SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 11, 1996, there were 13,518,008 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)
September 30 December 31
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $6,949 $1,752
Trade accounts receivable 59,191 76,442
Other receivables 3,646 6,890
Inventories 30,416 26,038
Prepaid royalties 19,778 16,622
Deferred income taxes 2,028 3,512
Other 4,441 3,349
126,449 134,605
OTHER ASSETS
Prepaid royalties 64,612 61,979
Coal supply agreements 29,102 31,498
Other 20,586 21,613
114,300 115,090
PROPERTY, PLANT, AND EQUIPMENT
Cost 906,862 905,842
Less accumulated depreciation,
depletion, and amortization 329,894 320,135
576,968 585,707
$817,717 $835,402
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $29,428 $30,595
Accrued expenses 26,623 37,279
Current portion of debt 50,116 42,000
106,167 109,874
LONG-TERM DEBT 154,283 172,975
ACCRUED POSTRETIREMENT BENEFITS
OTHER THAN PENSION 82,042 78,951
OTHER LONG-TERM LIABILITIES 55,608 50,493
DEFERRED INCOME TAXES 22,708 25,230
STOCKHOLDERS' EQUITY
Convertible preferred stock 67,841 67,841
Common stock 138 138
Paid-in capital 109,631 109,257
Retained earnings 224,735 224,574
Treasury stock, at cost (5,436) (3,931)
396,909 397,879
$817,717 $835,402
</TABLE>
See notes to condensed consolidated financial statements.
2<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Coal sales $139,688 $154,403 $415,691 $454,731
Operating revenues 3,303 4,163 9,424 12,073
142,991 158,566 425,115 466,804
COSTS AND EXPENSES
Cost of coal sold 128,930 133,351 377,651 388,353
Operating expenses 2,171 2,896 7,350 8,432
Selling, general, and
administrative expenses 5,618 6,678 19,986 20,988
136,719 142,925 404,987 417,773
OPERATING INCOME 6,272 15,641 20,128 49,031
OTHER INCOME (EXPENSE)
Interest income 2 20 229 77
Interest expense (4,025) (5,165) (13,641) (15,638)
INCOME BEFORE
INCOME TAXES 2,249 10,496 6,716 33,470
Income tax expense (benefit) (252) 1,281 (390) 3,648
NET INCOME $2,501 $9,215 $7,106 $29,822
Earnings per common share
Primary $.13 $.49 $.36 $1.59
Fully diluted $.13 $.48 $.36 $1.55
Dividends declared per
common share $.115 $.115 $.345 $.345
</TABLE>
See notes to condensed consolidated financial statements.
3<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $7,106 $29,822
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion, and
amortization 51,668 52,191
Prepaid royalties expensed 16,489 15,880
Deferred income taxes (1,039) (7,148)
Gain on disposition of assets (537) (355)
Partnership costs in excess of cash
advances 514 650
Changes in operating assets and
liabilities 9,516 286
CASH PROVIDED BY
OPERATING ACTIVITIES 83,717 91,326
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (42,353) (45,707)
Proceeds from sales 2,928 1,476
Advances on prepaid royalties (20,323) (20,187)
CASH USED IN
INVESTING ACTIVITIES (59,748) (64,418)
FINANCING ACTIVITIES
Proceeds from borrowings 844,971 800,679
Payments on borrowings (855,667) (820,665)
Dividends paid (6,945) (7,023)
Proceeds from sale of common stock 374 432
Purchase of common stock (1,505) -
CASH USED IN
FINANCING ACTIVITIES (18,772) (26,577)
Increase in cash and cash equivalents 5,197 331
Cash and cash equivalents at beginning
of period 1,752 1,120
Cash and cash equivalents at end of
period $6,949 $1,451
</TABLE>
See notes to condensed consolidated financial statements.
4<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 1996, are not necessarily
indicative of results to be expected for the year ending December 31, 1996.
