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, 1997
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 April 28, 1997, there were 13,520,952 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
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $11,396 $834
Trade accounts receivable 68,676 56,743
Other receivables 6,447 6,260
Inventories 40,366 41,394
Prepaid royalties 16,829 17,525
Deferred income taxes 2,161 2,187
Other 2,666 2,177
148,541 127,120
OTHER ASSETS
Prepaid royalties 73,393 61,040
Coal supply agreements 26,675 27,712
Other 13,316 14,355
113,384 103,107
PROPERTY, PLANT, AND EQUIPMENT
Cost 915,346 917,423
Less accumulated depreciation and
amortization 352,597 342,573
562,749 574,850
$824,674 $805,077
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $52,202 $37,544
Accrued expenses 29,670 30,599
Income taxes payable 4,305 761
Current portion of debt 40,762 41,000
126,939 109,904
LONG-TERM DEBT 128,609 135,339
ACCRUED POSTRETIREMENT BENEFITS
OTHER THAN PENSION 83,503 82,464
OTHER LONG-TERM LIABILITIES 55,206 55,221
DEFERRED INCOME TAXES 15,923 17,857
STOCKHOLDERS' EQUITY
Convertible preferred stock 67,841 67,841
Common stock 138 138
Paid-in capital 109,689 109,689
Retained earnings 242,262 232,060
Treasury stock, at cost (5,436) (5,436)
414,494 404,292
$824,674 $805,077
</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
1997 1996
<S> <C> <C>
REVENUES
Coal sales $163,104 $139,193
Operating revenues 3,504 4,131
166,608 143,324
COSTS AND EXPENSES
Cost of coal sold 136,627 126,731
Operating expenses 3,952 2,397
Selling, general, and
administrative expenses 7,303 7,980
147,882 137,108
OPERATING INCOME 18,726 6,216
OTHER INCOME (EXPENSE)
Interest income 72 14
Interest expense (4,034) (4,798)
INCOME BEFORE INCOME TAXES 14,764 1,432
Income tax expense (benefit) 2,480 (83)
NET INCOME $12,284 $1,515
Earnings per common share
Primary $.67 $.07
Fully diluted $.65 $.07
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
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income $12,284 $1,515
Adjustments to reconcile to cash
provided by operating activities:
Depreciation and amortization of
property, plant, and equipment 18,060 16,910
Other amortization 1,453 1,353
Prepaid royalties expensed 6,162 5,070
Deferred income taxes (1,910) (2,023)
(Gain) loss on disposition of
assets 2,108 (636)
Partnership costs in excess of
cash advances 165 157
Changes in operating assets and
liabilities (7,570) 3,593
CASH PROVIDED BY
OPERATING ACTIVITIES 30,752 25,939
INVESTING ACTIVITIES
Property, plant, and equipment:
Purchases (10,853) (14,445)
Proceeds from sales 260 920
Advances on prepaid royalties (518) (2,446)
CASH USED IN
INVESTING ACTIVITIES (11,111) (15,971)
FINANCING ACTIVITIES
Proceeds from borrowings 36,891 287,405
Payments on borrowings (43,888) (294,949)
Dividends paid (2,082) (2,080)
Proceeds from sale of common stock - 338
Purchase of common stock - (1,395)
CASH USED IN
FINANCING ACTIVITIES (9,079) (10,681)
Increase (decrease) in cash and
cash equivalents 10,562 (713)
Cash and cash equivalents at
beginning of year 834 1,752
Cash and cash equivalents at end
of period $11,396 $1,039
</TABLE>
See notes to condensed consolidated financial statements.
4<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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, 1996. Results of operations for the
period ended March 31, 1997, are not necessarily indicative of
results to be expected for the year ending December 31, 1997.
NOTE B - PROPOSED MERGER
Ashland Coal and Arch Mineral Corporation (Arch) have signed a
definitive agreement to merge the two companies in a tax-free
reorganization, which will be accounted for as a purchase by
Arch. After the merger, Ashland Coal and Arch stockholders will
hold approximately 48 percent and 52 percent of the combined
company, respectively. Consummation of the merger , which is
subject to approval by Ashland Coal's stockholders, is expected
to occur about June 30, 1997.
