Date: Thu, 20 Nov 1997 19:13:53 GMT Server: NCSA/1.5.2 Last-modified: Mon, 24 Feb 1997 22:16:22 GMT Content-type: text/html Content-length: 18891 Growth - Feb. 15, 1996

Chand B. Vyas to
New York Stock Securities Analysts
New Strategies For Growth

Feb. 15, 1996

Good morning. I intend to share with you today my visions and plans for Zeigler Coal Holding Company. But before I do, let me make several statements. They may seem contradictory on their surface. I assure you, they are not.

A generation ago, President John F. Kennedy stood in front of the Berlin Wall, and although he was an American, proclaimed: "I am a Berliner." Today, I stand here as part of the First Coal Industry Conference and say to you, "I am not a coal miner."

I am not a coal miner, though I have 22 years of experience in the coal business. In addition, Zeigler is not just a coal company, though today we are considered the largest pure play in coal. And finally, Zeigler's future success will not be measured solely on coal, although coal will continue as a core asset.

Let me address the first point, for it's important for you to understand me to understand my strategies. I wasn't a coal miner in 1985 when I mortgaged my house and helped to lead the buyout of Zeigler from Enron. Nor was I a coal miner when I orchestrated huge acquisitions from British Petroleum in 1990 ­ and Shell Mining in 1992. I wasn't a coal miner as Zeigler grew exponentially, from a company barely in the top 50 in 1985 to one of the five largest coal companies today.

And I am not a coal miner today, in the strict sense of the word. Oh, I know coal mining. I know well the massive construction and engineering that go into today's huge mines... the mining practices that make for best surface and underground operations... the land holdings and other deposits that accompany coal mining... the vagaries of coal transportation... and, perhaps most importantly, the complex issues surrounding coal markets... and coal customers.

My expertise, Zeigler's expertise, though, lies not in extracting coal but in extracting value. Each of our three acquisitions, and each of the thousands of decisions along the way, have been made with the single-minded focus of creating value. And coal has been a critical ingredient in that value.

We target our value creation through a focus on 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.

Given that context, let's discuss the more recent past. When I took over as CEO a year ago, the challenge was daunting.

Fundamental changes were taking place with utilities, our primary customers. These changes were dramatically changing the way they did business. And that had enormous implications for the way we did business.

In fact, the same day I became CEO, Phase I of the Clean Air Act Amendments of 1990 took effect. This dramatically increased our customers' appetites for low-sulfur coal.

In addition, utility deregulation was forcing our customers to really compete for the first time.

At the same time, we were locked in disputes with three of our customers.

I knew these challenges existed. I also knew that our strategies for tackling these challenges were necessary. But I have since become convinced that additional value-adding strategies can take us to a much higher level.

Our coal strategies had been threefold: to grow through productivity improvements, internal investment and acquisitions. Let's take a look at each one.

Productivity improvements have been crucial to success in an industry where the average spot price has declined nearly 50% over the past decade. While we have dramatically improved productivity, however, we as an industry have failed to use these gains to increase margins. Instead, we have produced additional coal at prices that simply cover the lower, incremental costs.

Internal investment is a constant necessity, of course. But such investments within the form of greenfield development are rare, and for good reason. By my own estimate, our industry has an overcapacity of about 150 million tons. The midwest is an excellent example of this.

We made the tough decision in 1995 to close some of the lowest-cost mines in the Illinois basin. These mines produce coal in the $16 a ton range. Yet in 1995 we sold coal here for as little as $11 a ton. These prices can only be met by producers interested in volume, with no regard for margins. It reminds me a bit of the grocer who said he lost a little on every sale, but planned to make it up on the volume........... We have no intention of becoming grocers.

That leaves us with acquisitions. In an industry with oversupply, acquisitions and consolidation must continue for a variety of reasons. Regulations and capital requirements are leaving the mom-and-pops behind. We've gone from 6,000 coal mines 20 years ago to fewer than 2,000 today. And further consolidation will come as aging mines close. It will come as long-term contracts expire. And it will come as non-strategic producers are forced to fight for capital. But the timing and scope of acquisitions are not something that can be easily predicted.

