Chand B. Vyas to
the Merrill Lynch ConferenceMarch 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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