NOTE C - INVENTORIES
Inventories are comprised of the following:
March 31, 1997 December 31, 1996
(In thousands)
Coal $21,821 $22,320
Supplies 18,545 19,074
$40,366 $41,394
NOTE D - DEBT
Debt consists of the following:
March 31, 1997 December 31, 1996
(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
Indebtedness to banks under
revolving credit agreement 15,000 15,000
Indebtedness to banks under
lines of credit - 6,261
Other 1,471 2,178
169,371 176,339
Less current portion 40,762 41,000
Long-term debt $128,609 $135,339
5<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E - CHANGE IN ESTIMATE AND NONRECURRING REVENUES AND
EXPENSES
Cost of coal sold in 1997 was reduced by $1.4 million by a change
in the estimate of the Company's liability for postmining
reclamation and mine closure. Operating expenses in 1997 include
a charge of $2.1 million related to an idled processing facility.
A payment of $1.1 million was received from a customer in the
quarter ended March 31, 1996, for an agreed reduction of 1996
deliveries under a sales contract and is included in operating
revenues. Costs and expenses in 1996 include a charge of $3.8
million for restructuring.
6<PAGE>
<TABLE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE F - COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended March 31
1997 1996
(In thousands, except per share data)
<S> <C> <C>
Net income $12,284 $1,515
Less: Common stock dividends 1,555 1,553
Preferred stock dividends 699 701
Undistributed earnings (loss) $10,030 $(739)
Primary
Average shares and equivalents
outstanding:
Shares outstanding 13,518 13,522
Shares issuable upon
Conversion of preferred stock 4,587 4,587
Exercise of stock options 57 23
Total 18,162 18,132
Per share amounts:
Undistributed earnings (loss) $.55 $(.05)
Dividends (except preference
dividends) .12 .12
Net income $.67 $ .07
Fully Diluted
Average shares and equivalents
outstanding:
Shares outstanding 13,518 13,522
Shares issuable upon
Conversion of preferred stock 5,212 5,212
Exercise of stock options 57 30
Total 18,787 18,764
Per share amounts:
Undistributed earnings (loss) $.53 $(.05)
Dividends (except preference
dividends) .12 .12
Net income $.65 $.07 <F1>
<FN>
<F1> Because the calculation of primary earnings per share
yields a more dilutive result, that amount is shown here.
</FN>
</TABLE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128). The Company is required to adopt SFAS 128 on
December 31, 1997, and at that time will present recomputed
earnings per share (EPS) for all prior periods using the
methodology specified by SFAS 128. Although the Company has not
yet determined the full effect of SFAS 128, it believes that
basic EPS as computed under SFAS 128 will be somewhat greater
than primary EPS as computed under the prior accounting rules.
Basic EPS excludes the dilutive effect of common stock
equivalents (such as stock options awarded to the Company's
employees), but primary EPS includes that effect. In addition,
the Company's convertible preferred stock will be less dilutive
under SFAS 128 than under the prior rules. The Company also
believes that diluted EPS computed in accordance with SFAS 128
will be slightly higher than fully diluted EPS as computed under
the prior accounting rules.
7<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G - 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 $1.8
million (included in other long-term liabilities) and believes
that probable insurance recoveries of $.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 $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.
8<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.
Results of Operations
Quarter Ended March 31, 1997, Compared
to Quarter Ended March 31, 1996
Net income for the quarter ended March 31, 1997, was $12.3
million, compared to net income of $1.5 million for the quarter
ended March 31, 1996.
Gross profit on coal sales (selling price less cost of sales) on
a per-ton basis increased significantly in the current quarter
from the low level experienced in the quarter ended March 31,
1996, in spite of a 4% decline in average selling price. Average
cost per ton was reduced by nearly 12% and sales volume increased
22%, to 6.4 million tons. The lower average selling price
reflects the lower prices obtained on the additional tonnage
sold. Average cost per ton in the 1996 quarter was adversely
affected by $3.1 million of charges related to the Company's
restructuring program, by the effects of severe winter weather on
production at the Company's large surface mines in West Virginia,
and by localized unfavorable geologic conditions at one of those
surface mines. Costs were favorably affected in the current
quarter by operational changes implemented during 1996, primarily
the relocation of a large dragline from the Hobet 07 complex to
the Dal-Tex complex. That relocation and other factors permitted
the increase in production that made the increase in sales volume
possible. Because the Company's fixed costs did not increase
significantly from the 1996 quarter and because fixed costs
are a significant part of the Company's total costs, the
additional production in the current quarter was achieved at a
low incremental cost. In addition, costs were reduced in the
quarter ended March 31, 1997, by a reduction of approximately
$1.4 million in the estimate of the Company's liability for
postmining reclamation and mine closure.
