Date: Thu, 20 Nov 1997 19:14:31 GMT Server: NCSA/1.5.2 Last-modified: Sun, 09 Mar 1997 21:38:22 GMT Content-type: text/html Content-length: 14098
FLB speech
Washington coal club
January 1997
Thank you George. I'd like to thank the Washington Coal Club for the opportunity to speak with you today about some of the changes we at Zeigler are making to place ourselves in the winners circle in a deregulated electric environment.
Those of you who have been familiar with Zeigler Coal Holding Company in the past, may have been looking at some of our recent actions, scratching your heads thinking "Zeigler is a coal company?" Well let me explain how we view ourselves and our industry to help you understand some of the paths we have chosen. And I hope you remember the importance we place on these three five letter words -- clean, cheap power.
Today, Zeigler ranks as one of the nation's largest coal producers, with a presence in all three major coal producing regions -- Appalachia, Illinois and the Powder River Basin.
Our holdings also include extensive land and coal reserves and two import/export terminals on the east coast, at Newport News and Charleston. They include a heavy investment in clean coal technologies, most notably our clean coal demonstration plant -- ENCOAL -- in the Powder River Basin. And they include the emerging power segment - our bid to purchase Cajun Electric, and the launch of our newest subsidiary, EnerZ Corporation, an energy trading firm.
Looking at our holdings you can see that we believe 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 coal technologies, electricity generation, power distribution and, finally, the end user, the electricity customer. In short, far from being a discrete industry, coal helps propel an industry value chain that encompasses nearly 15% of the U.S. economy.
But just because coal fuels more electricity in the United States than all other sources combined, you would be wrong to think our industry has carved out a dominant market and margin linkage along this value chain.
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 best example of this lies in coal -- raw energy -- that sells for about $3 per ton in the Powder River Basin in Wyoming, and yet can cost an end customer in the eastern part of the country the equivalent of $100 per ton by the time he plugs in his microwave or computer.
The coal industry must change. We at Zeigler have changed. When regulation forced us to look at coal differently, we made changes in our company to seek ways to provide clean, cheap power.
Clean coal was once an option. Clean coal was once an ideal. Today, however, it is real - it is mandatory - and it is accomplished. Not providing clean coal is no longer possible. The question is how we do so. And that question, like so many things, is driven by economics.
Clean cheap power is the result of changes that have taken place in our industries. The root of these changes come from regulation.
These thoughts may seem obvious, but I believe they have profound implications on how we act. Because whether we are with a coal company, with a utility, or somewhere else along the chain, our goal today must not be focused solely on coal. It must not be focused only on transportation, or generation or transmission.
In the 1990s there have been two major changes that have affected our primary customers and have dramatic implications for our product.
From their inception, we have known the Clean Air Act Amendments of 1990 would have a dramatic effect on our business through this decade and beyond. This would come through strict limits on sulfur dioxide emissions for utilities in Phase I beginning in 1995, and even tougher limits in Phase II, beginning in the year 2000.
Our challenge here has been to match our production with the changing compliance needs of our customers.
In 1992, Congress passed the Energy Policy Act, which for the first time enabled states to begin breaking down territorial monopolies of electric utilities, leading to so-called "deregulation." Since that time, the normally staid utility industry has been undergoing dramatic changes.
Our challenge here? To develop strategic alliances to help our customers through this uncertain time.
A lot of folks forget the original Clean Air Act wasn't passed in 1990, but in 1970. That passage was predicted to deal a death-blow to coal... But instead utilities more than doubled their coal consumption, while sulfur dioxide emissions have been reduced by more than 50%.
Congress knew the results of the original Clean Air Act was good... Their own study showed them as much. But in 1990, they yielded to political pressures and passed the Clean Air Act Amendments.
This unnecessary regulation has left utilities with essentially three choices for compliance:
They can burn high-sulfur coal, and install scrubbers;
They can switch to low-sulfur coal; or
They can burn higher-sulfur coal and offset those with emissions credits, which are traded on the open market.
Let's now turn our attention to deregulation, which I believe will have significantly broader ramifications for our customers than even the Clean Air Act.
Deregulation is traditionally a dirty word for industries. It conjures up images of price wars, uncertainty and shrinking margins. That's why it might surprise you to know that we at Zeigler areexcited about competing in an environment in which our customers are deregulated.
This optimism grows from a simple equation. Coal, year-in and year-out, has been the least-cost baseload fuel. Fuel is the largest cost component for utilities. And utilities will now have an incentive to compete on the basis of price. Coal's favorable cost structure will continue to position us favorably vis a vis other fuels, protecting and perhaps increasing coal's sizable market share.
