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, 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 May 10, 1996, there were 13,520,958 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>
March 31 December 31
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,039 $1,752
Trade accounts receivable 69,568 76,442
Other receivables 6,514 6,890
Inventories 32,618 26,038
Prepaid royalties 17,479 16,622
Deferred income taxes 3,588 3,512
Other 2,858 3,349
133,664 134,605
OTHER ASSETS
Prepaid royalties 74,137 61,979
Coal supply agreements 30,651 31,498
Other 21,392 21,613
126,180 115,090
PROPERTY, PLANT, AND EQUIPMENT
Cost 881,621 905,842
Less accumulated depreciation, depletion,
and amortization 300,011 320,135
581,610 585,707
$841,454 $835,402
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $45,854 $30,595
Accrued expenses 34,394 37,279
Income taxes payable 1,440 -
Current portion of debt 53,343 42,000
135,031 109,874
LONG-TERM DEBT 154,131 172,975
ACCRUED POSTRETIREMENT BENEFITS
OTHER THAN PENSION 80,119 78,951
OTHER LONG-TERM LIABILITIES 52,791 50,493
DEFERRED INCOME TAXES 23,125 25,230
STOCKHOLDERS' EQUITY
Convertible preferred stock 67,841 67,841
Common stock 138 138
Paid-in capital 109,595 109,257
Retained earnings 224,009 224,574
Treasury stock, at cost (5,326) (3,931)
396,257 397,879
$841,454 $835,402
</TABLE>
See notes to condensed consolidated financial statements.
2<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended March 31
1996 1995
<S> <C> <C>
REVENUES
Coal sales $139,193 $152,409
Operating revenues 4,131 4,215
143,324 156,624
COSTS AND EXPENSES
Cost of coal sold 126,731 131,587
Operating expenses 2,397 2,671
Selling, general, and administrative expenses 7,980 7,191
137,108 141,449
OPERATING INCOME 6,216 15,175
OTHER INCOME (EXPENSE)
Interest income 14 11
Interest expense (4,798) (5,140)
INCOME BEFORE INCOME TAXES 1,432 10,046
Income tax expense (benefit) (83) 1,005
NET INCOME $1,515 $9,041
Earnings per common share
Primary $.07 $.49
Fully diluted $.07 $.48
Dividends declared per common share $.115 $.115
</TABLE>
See notes to condensed consolidated financial statements.
3<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended March 31
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,515 $9,041
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion, and amortization 18,263 16,669
Prepaid royalties expensed 5,070 5,516
Deferred income taxes (2,023) (2,150)
Gain on disposition of assets (636) (550)
Partnership costs in excess of cash
advances 157 75
Changes in operating assets and liabilities 3,593 (5,260)
CASH PROVIDED BY
OPERATING ACTIVITIES 25,939 23,341
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (14,445) (10,129)
Proceeds from sales 920 932
Advances on prepaid royalties (2,446) (1,473)
CASH USED IN
INVESTING ACTIVITIES (15,971) (10,670)
FINANCING ACTIVITIES
Proceeds from borrowings 287,405 359,314
Payments on borrowings (294,949) (369,280)
Dividends paid (2,080) (2,106)
Proceeds from sale of common stock 338 50
Purchase of common stock (1,395) -
CASH USED IN
FINANCING ACTIVITIES (10,681) (12,022)
(Decrease) increase in cash and
cash equivalents (713) 649
Cash and cash equivalents at beginning
of period 1,752 1,120
Cash and cash equivalents at end of period $1,039 $1,769
</TABLE>
See notes to condensed consolidated financial statements.
4<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three months ended March 31, 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:
March 31, 1996 December 31, 1995
(In thousands)
Coal $14,733 $8,536
Supplies 17,885 17,502
$32,618 $26,038
NOTE C - DEBT
Debt consists of the following:
March 31, 1996 December 31, 1995
(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 - 30,000
Indebtedness to banks under lines
of credit 30,507 7,315
Other 1,967 2,660
207,474 214,975
Less current portion 53,343 42,000
Long-term debt $154,131 $172,975
5<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE D - COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended March 31
1996 1995
(In thousands, except per share data)
<S> <C> <C>
Net income $1,515 $9,041
Less: Common stock dividends 1,553 1,579
Preferred stock dividends 701 700
Undistributed (loss) earnings $(739) $6,762
Primary
Average shares and equivalents outstanding:
Shares outstanding 13,522 13,725
Shares issuable upon
Conversion of preferred stock 4,587 4,587
Exercise of stock options 23 62
Total 18,132 18,374
Per share amounts:
Undistributed (loss) earnings $(.05) $.37
Dividends (except preference dividends) .12 .12
Net income $.07 $.49
Fully Diluted
Average shares and equivalents outstanding:
Shares outstanding 13,522 13,725
Shares issuable upon
Conversion of preferred stock 5,212 5,212
Exercise of stock options 30 70
Total 18,764 19,007
Per share amounts:
Undistributed (loss) earnings $(.05) $.36
Dividends (except preference dividends) .12 .12
Net income $.07 <F1> $.48
<FN>
<F1> Because the calculation of primary earnings per share yields a more
dilutive result, that amount is shown here.