Operating revenues declined slightly because of changes in
several categories. Included in operating revenues in the
quarter ended March 31, 1996, was a $1.1 million payment received
for an agreed reduction of 1996 deliveries under a sales
contract.
Operating expenses increased $1.6 million principally because of
a charge of $2.1 million in the current quarter related to an
idled processing facility.
Selling, general, and administrative expenses declined $.7
million largely because of restructuring charges of $.7 million
recorded in the quarter ended March 31, 1996. Interest expense
decreased $.8 million because of lower average debt levels.
Income tax expense rose $2.6 million from a near-zero level for
the quarter ended March 31, 1996. That increase reflects both
higher profitability and a higher estimated effective tax rate
for 1997. The estimated effective tax rate for 1997 reflects
higher 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 Sheets
The balance of trade accounts receivable at March 31, 1997, was
$11.9 million greater than the balance at December 31, 1996,
primarily because of a higher level of sales in March 1997 than
in December 1996. 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. Currently,
the balance of trade receivables represents approximately five
weeks of sales. All significant customer accounts are being paid
within credit terms.
9<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
The noncurrent balance of prepaid royalties increased $12.4
million from the balance at December 31, 1996. This increase
reflects an annual royalty payment of $16 million due at the end
of March 1997. The amount of the payment was included in
accounts payable at March 31, 1997, and was primarily responsible
for the increase of $14.7 million in accounts payable.
Outlook
Ashland Coal and Arch have signed a definitive agreement to merge
the two companies in a tax-free reorganization, which will be
accounted for as a purchase by Arch. After the merger, Ashland
Coal and Arch stockholders will hold approximately 48 percent and
52 percent of the combined company, respectively. Consummation
of the merger , which is subject to approval by Ashland Coal's
stockholders, is expected to occur about June 30, 1997.
Increased production at Hobet 21 and Dal-Tex will permit the
Company to increase its sales volume significantly in 1997 from
the 1996 level. The move of the dragline at the Hobet 21 complex
across the Mud River was completed early in January 1997. This
move, to an area with lower overburden ratios than those
experienced during most of 1996, is anticipated to result in
higher production at a lower cost per ton, but the move did not
have a significant effect on the first quarter because of
start-up problems in the new area, which have now been resolved.
The overland conveyor system at the complex is being extended and
upgraded at a cost of $10.5 million. The work is expected to be
completed in the third quarter of 1997, and to reduce costs.
As a result of dragline operations at Dal-Tex, Dal-Tex production
has been increased significantly and cost per ton has been
significantly reduced. The Company expects somewhat higher costs
at Dal-Tex and at the Mingo Logan complex over the remainder of
1997, but expects that those increases will be offset by cost
reductions at Hobet 21. The Company's expectations for continued
high production levels and low costs at Dal-Tex and for increased
production and lower cost per ton at Hobet 21 assume timely
completion of improvements, 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.
In addition to the operational improvements at Hobet 21 and
Dal-Tex, 1997 results should reflect the full benefit of the
operational restructuring that occurred in 1996.
Ashland Coal anticipates that its effective tax rate for 1997
will approximate 17%, reflecting the Company's level of
profitability and the level of percentage depletion. The Company
currently expects to be able to continue to recognize all of the
alternative minimum tax credits it generates.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128). The Company is required to adopt SFAS 128 on
December 31, 1997, and at that time will present recomputed
earnings per share (EPS) for all prior periods using the
methodology specified by SFAS 128. Although the company has not
yet determined the full effect of SFAS 128, it believes that
basic EPS as computed under SFAS 128 will be somewhat greater
than primary EPS as computed under the prior accounting rules.
Basic EPS excludes the dilutive effect of common stock
equivalents (such as stock options awarded to the Company's
employees), but primary EPS includes that effect. In addition,
the Company's convertible preferred stock will be less dilutive
under SFAS 128 than under the prior rules. The Company also
believes that diluted EPS computed in accordance with SFAS 128
will be slightly higher than fully diluted EPS as computed under
the prior accounting rules.
10<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
Prices for Company coal sold in the spot market in the first
quarter of 1997 were higher than such prices in the last quarter
of 1996. However, because of its level of spot and contract
commitments for the balance of 1997, the Company does not expect
that changes in spot prices during the balance of 1997 would have
a material effect on the Company's results of operations.