Don't get me wrong. Despite these clear industry pathologies, let me assure you that my optimism for coal has not wavered. I just think it is important for you to clearly understand why our strategies must change ­ and why Zeigler's strategies have changed.

Coal does not exist in a vacuum. It is part of a chain of economic value that includes a variety of links: engineering, construction, mining, energy, transportation, clean air technologies, electricity generation, power distribution and, finally, the end user. In short, far from being a discrete industry, coal helps to propel an industry value chain that represents one-sixth of the U.S. economy.

Now, because coal fuels more electricity in the United States than all other sources combined, you might think that our industry has carved out a dominant market and margin linkage along this value chain.

And you would be wrong.

As we've discussed, historically, we in the coal industry have allowed ourselves to be isolated from the value in the rest of this chain. When there have been problems along the chain, we have borne the brunt of the pressures. And when there have been opportunities, we have too often been excluded.

The coal industry needs to strategically align itself with its customers. At Zeigler, we intend to make that happen.

Becoming strategic players in other links in this value chain ­ both domestic and overseas ­ is at the heart of our new corporate strategy.

We intend to access those links that allow us to boost margins ­ and to make best use of the reinvestment opportunities afforded us through our very good cash flows.

That's why we are currently completing a major corporate reorganization. We are now structured around a core corporate service staff along with three primary growth units: coal, non-mining, and marketing/new business development.

The three strategies we discussed earlier ­ productivity improvements, internal investments, and strategic investments ­ remain crucial prongs in our coal growth unit. Our non-mining unit is focusing on dramatically increasing contributions of previously underperforming assets and businesses in the non-mining sector.

And, most importantly, our marketing and new business development group has been charged with creating major new entries at strategic points along the value chain.

Let's take a look at each growth unit, given our accomplishments in 1995 and where we see each one taking us in 1996 and beyond. I think you'll find that we've given new meaning to the "three Rs" you heard of in school. For us, this has translated into redefined markets, restructured operations, and a revitalized corporation.

For our coal growth unit in 1995, we made tremendous strides:

  • We took aggressive steps to idle or close our poorest performing operations, thereby sharply improving our portfolio of coal mines.

  • We dramatically transformed our company from a predominately high-sulfur producer four years ago to one with an overwhelming low sulfur profile today. The coalfields are littered with producers who were unable to do this as quickly or as ably.

  • We resolved all three customer contracts under dispute, each time positioning the company for improved earnings and growth.

  • And we achieved a record year in cash flow from operating activities that allowed us to pay down more than $100 million in debt and fuel our future growth engine.

I am extremely pleased with this progress in 1995. But these moves were preliminary steps. And, as in the case of our announced closing of poor performing Midwest mines, which had been severely impacted by poor market conditions, these moves can even appear negative on the surface, as revenues show a temporary decline.

In the Midwest, our focus is on aggressive liability management. This is evidenced through our customary experience in controlling costs related to reclamation, medical and black lung. It also is demonstrated by our more creative efforts. Consider our donation of Old Ben Mine No. 25 to the National Museum of Coal Mining. As a result, our reclamation liabilities have been minimized, and the closed mine can live on to help educate future generations on the importance of coal.

Our liability management is also reflected in our recently signed sales transaction of our Indiana operations, which are expected to cap our liabilities and provide moderate future cash flow and earnings growth over the next several years.

Closing these Midwest operations has not been easy. But I believe this sort of pruning is important for long-term growth.

So let me share with you some of the most promising projects from our coal growth units.

  • First, and largest, is North Rochelle. After several years of planning ­ and selling ­ I am pleased to announce today that Zeigler is proceeding with what will be the largest new coal mine developed in the nation in the past decade. We anticipate selling 8 million tons of this supercompliance coal in 1998, with average yearly production in the 10 to 12 million ton range.

I said earlier that greenfield development rarely makes sense. I believe 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.

Today, North Rochelle contains more than 175 million-tons in reserves, providing a 15-year mine life. And we are taking steps to obtain an additional block of nearly 200 million tons nearby.

We are very bullish on North Rochelle, and are pleased to already have several contract customers signed up. These commitments add well over 50 million tons and more than 300 million dollars to our already extensive contract backlog. We also retain sufficient uncommitted coal to take advantage of anticipated price improvements as we move nearer to Phase II.