NOTE B - INVENTORIES
<TABLE>
<CAPTION>
Inventories are comprised of the following:
September 30, 1996 December 31, 1995
(In thousands)
<S> <C> <C>
Coal $13,458 $8,536
Supplies 16,958 17,502
$30,416 $26,038
</TABLE>
NOTE C - DEBT
<TABLE>
<CAPTION>
Debt consists of the following:
September 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 25,000 30,000
Indebtedness to banks under
lines of credit 24,354 7,315
Other 2,145 2,660
204,399 214,975
Less current portion 50,116 42,000
Long-term debt $154,283 $172,975
</TABLE>
5<PAGE>
<TABLE>
<CAPTION>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE D - COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $2,501 $9,215 $7,106 $29,822
Less: Common stock dividends 1,554 1,581 4,662 4,740
Preferred stock dividends 703 704 2,106 2,106
Undistributed earnings $244 $6,930 $338 $22,976
Primary
Average shares and equivalents
outstanding:
Shares outstanding 13,517 13,747 13,519 13,738
Shares issuable upon
Conversion of preferred
stock 4,587 4,587 4,587 4,587
Exercise of stock options 36 66 32 62
Total 18,140 18,400 18,138 18,387
Per share amounts:
Undistributed earnings $.01 $.37 $.01 $1.24
Dividends (except preference
dividends) .12 .12 .35 .35
Net income $.13 $.49 $.36 $1.59
Fully Diluted
Average shares and equivalents
outstanding:
Shares outstanding 13,517 13,747 13,519 13,738
Shares issuable upon
Conversion of preferred
stock 5,212 5,212 5,212 5,212
Exercise of stock options 45 69 44 65
Total 18,774 19,028 18,775 19,015
Per share amounts:
Undistributed earnings $.01 $.36 $.01 $1.20
Dividends (except preference
dividends) .12 .12 .35 .35
Net income $.13 $.48 $.36 $1.55
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 $3.1 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 $5.0 million (before tax) in excess
of the probable loss previously recognized. However, the Company believes
it is probable that substantially all of such losses, if any occur, will be
insured. After conferring with counsel, it is the opinion of management
that the ultimate resolution of these claims, to the extent not previously
provided for, will not have a material adverse effect on the consolidated
financial condition, results of operations, or liquidity of the Company.
On 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. The Company has responded to this complaint
and has filed counterclaims.
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 near the end of
1996 and that expected cost savings at the Hobet 21 and Dal-Tex mining
complexes are realized.
Results of Operations
Quarter Ended September 30, 1996, Compared
to Quarter Ended September 30, 1995
Net income for the quarter ended September 30, 1996, was $2.5 million,
compared to net income of $9.2 million for the quarter ended September 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
September 30, 1995. That decline, which was consistent with comparisons in
prior quarters of 1996, 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. The cost per ton of coal sold declined slightly from the level
of the third quarter of 1995. Cost per ton in the third quarter of 1995,
however, was lowered by a reduction in postretirement benefit expense that
arose from a revised actuarial estimate. Such expense included in cost of
coal sold was $1.4 million less in 1995 than in 1996, which is a difference
of $.25 per ton. Cost per ton in 1996 reflects somewhat lower costs at
each of the three operating subsidiaries. Coal sales volume was
approximately the same in the third quarters of 1996 and 1995.
Operating revenues declined $.9 million. This decrease was primarily
attributable to a reduction in railroad freight contract revenue resulting
from lower shipments from Hobet 07, lower revenues related to exports and
lower royalty income on reserves subleased to other coal companies. Those
reductions were partially offset by revenue related to an agreed reduction
in 1996 deliveries under a long-term sales contract. Operating expenses
declined $.7 million principally because of lower expenses related to
reserves subleased to other coal companies.
Selling, general, and administrative expenses declined $1.1 million because
of reductions in a variety of expense categories. Interest expense
decreased $1.1 million principally because of lower average debt levels.
The Company's income tax expense declined from $1.3 million in 1995 to a
negative $.3 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.
Nine Months Ended September 30, 1996, Compared
to Nine Months Ended September 30, 1995
Net income was $7.1 million for the nine months ended September 30, 1996,
and $29.8 million for the nine months ended September 30, 1995.