</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 $2.4 million (included in other long-term liabilities) and
believes that probable insurance recoveries of $1.6 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 $3.5 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
Reference is made to the Contingencies, Certain Risk Factors and Recurring
Factors 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 that planned dragline relocations will occur when
scheduled.
Results of Operations
Quarter Ended March 31, 1996, Compared
to Quarter Ended March 31, 1995
Net income for the quarter ended March 31, 1996, was $1.5 million, compared
to net income of $9.0 million for the quarter ended March 31, 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
March 31, 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, average cost per ton rose somewhat because of $3.1
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 fallen because of lower costs at the Mountaineer longwall mine of
Mingo Logan Coal Company (Mingo Logan), where better mining conditions
resulted in higher productivity. Average cost per ton at the Company s
large surface mines in West Virginia was higher in the current quarter
because of severe winter weather and, at the Hobet 21 complex, because of
localized unfavorable geologic conditions experienced in the quarter. Coal
sales volume declined .2 million tons (4%), to 5.2 million tons.
Operating revenues declined slightly as a $1.1 million payment received
upon an agreed reduction of 1996 deliveries under a sales contract was
offset by small revenue reductions in a number of categories.
Selling, general, and administrative expenses rose $.8 million principally
because of restructuring charges of $.7 million. Interest expense decreased
$.3 million because of lower average debt levels.
The Company's income tax expense declined from $1.0 million in 1995 to
about zero 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.
Balance Sheet
The balance of trade accounts receivable at March 31, 1996, was $6.9
million less than the balance at December 31, 1995, primarily because of a
lower level of sales in March 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 number of weeks of sales in trade
receivables has trended upward since 1994 because of a higher proportion of
export sales, which typically bear longer payment terms. More recently,
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.
8<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Inventories were $6.6 million higher at March 31, 1996, than at December
31, 1995. Approximately half of this increase related to higher inventory
at export terminals in preparation for shipments in April 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 $12.2 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. The
amount of the payment was included in accounts payable at March 31, 1996,
and was primarily responsible for the increase of $15.3 million in accounts
payable.
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 or planned are expected to have a substantial favorable effect on 1996
earnings, 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. During the first quarter, this study resulted in the
elimination of 51 salaried positions at Ashland Coal and several of its
subsidiaries, as well as the consolidation of some of its West Virginia
operations. The 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 totalled
$3.8 million (before tax) in the quarter ended March 31, 1996.
By the end of 1996, the Company expects that the dragline at the Hobet 21
complex will have moved across the Mud River 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.
Because of the timing of this move, no significant benefit will be
experienced until 1997.
The dragline that previously operated at Hobet 07, has been dismantled and
is being re-erected at the Dal-Tex complex where geologic conditions are
superior to those at Hobet 07. It is expected that this dragline will be
operating at Dal-Tex by September 1996. Once the dragline is operational,
production at Dal-Tex is expected to increase significantly and cost per
ton is expected to be significantly reduced.
The Company believes that 1997 earnings will rebound strongly from the
level of earnings expected for 1996. This improvement will be primarily
the result of expected improvement in costs as a result of the dragline
moves discussed above. In addition, the ongoing program to reengineer
business processes also is anticipated to contribute to the improvement
after recovery of related charges.
Ashland Coal now anticipates that its effective tax rate for 1996 will
approximate zero. The Company's effective rate reflects low profitability.
In addition, the Company currently expects to be able to recognize
alternative minimum tax credits (AMT 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
9<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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, 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 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 relatively stable spot market prices at higher levels than
experienced during most of 1995. 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 1996 would have a material
effect on the Company's 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. 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 Mining, Inc. (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. 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.
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
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.
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, 1996
and 1995:
1996 1995
(In thousands)
Net cash provided by (used in)
Operating activities
Before changes in operating assets
and liabilities $22,346 $28,601
Changes in operating assets and
liabilities. 3,593 (5,260)
25,939 23,341
Investing activities (15,971) (10,670)
Financing activities (10,681) (12,022)
(Decrease) increase in cash and cash
equivalents. $(713) $649
Cash provided by operating activities before changes in operating assets
and liabilities decreased in the first quarter of 1996 from the level in
the first quarter of 1995 primarily because of lower gross profit on coal
sales in 1996. The reduction in gross profit was primarily 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 in 1996 reflects a
reduction in accounts receivable balances and normal increases in operating
liabilities partially offset by an increase in inventories. Cash used for
changes in operating assets and liabilities in 1995 primarily reflects an
increase in inventories.