North Rochelle is an important element in our coal growth strategies, but it's by no means our only one.

  • We are in the latter stages of discussions to acquire reserves for the development of a 1-million-ton-per-year mine in Eastern Kentucky. And we're in negotiation for the sale of three-fourths of its first several years' production. This mine should produce quality coal for at least seven years beginning in 1997.

  • And there's Mine No. 20, a metallurgical grade mine originally scheduled to close in early 1995. Thanks to a motivated workforce, new thin-seam mine equipment and additional reserves, the mine is still very much alive. In addition, if our current efforts are successful, the operation will still be profitably selling coal far beyond the turn of the century.

These are only examples. Each of our mines is developing plans to improve productivity and expand markets and margins, and we are optimistic that these mines will produce a steady stream of successes.

Now let's turn to our non-mining growth units. I am particularly proud of their accomplishments in 1995, after we made the strategic decision that they were to be managed not as surplus assets but as core businesses. The result? Their contribution of EBIT more than quadrupled in 1995, and are expected to increase by another 50% in 1996.

Continuing improvement from our non-mining growth units should come from several sources:

It should come as revenues and margins improve for both import/export terminals, as we take advantage of the strong global coal market and better product mix.

Improvement should also come as we exit the demonstration phase and move to greater commercial development of ENCOAL, our clean coal technology plant. In fact, we're a step nearer to that thanks to the involvement of Mitsubishi Heavy Industries, who has signed an agreement for feasibility studies related to joint engineering and construction projects, and Mitsui, who intends to serve as our agent for the sale of our clean coal product in Southeast Asia.

And improvement should come from better use of our hundred thousand acres of land assets, leading to 20%-plus return projects in farming, timber, oil and gas, ash disposal and other businesses.

Now let's look at some of the opportunities offered by our third growth unit, which by nature is quite different from the other two.

Contrary to the first two operating units, Marketing and New Business Development has no operating or even sales duties on a day-to-day basis. It has one overriding purpose: to define, locate and land high-return projects and businesses at strategic points along our value chain.

How does access to links on a value chain differ from traditional vertical integration? Well, first of all, it involves accessing those links of the chain that offer the highest returns, rather than simply attempting to digest the entire chain. But, more importantly, it can come through strategic alliances in integrated projects ­ the sharing of equity positions with equally skilled partners at various points along the chain.

Discussing specific opportunities is dangerous, given that several of my competitors are sitting right here in this room. Still, I can give you a flavor of several of the projects being explored.

Each of the links on the value chain exists domestically and overseas. And, while the partnering concept is particularly appealing, each of these links offer entry points through organic development, strategic alliances or full equity positions.

  • That means we could take our surplus talent in efficient mining and put it to good use developing a low-risk, high-return international mining consulting venture.

  • That means we could combine our resources with other players and approach entire integrated projects for fuel, transportation, generation and distribution of electricity.

  • And that means that we could make a major acquisition of a player anywhere along the value chain, from pure producer to pure distributor.

Already, in the past several months we have signed a letter of intent with a partner to determine the feasibility of a major power plant/coalfield project overseas. We have been in advanced negotiations with power marketers ­ negotiations that could provide an entree into the electricity markets in a variety of ways. And, yes, we have explored strategic purchases of low-sulfur reserves and operations within coal domestically ­ and these discussions have already paid dividends.

Redefining, restructuring, revitalizing. Opportunities domestically and globally in coal mining, non-mining and new business development.

Zeigler's success has come from anticipating markets, moving to meet them, improving productivity, making good investments, and managing businesses as core assets. Our success has come from adding value.

Today, I tell you that Zeigler has turned a corner. Not because we are pursuing high-return businesses that add shareholder value ­ we have always done that. But because we are committed to participating along strategic links ­ links in an integrated value chain that dramatically increase our upside.

As one of Zeigler's largest shareholders, I can tell you today that I have never felt better about our future prospects, as we continue to manage the business for strong growth in revenues, earnings and cash flow.

And I appreciate the opportunity to share this enthusiasm with you today.

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