Date: Thu, 20 Nov 1997 19:14:20 GMT Server: NCSA/1.5.2 Last-modified: Mon, 24 Feb 1997 22:16:21 GMT Content-type: text/html Content-length: 15664 Chand B. Vyas to Merrill Lynch Conference

Chand B. Vyas to
the Merrill Lynch Conference

March 21, 1996

Thank you,

I appreciate the chance to talk to you this morning. I intend to tell you about the strategies that have made Zeigler successful in the past... how we quantify these successes... and why our strategies today point to a very successful future.

Today, Zeigler's coal operations rank as one of the nation's largest coal producers, with a presence in all three major coal producing areas.

Our holdings include extensive land and coal reserves. They include two major import/export terminals. And they include a heavy investment in clean coal technologies.

If you remember nothing else about Zeigler as you leave today, I would ask that you focus on three key points:

Number one: Zeigler's key to adding value has come through purchasing companies, and then improving them.

Number two: Zeigler has a track record of success, growing revenues, earnings and cash flow.

And number three: Zeigler is implementing growth plans along a number of links of what I call the Electricity Value Chain.

The roots of our successes lay in our acquisitions. We have made three major deals since 1985, each time growing dramatically by purchasing and improving operations that were not being managed as core assets.

The first purchase was Zeigler Coal Company in 1985. While we began as a small Midwestern coal company, in 1990 we grew five-fold with the purchase of Old Ben Coal Company. And we more than doubled again in 1992 with the purchase of Shell Mining Company.

As a result, Zeigler has gone from a company that was barely among the top 50 coal producers in 1985 to a company that today is one of the very largest producers.

Each of the three companies we acquired were breaking even or losing money at the time of the purchase. And in each case the management of this company added value and turned these operations around.

Our goal in these acquisitions was not to simply add bulk. Buying and then improving management of these assets has been central to our strategies.

The first component of that improvement is operational. Year-in and year-out, we have been successful in reducing our costs through productivity improvements, liability management and other cost reductions. We expect these operational improvements to continue.

Now let's look at strategic improvements, as we align ourselves to meet customer needs. Utilities are our primary customers, and these utilities are facing enormous changes through the Clean Air Act and pending deregulation.

In response to the Clean Air Act, Zeigler is completing a dramatic transformation from what was essentially a high-sulfur coal producer several years ago to a company with an overwhelmingly low-sulfur profile today. In fact, three-fourths of our sales this year will be in low-sulfur coal. The remainder will find a home with export customers, or domestic customers who choose other compliance options.

In anticipation of pending utility deregulation, Zeigler is taking a variety of measures to improve our customers' ability to compete on the basis of price. We believe coal is unequaled as the least expensive, most abundant domestic energy source, and we look forward to helping our customers thrive in a deregulated environment.

We do this through contract structures that preserve shareholder value while offering customer flexibility. We do this through partnering with customers that lets us both profit through power marketing arrangements. And we do this through exploration of "coal by wire" concepts that let utilities transport coal in its combusted state, via transmission lines, versus traditional rail transport.

Our success at buying and improving properties has been dramatic. We measure that success through sustainable, long-term growth in revenue, earnings and cash flow. And, although that growth has not always been linear, you can see for yourself what that focus has brought us.

Since 1985, our actions have led to a 10-fold growth in revenues, a 7-fold growth in income and a 10-fold growth in cash flow.

This growth has occurred against a backdrop of declining prices in the coal industry. In fact, since 1985, Zeigler's cash flow has grown 10-fold, to more than five dollars per share in 1995, while coal prices have declined more than 40%.

This growth has come largely through coal, although our non-mining businesses have become ever-more-important contributors to our success.

The growth in our non-mining businesses has come through our vast land holdings, our import/export terminals, and our clean coal technologies. We've talked about our success in buying properties and improving them, and I've shown you the results of our value-adding management systems.

I'd now like to turn to the strong growth prospects we see in coal operations, in our non-mining operations and in other new business opportunities along the Electricity Value Chain.

Because believing in an industry is an important gateway to believing in a company, Zeigler's investment appeals are best understood within the context of our industry structure. We've been discussing coal, I realize, so it may surprise you to know that I believe the coal industry is not the appropriate context in which to view Zeigler.

For, while coal is an important part of our success, it does not exist in a vacuum. Instead, it is part of a chain of economic value that includes a variety of links: land, mining, energy, transportation, environmental activities, electricity generation and transmission, power distribution and, finally, the end user. Far from being a distinct industry, coal is a crucial driver for an industry value chain that encompasses one-sixth of the U.S. economy.

Today and for the forseeable future, coal is expected to fuel more electricity in the United States than all other sources combined. Unfortunately, though, we in the coal industry have too often allowed ourselves to be isolated from the value in the rest of this chain. We have taken a disproportionate share of the downside when times were tough, and shared in too little of the upside during times of opportunity.

The coal industry must change. And we at Zeigler have changed. At the heart of this change strategy is our aggressive participation in strategic alliances at links along the value chain. Let's explore these linkages.

I briefly mentioned our land holdings earlier. Zeigler operations hold or control more than 100,000 acres of land, primarily east of the Mississippi. In addition, we hold 1.3 billion tons of coal reserves, three fourths of which comply with Clean Air Act requirements. We also have oil, gas and minerals underlying the majority of these lands.

