below.
Based on its expectation of lower costs per ton and higher production as
the result of the dragline relocations, the Company believes that 1997
earnings will rebound strongly from the level of earnings expected for
1996. The ongoing program to reengineer business processes also is
anticipated to contribute to the improvement in 1997. In addition to the
contingencies affecting production and costs at the Company's mines
discussed above, the Company's earnings expectations also assume stable
coal prices and wage rates, among other factors discussed below in "Factors
Routinely Affecting Results of Operations."
Ashland Coal now anticipates that its effective tax rate for 1996 will be
slightly negative. The Company s effective rate reflects lower
profitability. In addition, the Company currently expects to be able to
recognize alternative minimum tax credits generated during 1996.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 encourages, but does not require, companies to
recognize compensation expense related to the grants of stock or stock
options to employees under plans such as the Company's 1988 and 1995 Stock
Incentive Plans. Companies choosing not to adopt SFAS No. 123 will
continue to account for such grants using the accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB25), but will be required to make certain disclosures about
their plans in their year-end financial statements, including pro forma net
income and earnings per share under the new method. The Company has
elected to continue to follow APB25 for expense recognition and to make the
disclosures required by SFAS No. 123. Accordingly, SFAS No. 123 will have
no effect on the Company's earnings or financial position.
The Company believes that Phase I sulfur dioxide emission reductions
required by 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. However, it appears that any further effects on market
prices in the near term related to this increase in demand will be
mitigated by the effects of increased supply of competing coals. A
combination of prolonged cold last winter and increased economic activity
have resulted in more coal being burned to produce electricity. This has
resulted in recent increases in spot market prices. Spot price movements
for the remainder of 1996 will be affected by the weather. However,
because of its level of spot and contract commitments for 1996, the Company
does not expect that a significant movement in spot prices during the
remainder of 1996 would have a material effect on the Company's results of
operations for 1996.
10<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
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. Metallurgical coal sales
do, however, enhance Ashland Coal's market flexibility and profit
potential.
The National Bituminous Coal Wage Agreement of 1993 (Wage Agreement), which
covers the employees of Hobet represented by the United Mine Workers of
America (UMWA), provides for wage increases totalling $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 and certain benefits
are subject to renegotiation after both the third and fourth years of the
contract. It is possible that such a renegotiation may commence in the
second half of 1996. 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. Assuming that wages and benefits are not materially
increased in a 1996 renegotiation, the Company believes that the provisions
of the current Wage Agreement and the Memorandum, taken as a whole, 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.
The Company continues to investigate merger and 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 transactions, if they
occur, may involve coal properties in the central Appalachian coal fields,
which is currently the Company's only 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 six months ended June 30, 1996 and
1995:
1996 1995
(In thousands)
Net cash provided by (used in)
Operating activities
Before changes in operating assets
and liabilities $47,497 $61,068
Changes in operating assets and
liabilities 21,125 (1,018)
68,622 60,050
Investing activities (46,723) (37,858)
Financing activities (21,080) (17,894)
Increase in cash and cash equivalents $819 $4,298
Cash provided by operating activities before changes in operating assets
and liabilities decreased in the first half of 1996 from the level in 1995
primarily because of a lower average selling price on coal sales in 1996.
The reduction in average
11<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
selling price was principally related to the expiration of the CG&E
contracts at the end of 1995 and the reduction of selling prices at the
beginning of 1996 under three other contracts. Cash provided by changes in
operating assets and liabilities increased in the first half of 1996 from
the $1 million used in the same period of 1995 primarily due to a decrease
in the level of trade receivables during 1996. The decrease in trade
receivables principally resulted from a lower level of sales in June 1996
compared to December 1995.
The increase in cash used for investing activities in 1996 from 1995
primarily reflects an $8.4 million increase in capital expenditures.
Cash used in financing activities includes payments on borrowings of $15.8
million in 1996 and $14.0 million in 1995. In addition, outstanding
Company common stock was purchased by the Company for $1.5 million in 1996.
Dividends paid were approximately the same in both periods.