The increase in cash used for investing activities from the first quarter
of 1995 to the first quarter of 1996 resulted primarily from an increase of
$4.3 million in capital expenditures. In addition, advances on prepaid
royalties were $1.0 million higher in 1996 than in 1995.
Cash used in financing activities reflects payments on borrowings of $7.5
million in 1996 and $10.0 million in 1995. In addition, outstanding
Company common stock was purchased by the Company for $1.4 million in 1996.
Dividends paid were approximately the same in both periods.
The Company's capital additions in the three months ended March 31, 1996
totalled $13.4 million. Of that amount, $3.7 million related to the
purchase of formerly leased mining equipment discussed below, and $2.3
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 additions may be as much as $55 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 believes 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 March 31, 1996, the Company had no borrowings
under this agreement. Also at March 31, 1996, the Company 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
11<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
lines of credit with banks. These agreements generally provide for
short-term borrowings at market rates. At March 31, 1996, there were $255
million of such agreements in effect with borrowings outstanding of $30.5
million. The Company expects to make payments on its indebtedness
totalling approximately $32 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 $2.7 million and $2.6 million at March 31, 1996,
and December 31, 1995, 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 (collectively, closing costs) over the
lives of the various mines. Closing costs, in the aggregate, are estimated
to be approximately $38.0 million. At March 31, 1996, and December 31,
1995, the accrual for closing costs, which is included in other long-term
liabilities and in accrued expenses, was $9.9 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 $2.4 million (included in other
long-term liabilities) and believes that probable insurance recoveries of
$1.6 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 $3.5
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.
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
12<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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.
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 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 $20 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.
13<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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, generally 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 and sales are subject to a variety of
operational, geologic, transporation, 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
14<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on April 26,
1996, at the Ashland Coal Headquarters Building, 2205 Fifth Street Road,
Huntington, West Virginia, at 10:30 a.m.
(c) 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 12,322,222 370,903
Paul W. Chellgren 12,313,223 379,902
Thomas L. Feazell 12,309,517 383,608
Robert L. Hintz 12,320,970 372,155
Thomas Marshall 12,321,623 371,502
William C. Payne 12,314,123 379,002
Robert E. Yancey, Jr. 12,310,146 382,979
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 -
At such Annual Meeting, the Company's stockholders, by a vote of
13,889,589 for and 3,090,440 against, with 21,246 abstentions and 278,350
broker non-votes, failed to approve by the requisite 85% supermajority
management s proposal to amend and restate the Company's Restated
Certificate of Incorporation to authorize 20,000,000 shares of serial
preferred stock and eliminate certain internal references that are no
longer relevant. Finally, the Company's stockholders, by a vote of
17,254,778 for and 14,322 against, with 10,525 abstentions, ratified the
appointment of Ernst & Young LLP as the Company's independent auditors for
1996. Voting on the amendment and restatement of the Company's Restated
Certificate of Incorporation and ratification of the appointment of
auditors 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.
Item 5. Other Information
At an April 1996 meeting, the Company's Board of Directors terminated
the Company's Salary Continuation Plan. The Plan had provided that certain
employees would receive lump sum payments and other benefits if they were
terminated without cause during a two year period following a change in
control of the Company. As a consequence of the termination, future
changes in control will not give rise to any rights under the Plan, but the
termination does not affect employees existing rights under the Plan as a
consequence of changes in control occurring prior to the date of the
Board s action.
Item 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
(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 March 14, 1996, reporting a $4.5
million pre-tax charge to earnings in connection with a first
quarter 1996 restructuring. The amount of the charge was
subsequently determined to be $3.8 million.
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 14, 1996 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting Officer)
Date: May 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 March 31, 1996
INDEX TO EXHIBITS
ITEM
27 Financial Data Schedule
18<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1039
<SECURITIES> 0
<RECEIVABLES> 76082
<ALLOWANCES> 0
<INVENTORY> 32618
<CURRENT-ASSETS> 133664
<PP&E> 881621
<DEPRECIATION> 300011
<TOTAL-ASSETS> 841454
<CURRENT-LIABILITIES> 135031
<BONDS> 0
0
67841
<COMMON> 138
<OTHER-SE> 328278
<TOTAL-LIABILITY-AND-EQUITY> 841454
<SALES> 139193
<TOTAL-REVENUES> 143324
<CGS> 126731
<TOTAL-COSTS> 137108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4798
<INCOME-PRETAX> 1432
<INCOME-TAX> (83)
<INCOME-CONTINUING> 1515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1515
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