More greatly utilizing these assets was an important component in our non-mining growth in 1995, and I expect further successes from our land holdings this year.

Turning to our coal operations, I mentioned earlier that productivity improvements will continue to be important components of growth. These reductions in 1995 were partially masked by several operations that ran inefficiently due to market constraints. Barring anything unforeseen, we are targeting average cost improvements in the 40- to 50-cent-per-ton range in 1996.

Strategic investments are another key area for our growth. The biggest of these is the North Rochelle Mine, the largest new U.S. coal mine to be developed in the past decade.

We anticipate selling 8 million tons of this supercompliance Powder River Basin coal in 1998, with average production in the 10 to 12 million ton range.

In an industry with general oversupply conditions, greenfield development rarely makes sense. This development is one such exception. North Rochelle brings the perfect coal to a hungry market at the perfect time... as the utility industry approaches the stricter limitations of Phase II of the Clean Air Act in the year 2000. In addition to having some of the lowest sulfur of any U.S. coal, North Rochelle contains higher heating value than most other Wyoming mines. And North Rochelle offers important transportation diversity, expanding our customer universe.

As a result, this PRB coal may be among the first "national" coal ever, as we have seen market penetration as far as the deep south and northeast. We forsee the day where the type of coal produced by North Rochelle will be economically available to every region in America. No other coal-producing basins can today make this claim.

As such, we are very bullish on North Rochelle for both the financial and strategic successes that we anticipate.

Our discussion of coal growth strategies is incomplete without a brief discussion of strategic acquisitions. After a lull in 1995, we have seen industry activity pick up of late, with the announced purchase of Mapco, the pending demerger of Peabody and the sales of Coastal and Costain. This continues what I believe to be an inevitable trend, as the number of coal mines and producers in the nation continue to dramatically decrease from more than 6,000 mines two decades ago to 2,000 today. Zeigler has helped this consolidation along quite well in the past, and, without naming particular targets, I will say that I have little doubt that we will continue to be a major consolidator in the future.

We are already participants in the traditional transportation market, and in 1995 saw shipments nearly double at our Pier IX export terminal in Virginia. We see increased coal shipments as we continue to benefit from a growing global market for U.S. coal. Together with improved product lines, this dynamic should lead to greater contributions from both terminals in 1996.

The rules of electricity are changing, and one new rule is that coal may be more economic to transport once it is combusted. Domestically, I am not at all convinced that railroads will continue to be the transportation of choice for electricity fuel. As utilities break down geographic barriers and for the first time focus on low-cost competition through deregulation, I see strong potential for the transportation of coal by wire.

Now let's turn to the environmental front. We talked about our dramatically transformed coal production, as a result of the Clean Air Act requirements. We also have a major investment in clean air technologies through our Encoal subsidiary.

We have largely proven the proprietary Liquids from Coal technology, a process that takes Powder River Basin-type coal and converts it into two marketable products. The first is a solid fuel that is higher in heating value and lower in sulfur. The second is a liquid that resembles a number six fuel oil. Today, we are pursuing commercial applications through strategic alliances with Mitsubishi Heavy Industries and Mitsui. We look to continue the progress marked by our letters of intent for plant feasibility studies in China, Russia and Indonesia.

As a result, I am optimistic that we could see a full-scale plant commissioned within the next couple of years. We are working hard to turn that optimism into reality.

You've heard of customer alignment at a number of points along the electricity value chain, but nowhere is that alignment more important than at the power generation, transmission and distribution level.

This offers one of the more exciting linkages involving Zeigler, and in the customer/supplier line we are already carving out some significant successes. For instance, in 1995 we reached a partnering relationship with a utility that goes beyond traditional request-bid arrangements. Largely as a result of their low-cost fuel from our operations, the customer has joined one of the many exchanges that now broker electricity. As a result, the utility has opportunities for specific sales on the power grid.

We are their sole partner in offering on-the-spot coal quotes that enable them to make the best bids to gain this business. If the deal makes sense for both parties, we make it. Otherwise, we don't. We are also exploring strategic alliances within the domestic power market, possibly through equity participation at the generation or distribution level. And we continue to have discussions on a number of projects overseas. There we seek to turn our expertise into integrated projects with cross-equity participation.

While the timing of these projects is difficult to anticipate, I feel very good about the quality of project development now underway. And I would hope to have good news on this front as the year progresses.

I've told you that Zeigler's key to adding value has come through purchasing properties, and then improving them. I've shown you our track record of success. And I've discussed the strategies and plans that I believe will help us to meet our growth targets.

We are already experiencing the benefits of our efforts in 1996. I am pleased to report that, barring any unforeseen events, we are looking for first quarter earnings approximately two-thirds above last year's 22 cents per share. As a result, we continue to target a strong earnings performance in 1996.

Of course, my lawyers wouldn't forgive me if I didn't advise that these forward-looking numbers I've discussed are targets and not projections, and as such are subject to the uncertainties inherent in our business.

As a final note, I would add that we are very eager to show off our operations. I would invite everyone here to our annual shareholders meeting, which is planned for May 7 in Gillette, Wyoming. In addition to discussing our general plans and strategies, we intend to offer tours of the low-sulfur Buckskin Mine, our largest coal operation, as well as our Encoal plant.

Thank you for your time today. I would welcome any questions you may have.

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