The Company's capital expenditures in the six months ended June 30, 1996
totalled $29.4 million. Of that amount, $3.7 million related to the
purchase of formerly leased mining equipment discussed below, and $6.0
million related to the relocation of a dragline from Hobet 07 to the
Dal-Tex complex. The Company estimates that during the remainder of
1996, capital expenditures may be as much as $42 million.
On January 29, 1993, mining equipment valued at approximately $64 million
being used by Hobet was sold and leased back under an operating lease for a
three-year term. In May 1995, the Company completed the negotiation of a
two-year extension of that lease for most of the equipment. The equipment
not included in the extension was repurchased by the Company 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 anticipates that such purchase, if it should
occur, would be funded under the Company's revolving credit agreement or
lines of credit, which borrowings would be repaid from cash flow from
operations in that same year.
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 June 30, 1996, the Company had no borrowings under
this agreement. Also at June 30, 1996, the Company had $152.9 million of
indebtedness under senior unsecured notes maturing in 1997 through 2006.
Senior notes amounting to $22.1 million were paid on May 15, 1996 with the
proceeds of borrowings under lines of credit. Ashland Coal periodically
establishes uncommitted lines of credit with banks. These agreements
generally provide for short-term borrowings at market rates. At June 30,
1996, there were $195 million of such agreements in effect with borrowings
outstanding of $44.3 million. The Company expects to make payments on its
indebtedness totalling approximately $26 million from cash flow generated
by operations over the next 12 months.
Ashland Coal believes that over the next 12 months cash flow generated by
operating activities will be adequate to fund anticipated capital
expenditures, to reduce debt as discussed above, and to fund its stock
purchase program. 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 $2.6 million at both June 30, 1996, and December
31, 1995.
12PAGE
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
In addition, the Company accrues the costs of removal at the conclusion of
mining of roads, preparation plants, and other facilities and other costs
(collectively, closing costs) over the lives of the various mines. Closing
costs, in the aggregate, are estimated to be approximately $39.0 million.
At June 30, 1996, and December 31, 1995, the accrual for closing costs,
which is included in other long-term liabilities and in accrued expenses,
was $10.0 million and $9.4 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 and claims related to labor and employment
of the sort encountered by employers in general. 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 $2.9 million (included in other
long-term liabilities) and believes that probable insurance recoveries of
$1.5 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 $4.2
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 August 6, 1996, the Company, its Hobet Mining, Inc. subsidiary and an
officer of the Company were served with the complaint of Addington
Enterprises, Inc. ("Addington"), certain of its affiliates, and an
individual contractor of one of the Addington affiliates alleging various
causes of action (including breach of contract, fraud and conversion) and
related damages of $72 million plus punitive damages. The damage claims
arose in connection with highwall mining operations by Addington at the
Hobet 07 and Hobet 21 mining complexes, which operations were terminated by
Addington at Hobet 07 on or about December 27, 1995, and at Hobet 21 on or
about February 20, 1996. Such damage claims are presently pending in the
Circuit Court of Boone County, West Virginia. The contractor for Addington
is also seeking declaratory relief in connection with a security agreement
covering certain equipment belonging to such contractor. The parties
defendant intend to vigorously defend the claims, and the Company believes
the claims are without merit.
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.
Falling market prices 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 prolonged 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.
13<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
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 estimates that currently a 1% increase in
short-term interest rates would reduce income before income taxes by
approximately $1.1 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, depending on the level of its
sales commitments at the time, 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 from time to
time utilizes certain types of derivative securities to manage its
interest-rate risk. Either extending the term of short-term borrowings at
fixed rates or using derivatives may reduce the adverse impact of increases
in interest rates upon Ashland Coal. The Company has swapped $32.5 million
of its fixed-rate debt for floating-rate debt. The increased exposure to
interest-rate fluctuations has been mitigated through the purchase of
interest-rate caps.
Factors Routinely 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, generally by not
more than 10% to 20%, 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.