I say this for two reasons. The first is fairly obvious: a utility with, say, a troubled nuclear investment, has traditionally been able to pass along the higher rates to customers without regard for efficiency. The new marketplace, however, will have patience neither for so-called "troubled" plants, nor for subsidizing pie-in-the-sky fuels like solar and windmills. We see nuclear's market share shrinking from its number two position now, at 21%, to less than 10% in the next 15 years. Coal stands ready to compete for that market share.
The second reason has to do with reserve capacity. Utilities in the past have been generally rewarded on invested capital, and not on operating efficiencies. As a result, coal-fired baseload plants today run at an average of only 55 to 60% capacity. We believe that utilization could increase by 20 percentage points, and such an increase would account for a 250-million-ton-per-year boost in coal demand, absent any new coal-fired plants that could come on line.
Our industry will fare well within this environment, and we continue to leverage our position by continuing to build strategic customer alliances. Let me offer you several examples of what I'm referring to. They offer a good glimpse of the future... And how Zeigler is positioning ourselves - and our customers - to prevail within this new environment.
The first model comes from a long-term customer with whom we reached agreement by establishing a two-tier pricing structure that involves both a per-ton pricing as well as semi-regular lump sum payments over the life of the contract. Doing this allows them a second tier of costs that may be recouped under possible stranded investment recovery mechanisms.
The second model involves a pure partnering relationship that goes beyond traditional request-bid arrangements. It comes from a utility in Illinois which, largely as a result of its low-cost fuel from our operations, 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, and we are their sole partner in offering on-the-spot coal quotes that enable them to make the best bids to gain this incremental business. If the deal makes sense for both parties, we make it. Otherwise, we don't.
The third model involves our Encoal process - the R&D project I referred to earlier which XXXXX the BTU and leaves the sulphur from already low sulfur coal. Encoal was conceived with the thought of providing cleaner coal for utilities burning midwest coal at full capacity but unable to handle the derating that could come about from a switch to Powder River Basin coals. This could still be the case - but we also believe Encoal has strategic positioning within a deregulated environment for utilities running PRB coals at full capacity and wanting a btu boost without adding expensive extra capacity.
The fourth model, falls into pure "wheeling" concepts. Recently, we have been told by some of our customers: "give us your best price on coal going to the closest low-cost utility with excess capacity... And we'll buy your coal by buying their power." This approach... Referred to as "coal by wire" will become increasingly important as transmission lines become the coal carriers of the next century.
Let's explore the coal by wire theory a bit further.
We believe that because the rules of electricity are changing, coal transportation will come in different forms in the future. And one new premise is that coal may be more economical 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.
Zeigler intends to be a winner in its exploration of coal by wire concepts, letting utilities transport coal in its combusted state, via transmission lines, versus traditional rail transport.
The fifth model relates to our current offer to purchase the non-nuclear assets of Cajun Electric out of bankruptcy. Some have said that, while they know of utilities buying coal mines, this is the first time a coal company has made a bid for a significant utility. We are doing so to align ourselves more closely with our end customer, grow along strategic links of the electricity value chain, and satisfy the mandate of those three words again: "Clean Cheap Power."
And finally, the sixth model involves EnerZ Corporation. This fall, Zeigler announced the launch of EnerZ Corporation to take advantage of emerging market opportunities growing out of utility deregulation. Since that time, EnerZ has opened a New York City office and received approval from the Federal Energy Regulatory Commission for status as a wholesale power marketer. Leading EnerZ is Tayeb Tahir, who has extensive expertise helping utilities and gas companies create and operate energy trading groups. And I am proud to report that within the last copule of weeks (even before we moved into our Newy York Office) EnerZ has in fact made several trades.
One thing that will, we believe, help us with EnerZ, is that Zeigler itself brings to the table a natural long position in coal and annually fuels more than 50 billion kilowatt hours of power in the U.S., Or nearly 2 percent of the total.
Whereas in the past Zeigler could only sell its coal to a utility customer over an industrial company, tomorrow we may be in the position of not only providing the fuel supplies, but the end customer for the power. Another likely scenario is the potential of purchasing excess generating capacity at a coal-fired plant, paying the generator to burn our coal, and selling the power to the end customer.
These are just a few of the possibilities we see unfolding with EnerZ, as we position ourselves for a fully deregulated energy marketplace -- a marketplace where Clean, Cheap Power will prevail.
These new models which I have discussed with you this afternoon portray the rapidly changing environment in which we operate... And how we at Zeigler are positioning ourselves to respond to this changing environment by being a supplier of Clean, Cheap Power. For those of you who have been scratching your heads wondering what Zeigler "the coal company" has been up to, I hope I've cured your itch. We have worked hard and had the good fortune to complete a dramatic transformation of our company in the face of a fast growing deregulated electric environment.
At this time, I would like to open up the floor to any questions you may have.
And once again thank you for having me as your guest today.