Date: Thu, 20 Nov 1997 19:14:38 GMT Server: NCSA/1.5.2 Last-modified: Fri, 26 Sep 1997 18:57:11 GMT Content-type: text/html Content-length: 13456 FLB speech

Francis Barkofske
Lehman Brothers Energy Conference
The Sheraton New York Hotel & Towers
New York, NY
September 10, 1997


Good morning.

Zeigler Coal Holding Company is a very different company than we were a decade ago and undoubtedly from where we will be five years from now.

My purpose today is to offer an overview of Zeigler -- where we've been, where we're going, and why we're changing. That last element -- the why -- is perhaps the most important. For Zeigler's major growth initiatives share one common thread a careful read of what the market is telling us, and a bold but reasoned action based on that read.

It was our read of that marketplace that has led to significant growth through acquisitions, the first of the three growth areas I would like to discuss with you -- a growth strategy that has led to dramatic changes in production from high-sulfur coal to low and that has led to our growth not just as a coal-based business but as an emerging integrated energy company.

Before I discuss each of these in more detail, I'd like to show you two maps that offer a brief overview of our traditional industry and our company.

Most people in the United States don't realize that coal is more widely used today than ever before. Rather than deliver it into their basements, as we did half a century ago, almost all coal goes to electric utilities. On average, each of you today will use 20 pounds of coal. But don't worry -- we deliver. We deliver right through your electrical outlets.

Coal fuels 55% of all electricity in the country today -- more than nuclear, gas, oil, hydropower and renewables combined.

Coal is an abundant resource throughout the United States, which has been called the Saudi Arabia of coal. And economic reserves will last at least several more centuries at today's consumption rate. Utilities burn coal because of its reliability, both in supply and price.

Zeigler is among the largest U.S. coal producers and marketers in the United States.

We are also among the largest holders of coal reserves, and control more than 300,000 acres of surface lands. We have a significant presence in all three major coal-producing regions. We have transloading terminals in Virginia and South Carolina. We have major investments in technology, including our Liquids From Coal technology.

And we have an emerging presence in power, both in hard assets and through EnerZ Corporation, what I call a virtual utility.

Now, back to a discussion of our growth. Zeigler's growth, first and foremost, has been driven by a recognition that the market demands producers who manage their business as a core asset. Between 1985 and 1992, Zeigler completed three acquisitions that propelled us from outside the top 50 coal producers to high within the top 10.

Our former parent company -- Houston Natural Gas (now ENRON) bought into coal in the 1970s, as a commodity hedge.

Then in 1985, management took the company private through an LBO, believing that coal was not being managed as a core asset.

We then completed two additional acquisitions, increasing five-fold in 1990 with the purchase of Old Ben Coal from British Petroleum, then doubling again in 1992, acquiring Shell Mining from Shell Oil Company.

We don't, however, just buy coal properties; we improve them. Our success here has been dramatic, as measured 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 roughly a nine-fold growth in revenues, income and cash flow.

Having gone public in the Fall of 1994, we have seen our share price increase, as both our earnings and price-earnings multiple have grown to reflect our strategies and performance. Yesterday, our stock closed on the New York Stock Exchange at 24 13/16.

Our second growth strategy was dictated by the dramatic market changes caused by the Clean Air Act Amendments of 1990 and resulted in our growth in low-sulfur production, both by acquisition and development.

In 1990, eight of our nine active mines were in the Illinois Basin, which is known for coal with high heating value but also high sulfur. Later that year, Congress passed amendments to the Clean Air Act greatly limiting the sulfur content emitted by electric utilities.

American utilities have three primary ways to comply with this act. They can:
-- install scrubber and continue to burn higher sulfur coal
-- purchase emissions credits and continue to burn higher sulfur coals or
-- switch to lower-sulfur coals

To date, most utilities have chosen to switch to lower-sulfur coals. As you might guess, this has had an enormous impact on the market for Illinois Basin coal.

The ink was barely dry on this act when we responded. Whereas in 1990 nearly all of our production was in high-sulfur coal, by 1995 more than half was in low-sulfur coal. And today, primarily as a result of the Shell acquisition in 1992, four of every five tons we sell is low in sulfur.

We've discussed growth through acquisitions and growth through a dramatic change in our product mix. I'd now like to take a look at our third, and by far largest, growth driver -- utility deregulation.

Let me make a few points regarding utility deregulation. Open access at the wholesale level has been with us for a short while now. A retail market is just emerging, with pilot projects in a number of states.

As a result, the traditional utility structure will no longer apply. In the vertically integrated structure of the past, a utility owned the generating, marketing, transmission, service and distribution assets. In the future, many or all of these will be owned separately.

In addition, we also see potential in virtual assets -- the non-physical instruments that can control the creation and flow of energy absent the ownership of the hard assets.

Deregulation can mean pressures on pricing and margins for suppliers. Yet I believe there are several key reasons why coal is poised to grow within deregulation:

  1. Coal is the lowest-cost fuel consider that 22 of the 25 lowest cost power plants in the United States are today coal-fired.

  2. Coal has built in expansion opportunities. We estimate that there are 250 million tons of unutilized coal fired capacity within baseload generating plants today.

  3. And deregulation opens up coal transportation alternatives. For instance, we are seeing increased use of coal-by-wire, whereby customers may find coal more economical to ship via transmission lines, in its combusted state, than via rail.

I've talked to you about the marketing catalysts that have led Zeigler to change. Utility deregulation again offers us the chance to see the world in a much different way from most of our colleagues. Zeigler has identified twin strategies to succeed in this new marketplace.

First, we intend to strategically align ourselves with customers. Second, we intend to grow along the chain of economic value for electricity.

Both of these strategies have embedded echoes of an age long ago. Then, Zeigler did strategically align itself with our ultimate customers each day -- since we controlled all of a very short chain of economic value from coal mine to delivery truck to home. Since then, we have become quite distant from the end customer, because utilities with captive customers have comprised nearly 90% of U.S. coal consumption. With utility deregulation, though, we are returning to a day when end users will once again be the decision makers for energy.

Growing along the value chain also means unlocking value that has flowed from coal to others outside our industry in the past several decades. Consider that coal we sell in some instances for four dollars per ton can cost the ultimate energy customer -- the homeowner who uses his microwave or computer -- the equivalent of eighty to one hundred dollars per ton for that combusted coal, vis a vis his electrical outlet.

we've identified six primary business segments.

1.Coal
2.Technology

3.Power
4. Environmental & Engineering 5. Asset Management
6. International
That's a brief overview of where we've been, where we're going and why we're changing.

I personally perceive our future as a vibrant, growing integrated energy company one that has met the challenge of several enormous strategic transformations in the past and one that intends to continue to make the changes necessary to ensure significant returns to our shareholders in the future.

At this time, Jackie Burwitz our Manager of Investor Relations would be pleased to answer any questions you may have.