Gross profit on coal sales declined $1.65 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. Average cost per ton in 1996
was about the same as in 1995. Sales volume decreased .5 million tons
(3%), to 16.0 million tons.
8<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Operating revenues were $2.6 million lower in 1996 than in 1995,
principally because of the reductions in railroad freight contract revenue
and royalty income described above and lower throughput at the Company's
Dominion Terminal Associates coal loading facility, partially offset by
revenue of $1.9 million under agreements to reduce 1996 deliveries
under a long-term sales contract.
Selling, general, and administrative expenses declined $1.0 million because
of the reductions experienced in the third quarter of 1996. Interest
expense was reduced by $2.0 million, principally because of lower average
debt levels.
Income tax expense decreased to a negative $.4 million in 1996 from $3.6
million in 1995. As discussed above, this decrease relates to lower
estimated profitability in 1996.
Balance Sheet
The balance of trade accounts receivable at September 30, 1996, was $17.3
million less than the balance at December 31, 1995, primarily because of a
lower level of sales in September 1996 than in December 1995. The actual
level of trade receivables at any date is dependent upon the specific
customer accounts active at that date and the payment terms for those
accounts. For example, 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 approximately five weeks of sales. All significant customer
accounts are being paid within credit terms.
The balance of other receivables has declined $3.2 million since December
31, 1995, principally because of lower revenues under railroad freight
contracts.
Inventories were $4.4 million higher at September 30, 1996, than at
December 31, 1995. This increase is primarily related to higher inventory
at export terminals in preparation for shipments in October 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 combined current and noncurrent balances of prepaid royalties increased
$5.8 million from the combined balances 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 portion of prepaid royalties classified
as current has increased because of higher projected production over the
next 12 months from properties for which royalties have been prepaid.
Accrued expenses at September 30, 1996, were $10.7 million lower than at
December 31, 1995, because of seasonal and other normal fluctuations in
accrued amounts.
Outlook
The Company's earnings in 1996 will be significantly below those 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. 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 costs
expected at Mingo Logan Coal Company (Mingo Logan) in the fourth quarter of
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 55
salaried positions at Ashland Coal and several of its subsidiaries, as well
as the consolidation of some West Virginia operations. The study
9<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
is continuing and additional changes, which may include 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 $3.8 million (before tax) through September 30,
1996.
The permits required for the move of the dragline at the Hobet 21 complex
across the Mud River have been received, and some equipment has already
been moved. The dragline itself is expected to be moved around the end of
1996. This move, to an area with more favorable geologic conditions than
those currently being experienced, 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 operation of equipment
mining in advance of the dragline in the new area, significant benefit is
not expected until 1997.
The dragline that was dismantled at Hobet 07 and re-erected at the Dal-Tex
complex commenced operations in August. As a result of dragline operations
at Dal-Tex, 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 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 relatively
stable coal prices and wage rates, among other factors discussed below in
"Factors Routinely Affecting Results of Operations."
Ashland Coal anticipates that its effective tax rate for 1996 will be
negative. The Company's effective rate reflects lower profitability. In
addition, the Company currently expects to be able to recognize all of its
alternative minimum tax credits generated during 1996.
In 1995, the Financial Accounting Standards Board 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, including
higher sulfur coals which can be consumed by utilities holding sulfur
dioxide emission allowances issued by the Environmental Protection Agency
(EPA).
Increased economic activity has resulted in more coal being burned to
produce electricity. This has resulted in some increase in spot market
prices. The Company believes that spot price movements for the remainder
of 1996 will be affected chiefly 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 Mining, Inc. (Hobet) represented by the
United Mine Workers of America (UMWA), provided 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 under the Wage Agreement were recently
renegotiated, but the additional costs to the Company arising from this
renegotiation are not significant.