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 have since been
renegotiated, but the additional costs to the Company arising
from this renegotiation are not significant.
CSX Corporation (CSX) and Norfolk Southern Corporation (NS) are
major railroads in the eastern United States which together
transport most of the coal sold by the Company. CSX and NS have
agreed to acquire Conrail Inc. (Conrail), another major railroad,
whose primary service area is the Northeastern United States, and
to divide Conrail's assets between them. Costs of the
reconstituted CSX and NS may be somewhat lower than the costs of
those railroads prior to the acquisition. 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 in some markets. It
is not possible to predict with certainty the effects of the
proposed combination on interregional competition and,
specifically, on the Company.
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, 1997 and 1996:
1997 1996
(In thousands)
Cash provided by (used in)
Operating activities
Before changes in operating
assets and liabilities . . . . . $38,322 $22,346
Changes in operating assets and
liabilities. . . . . . . . . . . (7,570) 3,593
30,752 25,939
Investing activities . . . . . . . (11,111) (15,971)
Financing activities . . . . . . . (9,079) (10,681)
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . $10,562 $(713)
Cash provided by operating activities before changes in operating
assets and liabilities increased in the three months ended March
31, 1997, from the level in the same period of 1996 primarily
because of a higher gross profit per ton of coal sold and higher
sales volume. Those changes stemmed from the cost reductions and
productivity increases described above. Cash used for changes in
operating assets and liabilities in 1997 resulted primarily from
an increase in trade accounts receivable because of a higher
level of sales in the 1997 quarter, particularly in March, than
in the comparable period in 1996. Cash provided by changes in
operating assets and liabilities in 1996 reflects a reduction in
trade accounts receivable and normal increases in operational
liabilities partially offset by an increase in inventories.
The decrease in cash used in investing activities from the first
quarter of 1996 to the first quarter of 1997 resulted from both
lower purchases of property, plant, and equipment and lower
advances on prepaid royalties, which declined $3.6 million and
$1.9 million, respectively. Those decreases were partially
offset by somewhat lower proceeds from the sale of property,
plant, and equipment in the 1997 quarter than in the 1996
quarter.
Cash used in financing activities declined $1.6 million
principally because $1.4 million was used to repurchase some of
the Company's stock in the 1996 quarter, but no stock was
repurchased in 1997.
11<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
The Company's capital expenditures in the three months ended
March 31, 1997, were $10.9 million. Ashland Coal has budgeted
capital expenditures of approximately $45 million for the
remainder of 1997.
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.
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, 1997, the
Company had borrowings of $15 million under this agreement. At
March 31, 1997, the Company also had $152.9 million of
indebtedness under senior unsecured notes maturing in 1997
through 2006. Ashland Coal periodically establishes uncommitted
lines of credit with banks. These agreements generally provide
for short-term borrowings at market rates. At March 31, 1997,
there were $165 million of such agreements in effect with no
borrowings outstanding. The Company expects to make payments on
its indebtedness over the next 12 months totalling approximately
$41 million from cash flow generated by operations. 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. Some
of those borrowings are expected to be repaid during 1997.
Ashland Coal believes that over the next 12 months cash balances
at March 31, 1997, and cash flow generated by operating
activities will be adequate to fund anticipated capital
expenditures and to reduce debt as discussed above. Over the
longer term, Ashland Coal believes that cash flow from operations
will be adequate to fund anticipated capital expenditures, to
reduce the level of long-term borrowings, and to pay other
commitments when due.
Contingencies
Under the 1977 Surface Mining Control and Reclamation Act, a mine
operator is responsible for postmining reclamation on every mine
for at least five years after the mine is closed. Ashland Coal
performs a substantial amount of reclamation of disturbed acreage
as an integral part of its normal mining process. All such costs
are expensed as incurred. The remaining costs of reclamation are
estimated and accrued as mining progresses. 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 $33 million. The accrual for reclamation and
closing costs, which is included in other long-term liabilities
and in accrued expenses, was $12.7 million and $13.2 million at
March 31, 1997, and December 31, 1996, 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 to 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 $1.8 million (included in other long-term liabilities)
and believes that probable insurance recoveries of $.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 $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.
12<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. Most
electric utilities with whom the Company conducts business are
stable, well-capitalized entities with favorable credit ratings.
