Date: Thu, 20 Nov 1997 19:15:08 GMT Server: NCSA/1.5.2 Last-modified: Tue, 04 Nov 1997 16:42:30 GMT Content-type: text/html Content-length: 12976 Zeigler's Three Strategic Transformations

Chand B. Vyas
Zeigler's Three Strategic Transformations
The Merill Lynch International Coal Conference
August 21, 1997




Good Morning,

There are several parallels between Australian and U.S. Coal For Example:

I am here to provide you one company's answer to some of the same challenges we have faced in the U.S.

Like nations, companies undergo periods of evolution or dramatic revolution. Zeigler has been marked by both. We are a very different company than we were a decade ago… and undoubtedly from where we will be five years from now.

I'd like to focus on three specific transformations that have defined Zeigler… and that spell opportunity for investors.

We have undergone massive change with ownership as a catalyst… with legislation as a catalyst… and with the market as a catalyst.

Before I delve into our transformations, though, I'd like to show you two maps to give you 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. They will each use 20 pounds of coal today. But they don't worry about picking it up… we deliver, right through their 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.

Before I begin a discussion of our transformations, I'd like to offer you a brief overview of our operations.

Now I'll discuss the transformations that have shaped Zeigler.

The first of these is structural in nature. In a little more than a decade, Zeigler has been a subsidiary of a major company, a private, closely held company and, now, a public company.

Our former parent company bought into coal in the 1970s, as a commodity hedge.

Management took the company private in 1985, believing that coal was not being managed as a core asset.

We then completed two additional acquisitions, increasing five-fold in 1990, then doubling again in 1992.

We don't just buy coal properties. We improve them. Our success in improving coal operations 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 roughly a nine-fold growth in revenues, income and cash flow.

In 1994, we completed our IPO. In the past several years, we have seen our share price increase, as both our earnings and price-earnings multiple have grown to reflect our strategies and performance.

We've talked about ownership as a catalyst for change. Now I'd like to turn to legislation.

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:

Most utilities have chosen to switch during the first phase of the act. 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, four of every five tons we sell is low in sulfur.

This was not the first time we added shareholder value by successfully responding to the needs of the marketplace. And it would not be the last.

We've discussed two of the three defining catalysts for Zeigler's transformations. I'd now like to take a look at our third.

The marketplace was the backdrop in which our financial structure evolved, and was a key driver for our shift from high to low sulfur.

But when utilities are your customers, I can think of no greater change than what is going on right now, with 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, and 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.

I also see potential in what I would call virtual assets -- the non-physical instruments that can control the creation and flow of energy absent the ownership of the hard assets. And there are other industries that we could look to for examples of this.

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:

Coal the lowest-cost fossil fuel… consider that 22 of 25 lowest cost power plants are coal-fired.

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

And deregulation opens up coal transportation alternatives. We are seeing increased use of so-called 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 external catalysts that have led Zeigler to change. Utility deregulation again offers us the chance to see the world in a much different way fromm 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 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 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 equivalent of eighty to one hundred dollars per ton for that combusted coal.

To enact these strategies, we've identified six primary business segments.

Coal will remain a growing business, and one in which we see potential growth as the result of pending utility deregulation.

The story of coal is one of an industry whose markets have dramatically changed as the result of technological innovations, from home use to trains, ships, industry and power plants. We believe in continuing investments into technologies to provide tomorrow's solutions to today's energy problems. Zeigler's Technology Segment is charged with pursuing promising technologies that could in the future shape the way we do business in the energy sector.

Wholesale and retail deregulation of the $200 billion-plus electric utility industry is a huge national economic dynamic. The Zeigler family of companies, whose coal fuels over 50 billion kilowatt hours each year of clean, reliable, low-cost power, is uniquely positioned to recognize and take advantage of the many opportunities posed by utility deregulation. Our most direct investment in power comes through our bid for Cajun Electric, but we have other projects pending in this area.

The United States experienced radical growth in sales from power marketers since 1995, doubling each quarter and now accounting for more than 10% of all wholesale transactions. At the same time, affiliates of utilities account for just 8% of all power market sales. EnerZ is already active in energy trading, but our longer term vision is that of a virtual utility, owning and controlling the creation and flow of electricity without necessarily owning the related hard assets.

We have had considerable experience and opportunity managing environmental issues, including land reclamation and water clean-up as well as waste disposal and remediation. I believe the environmental and engineering industries offer exciting opportunities to add shareholder value utilizing existing expertise. Areas currently being explored include environmental services and industrial development. The first major project in this emerging segment is the Phoenix Commerce Center, a 415-acre industrial park we are developing in southern Indiana on land already owned by Zeigler.

Asset Management includes our two East Coast transloading terminals and Phoenix Land Company. Their mission is to buy, sell and manage assets for maximum returns -- assets that in a different company may have been forgotten.

In addition to domestic expansion through investments both in hard and "virtual" assets, Zeigler is evaluating international opportunities in energy hungry nations. While power tends to grow at a 2% to 3% rate in the United States, demand in certain European and Asian countries is growing at 7% to 10% annually. Coal continues to be a popular, inexpensive fuel source globally, mined in more than 50 countries and powering 40 percent of all electricity worldwide. Zeigler is evaluating several different avenues whereby it can add value in promising ventures, including privatizations, independent power projects, contract mining and our Liquids From Coal investment.

Zeigler's coal business is not going away, and in fact is growing. But make no mistake. The new Zeigler is no longer about coal mining. It is about new markets, new products, and new customers along segments of a rapidly changing and growing value chain, and we see these segments contributing strongly to our growth in years to come.

That's a brief overview of where we've been, why we are changing and where we are going.

I 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 in the future.

Please understand. I am not entering these segments simply to acquire wisdom or gray hair or business trophies. I am a significant investor in this company, and we are making these moves because I see the opportunity to add significant shareholder value by expanding the business to create new markets, new products and new customers.

At this time, I would be pleased to answer any questions you may have.