On August 13, 1996, the National Labor Relations Board (NLRB) ruled that
the employees of Mingo Logan, an operating subsidiary of Ashland Coal, may
not be grouped with the employees of two of Mingo Logan's contractors to
create a single bargaining unit for purposes of collective bargaining at
Mingo Logan's Mountaineer Mine. An earlier decision by an acting regional
NLRB director had ruled that employees of Mingo Logan and these two
contractors were a single bargaining unit and as a result, these employees
voted together in a January 1995 election to determine whether or not they
were to be represented by the UMWA. As a consequence of the NLRB ruling,
the election was vacated and the ballots from the 1995 election, which were
impounded by the NLRB and were not opened, will never be counted. The NLRB
additionally ruled that there are three separate bargaining units at Mingo
Logan's Mountaineer Mine, one consisting of Mingo Logan's employees, and
that any future UMWA representation election depends upon an adequate
showing of interest in having such election by each unit. On August 26,
1996, the UMWA withdrew its petition seeking a representation election at
the operations of Mingo Logan and the two contractors.
CSX Corporation (CSX) and Conrail Inc. (Conrail) have agreed to a
combination of their businesses. Norfolk Southern Corporation (NS) has
initiated a hostile offer for Conrail. CSX and NS are major railroads in
the eastern United States, and together transport most of the coal sold by
the Company. Conrail, whose primary service area is the northeastern
United States, is also a major railroad. If Conrail combines with either
of CSX or NS, costs of the combined railroad may be somewhat lower than the
costs of either independent railroad. If lower costs are realized and
freight rates are lowered as a consequence, the coal of some producers
could become less costly on a delivered basis and therefore gain a
competitive advantage. It also has been reported in the press that NS, if
it were not successful in combining with Conrail, would seek to acquire
certain Conrail assets from CSX, thereby further affecting the
transportation costs in coal markets. Although it appears likely that
Conrail will be combined with another railroad, it is not possible to
predict with certainty the effects of such a combination on interregional
competition and, specifically, on the Company.
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. The Company is in discussions with
Arch Mineral Corporation regarding a business combination. There can be no
assurance that such discussions will result in the combination of the two
companies.
11<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 nine months ended September 30,
1996 and 1995:
1996 1995
(In thousands)
Net cash provided by (used in)
Operating activities
Before changes in operating assets
and liabilities . . . . . . . $74,201 $91,040
Changes in operating assets and
liabilities . . . . . . . . . 9,516 286
83,717 91,326
Investing activities. . . . . . (59,748) (64,418)
Financing activities. . . . . . (18,772) (26,577)
Increase in cash and cash equivalents . . $5,197 $331
Cash provided by operating activities before changes in operating assets
and liabilities decreased in the first nine months of 1996 from the level
in 1995 primarily because of a lower average selling price on coal sales in
1996. The reduction in average 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 nine months of 1996 from the amount provided in the same period
of 1995 primarily due to a decrease in the level of trade receivables
during 1996 partially offset by a reduction in the amount of accrued
expenses. The changes in those balances are discussed above.
The decrease in cash used for investing activities in 1996 from 1995
primarily reflects a $3.4 million decrease in capital expenditures and
higher proceeds from the sale of property, plant, and equipment.
Cash used in financing activities reflects a reduction in borrowings of
$10.7 million in 1996 and $20.0 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 nine months ended September 30,
1996 totalled $42.4 million. Of that amount, $6.3 million related to the
upgrade of Hobet's Beth Station preparation plant, and $8.7 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 $17 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 September 30, 1996, the Company had borrowings of
$25 million under this agreement. Also at September 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.
12PAGE
<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
These agreements generally provide for short-term borrowings at market
rates. At September 30, 1996, there were $195 million of such agreements
in effect with borrowings outstanding of $24.4 million. The Company
expects to make payments on its indebtedness totalling approximately $35
million from cash flow generated by operations over the next 12 months.
The Company expects that a payment of $25 million due on a senior note in
September 1997 will be made from funds borrowed under the revolving credit
agreement or bank lines of credit or both.
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 at September 30, 1996, and $2.6
million at December 31, 1995. 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 million. At September 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 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 $3.1 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 $5.0 million (before tax) in excess
of the probable loss previously recognized. However, the Company believes
it is probable that substantially all of such losses, if any occur, will be
insured. After conferring with counsel, it is the opinion of management
that the ultimate resolution of these claims, to the extent not previously
provided for, will not have a material adverse effect on the consolidated
financial condition, results of operations, or liquidity of the Company.