Deregulation in the electric utility industry may adversely
affect the creditworthiness of some utilities. Generally, credit
is extended based on the evaluation of the customer's financial
condition, and collateral is not required. Historically, credit
losses have 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
change the cost of mining, processing, or transporting the coal
under those contracts. Spot prices fluctuate primarily because
of changes in coal demand and supply. Demand for coal in the
short term is primarily driven by changes in demand for
electricity in the general 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 Environmental
Protection Agency, 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. In the event of a disruption of
supply, the Company might, depending on the level of its sales
commitments, benefit from higher spot prices if its own mines
were not affected by the disruption.
Interest-rate risk - Ashland Coal has significant debt and lease
obligations which are linked to short-term interest rates. If
interest rates rise, Ashland Coal's costs relative to those
obligations would also rise. For example, the Company estimates
that currently a 1% increase in short-term interest rates would
reduce income before income taxes by approximately $1.1 million
per year. Because an increase in interest rates is usually an
outgrowth of a higher level of economic activity and because
increased economic activity would likely lead to a higher demand
for electricity and consequently to higher spot prices for coal,
Ashland Coal believes that the negative effects of higher
interest rates on Ashland Coal's earnings could be partially
offset, depending on the level of its sales commitments at the
time, by higher spot prices. Additionally, the Company has the
capability to fix its interest rates on borrowings under its
revolving credit agreement for periods up
13<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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 enters into interest-rate swap agreements to modify
the interest characteristics of its outstanding debt. At March
31, 1997, the Company had entered into interest-rate swap
agreements having a total notional value of $50 million. These
swap amounts were used to convert fixed-rate debt to a variable
rate. Under these agreements, the Company receives a weighted
average fixed rate of 6.66% and was paying a weighted average
variable rate at March 31, 1997, of 5.67%. The average remaining
life on these swaps at March 31, 1997, was approximately 52
months. During the first quarter of 1997, interest rates rose,
and the Company chose to increase its exposure to variable
interest rates by selling $25 million of reverse swap agreements
that had been in place. A gain totalling $.2 million was
realized on the sale. The terms and amounts of the swaps
coincide with the stated maturities of the fixed-rate debt
obligations being converted. The variable rates are adjusted
using six months LIBOR. The Company's exposure to large
interest-rate fluctuations on its variable rate debt has been
mitigated through the purchase of short-term interest-rate caps
totalling $10 million as of March 31, 1997.
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 profitability will be substantially dependent upon
its ability to mine its reserves at competitive costs and to
replace depleted reserves with new reserves that can be mined at
competitive costs. There can be no assurance that replacement
reserves will be available when required or whether such
replacement reserves can be mined at costs comparable to the
depleting mines. Exhaustion of reserves at particular mines can
also have an adverse effect on operating results that is
disproportionate to the percentage of overall production
represented by the production of such mines.
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.
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.
14<PAGE>
ASHLAND COAL, INC. AND SUBSIDIARIES
Management's Discussion and Analysis--Continued
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 of the Hobet 21 or Dal-Tex
complexes for a prolonged period would have a significant adverse
effect on the Company's results of operations.
Any one or a combination of changes in demand; fluctuations in
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.
15<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The claims of Addington Enterprises, Inc. and certain of its
affiliates against the Company, Hobet Mining, Inc. and a
Company officer, and the Company's cross claims in such
litigation, all as previously reported in the Company's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1996, and in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, have been settled by agreement
of such parties dated April 24, 1997. Claims of all parties
not affiliated with Addington Enterprises, Inc. in such
litigation are anticipated to be settled prior to May 9, 1997,
for a nominal amount. The amounts paid by the Company and to
be paid by it pursuant to this agreement have not and will not
have a material adverse effect on the Company's financial
condition, results of operations, or liquidity.
Item 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the
Securities and Exchange Commission during the period
covered by this Report:
Current Report on Form 8-K dated January 27, 1997,
reporting that the Boards of Directors of the Company and
Arch had reached an agreement in principle to combine the
companies and that the agreed exchange ratio in the
transaction would result in former Company stockholders
holding 48% of the combined company.
Current Report on Form 8-K dated April 4, 1997, wherein
the Company reported that it and Arch had executed a
definitive Merger Agreement, and wherein the Company
filed a copy of its press release on the subject and the
definitive Merger Agreement.
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 1, 1997 /s/ William M. Gerrick
William M. Gerrick
Controller (Chief Accounting
Officer)
Date: May 1, 1997 /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, 1997
INDEX TO EXHIBITS
ITEM
27 Financial Data Schedule
18<PAGE>
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