14<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
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 and sales are subject to a variety of
operational, geologic, transportation, and weather-related factors that
routinely cause production to fluctuate. Operational factors affecting
production 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. Permits
are sometimes delayed by unanticipated regulatory requests or processing
delays. Timely completion of improvement projects and equipment
relocations depend to a large degree on availability of labor and
equipment, timely issuance of permits, and the weather. Sales can be
adversely affected by fluctuations in production and by transportation
delays arising from equipment unavailability and weather-related events,
such as flooding.
Geologic conditions within mines are not uniform. Overburden ratios at the
surface mines vary, as do roof and floor conditions and seam thickness in
underground mines. 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.
The results of the third quarter of each year are frequently adversely
affected by lower production and resultant higher costs because of
scheduled vacation periods at the West Virginia mines. In addition, costs
are typically somewhat higher during vacation periods because of
maintenance activity carried on during those periods. These adverse
effects on the third quarter may make the third quarter not comparable to
the other quarters and not indicative of results to be expected for the
full year.
Hobet is a party to the Wage Agreement. From time to time in the past,
strikes and work stoppages have adversely affected production at the Hobet
and Dal-Tex complexes. Any future strike or work stoppage that affected
both the Hobet 21 or Dal-Tex complex 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 labor disruptions of the type that affect
union operations.
Any one or a combination of changing demand, fluctuating selling prices,
routine operational, geologic and weather-related factors, unexpected
regulatory changes or results of litigation, or labor disruptions may occur
at times or in a manner that causes current and projected results of
operations to deviate from projections and expectations. Any event
disrupting substantially all production at any of the Hobet 21, Dal-Tex or
Mingo Logan complexes for a prolonged period would have a significant
adverse effect on the Company's current and projected results of
operations. The effect of such a disruption at Mingo Logan would be
particularly severe because of the high volume of coal produced at that
complex and the relatively high contribution to operating income by the
sale of each ton of that coal. Decreases in production from
anticipated levels usually lead to increased mining costs and decreased net
income.
15<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
On August 6, 1996, the Company, its Hobet Mining, Inc. subsidiary and an
officer of the Company were served with the complaint of Addington
Enterprises, Inc. ("Addington"), certain of its affiliates, and an
individual contractor of one of the Addington affiliates alleging various
causes of action (including breach of contract, fraud and conversion) and
related damages of $72 million plus punitive damages. The damage claims
arose in connection with highwall mining operations by Addington at the
Hobet 07 and Hobet 21 mining complexes, which operations were terminated by
Addington at Hobet 07 on or about December 27, 1995, and at Hobet 21 on or
about February 20, 1996. Such damage claims are presently pending in the
Circuit Court of Boone County, West Virginia. The contractor for Addington
is also seeking declaratory relief in connection with a security agreement
covering certain equipment belonging to such contractor. The parties
defendant intend to vigorously defend the claims, and the Company believes
the claims are without merit.
Item 5. Other Information
As previously reported, in April 1996 the Company's Salary Continuation
Plan was rescinded. On July 31, 1996, the Personnel and Compensation
Committee of the Board approved a new Salary Continuation Plan pursuant to
which each regular, full-time salaried employee (but excluding hourly
employees, employees covered by collective bargaining, employees of
entities in which Ashland Coal has a 50 percent or less ownership interest
and certain international employees of Ashland Coal and its subsidiaries)
may receive a payment in the event that the Ashland Coal Board of
Directors, as constituted prior to the change of control, determines a
"change in control" of Ashland Coal has occurred, and a participant's
employment is terminated without cause within two years following such a
change in control. Any benefits under the Salary Continuation Plan are
determined according to the following schedule:
Length of Service Payment
Up to 5 full years 3 months' base salary
6-10 full years 6 months' base salary
11-15 full years 1 year's base salary
16-20 full years 1 1/2 years' base salary
20+ years 2 years' base salary
Item 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
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: August 14, 1996 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting Officer)
Date: August 14, 1996 /s/ Roy F. Layman
Roy F. Layman
Administrative Vice President
and Secretary
17<PAGE>
Ashland Coal, Inc.
Form 10-Q for Quarter Ended June 30, 1996
INDEX TO EXHIBITS
ITEM
27 Financial Data Schedule
18<PAGE>
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<MULTIPLIER> 1000
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67841
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