On 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. The Company has responded to this complaint and has
filed counterclaims.
13<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Certain Risk Factors
Credit risk - Ashland Coal markets its coal principally to electric
utilities in the United States and Europe. As a group, electric utilities
are stable, well capitalized entities with favorable credit ratings.
Credit is extended based on an evaluation of each customer's financial
condition, and collateral is not generally required. Credit losses have
consistently been minimal.
Price risk - Selling prices for Ashland Coal's products are determined by
long-term contracts and the spot market. Selling prices in many of Ashland
Coal's long-term contracts are adjusted for changes in certain price
indices and labor costs, including wage rates and benefits under the Wage
Agreement or any successor agreement. Some of the long-term contracts
permit adjustment in contract price for changes in market conditions.
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. The coal industry is highly competitive, and
Ashland Coal competes with a large number of other coal producers. Factors
such as the availability of sulfur dioxide emissions allowances issued by
the EPA, utility deregulation, and new clean air regulations have had, or
will have, the effect of further 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 Hobet are covered by the Wage Agreement, which provides for
certain wage rates and benefits. 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 $1.2 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
14<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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.
At September 30, 1996, Ashland Coal had changed the interest rate being
paid on $40 million of its fixed rate debt to a variable rate using
interest rate swap agreements entered into with major money center banks.
Under these agreements the Company was being paid an amount based on an
average fixed rate of 6.592% and was paying an amount based on an average
variable rate of 5.781%. The term was 48 months on $25 million of the
swaps and 67.5 months on the remaining $15 million of swaps for an average
remaining life of 55 months. These terms and amounts coincide with the
stated maturities of the fixed rate debt obligations being converted. The
variable rates are adjusted using six month London Interbank Offered Rates
(LIBOR).
Since September 30, 1996, general interest rate levels have declined. As a
result of this interest rate environment the Company chose to reduce its
exposure to variable interest rates created by these swap agreements by
entering into reverse swap agreements having identical terms. Under these
agreements totaling $17.5 million the Company now receives a payment based
on variable rates and makes payment based on fixed rates in effect at the
time of the transactions. This has had the effect of increasing the
notional amount of swaps in place to $57.5 million while reducing the
amount of the variable interest rate exposure to $22.5 million. A
30-basis-point rate improvement on $17.5 million of fixed rate debt
resulted for the remainder of the terms of the swaps. The average life on
the remaining $22.5 million that continues to be exposed to variable
interest rates has been reduced modestly to 54.5 months.
The Company's exposure to large interest rate fluctuations on its variable
rate debt has been mitigated through the purchase of very short term
interest rate caps totaling $35 million as of September 30, 1996.
Factors Routinely Affecting Results of Operations
The Company's customers frequently combine various qualities of coal,
nuclear, natural gas and other energy sources in their generating
operations, and, accordingly, their demand for coal of the kind produced by
the Company 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.
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, could adversely affect production.
15<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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 Hobet's
mining complexes. Any future strike or work stoppage that affected either
the Hobet 21 or Dal-Tex complex for a prolonged period would have a
significant adverse effect on the Company's results of operations.
Any one or a combination of changing demand; fluctuating selling prices;
routine operational, geologic, transportation 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.
16<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the period covered by this Report:
Current Report on Form 8-K dated August 13, 1996, reporting that
the National Labor Relations Board had ruled that employees of
Ashland Coal's Mingo Logan Coal Company subsidiary would not be
grouped with Mingo Logan's contractors' employees to create a
single bargaining unit; that the January 1995 United Mine Workers
of America representation election results at Mingo Logan were
vacated; and that the ballots of such election would not be
counted.
17<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASHLAND COAL, INC.
(Registrant)
Date: November 13, 1996 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting Officer)
Date: November 13, 1996 /s/ Roy F. Layman
Roy F. Layman
Administrative Vice President
and Secretary
18<PAGE>
Ashland Coal, Inc.
Form 10-Q for Quarter Ended June 30, 1996
INDEX TO EXHIBITS
ITEM
27 Financial Data Schedule
19<PAGE>
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