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
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: