In search of the mother lode - Ziegler Coal - Nota Bene

Chief Executive, The, Nov, 1995 by Frances Nuelle

Coal has taken its lumps over the years, but Chand Vyas would like to change all that. Everyone has always described the coal industry with a D-word: damp, dirty, or dangerous," says Vyas, CEO of the fifth-largest coal producer in the U.S., $870 million Zeigler Coal. "Today, nothing could be further from the truth."

Yet it is another D-word - deregulation - that could be a boon to the coal industry. While one could hardly characterize coal as a sexy mineral, as deregulation of the utilities looms larger and consolidation among the big coal producers winnows the number of players down to a manageable five or six, coal may be getting sexier as an investment. "The industry has suffered because everyone always thinks coal is still mined with a pick and that all miners get black-lung disease," says Clay Hoes, vice president of steel and coal equity research at Chicago-based Everen Securities. "That is simply not the case anymore." Those misperceptions, he says, are coupled with a lack of knowledge about the extent to which coal is used as an electricity source. "The coal industry as a whole hasn't been doing as well as it should be, investment-wise."

Fairview Heights, IL-based Zeigler, the U.S.' largest publicly traded pure-play coal company, is no exception. The company made its first public offering in September 1994 at $15, and recently has been trading around $11. The stock's lackluster performance has been attributed in part to a contract dispute - now resolved - with Carolina Power & Light, Zeigler's largest customer, accounting for 25 percent of its revenues. But analysts say such disputes in the coal industry are not uncommon as utilities renegotiate long-term contracts. And rather than focusing on the dispute, Vyas and analysts agree, investors would be wise to look at the long-term potential of coal as an abundant, price-stable, and cheap source of energy.

"Zeigler's stock has been undervalued for a couple of reasons," says Marc D. Cohen, managing director and natural resource analyst with New York-based PaineWebber. "Despite positive momentum in earnings, Zeigler's dispute with CP&L has given off negative vibes, although there was no real problem. And there are investors who have limited interest in small-cap 'e' energy companies - like coal - resulting in significantly undervalued coal stocks."

Some background: Coal is the largest source of energy in the U.S., the basis of about 57 percent of all domestic electricity. (By contrast, nuclear power generates about 20 percent, with oil, natural gas, and hydro-electric power as the basis for the balance.) Historically, the coal industry has been fragmented, with more than 100 coal-producing foreign and domestic companies supplying the world market. In recent years, however, cash-strapped diversified oil and gas companies have one by one sold off their coal interests. The industry is fast consolidating.

Meanwhile, the supply-and-demand economics created by utility deregulation augur well for coal: As the price for electricity goes down and commercial and residential customers increase their usage as a result, utilities should buy more coal - 30 percent more, by Vyas' reckoning.

Utility deregulation, however, is taking place against another backdrop: the Clean Air Act. As the legislation is phased in, utilities will weigh their options for federal emissions standards compliance. In essence, coal companies that are best-positioned are those with rich reserves of low-sulphur - often called "compliance" - coal, mostly found in the Rocky Mountains. Zeigler is one of several coal producers acquiring and developing mines in Wyoming's Powder River Basin. Says Hoes: "The reserves that Zeigler has in Wyoming Powder River Basin provide it with an operating ability that stacks up extremely well against its competition."

Even with these reserves, the company has been faulted for its high-sulphur coal reserves in the Midwest, which could leave Zeigler exposed when - and if - the value of high-sulphur coal decreases. "There are competitors who are better positioned, but they aren't public companies," says Cohen.

Ziegler had profits of about $25 million last year - slightly less than 3 percent of sales. More significant is the $5 billion in future contracts and EBITDA of $165.3 million, giving a price/EBITDA ratio of less than 2. The company's debt-to-equity ratio last year was 2.67.

Zeigler's competition consists of both domestic and foreign coal producers, pure-play coal as well as those with diversified oil and mining interests: Peabody Holding, Consol Coal Group, Arco, Pittston Minerals, Ashland Coal, and Cyprus-Amax.

However volatile coal's prospects, Vyas is championing its future. "He has made a cause of educating the investment community about coal and its importance to electricity," says one analyst.

In an interview, Vyas, 51, does not disappoint: "This country should realize the importance of coal in its past, present, and future. For the amount of money we spent protecting oil in Kuwait, we could have scrubbed almost every [coal] plant in the U.S. so we would not have had to worry about S[O.sub.2] emissions. If only we as a country could focus on one of the cheapest and best energy sources."