UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-7775
MASSEY ENERGY COMPANY
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(Name of Registrant as Specified In Its Charter)
Delaware 95-0740960
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 North 4th Street, Richmond, Virginia 23219
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(Address of principal executive offices) (Zip Code)
(804) 788-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No[_]
As of April 30, 2002 there were 74,858,014 shares of common stock, $0.625 par
value, outstanding.
MASSEY ENERGY COMPANY
FORM 10-Q
For the Quarterly Period Ended March 31, 2002
TABLE OF CONTENTS PAGE
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Part I: Financial Information 3
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Discussions About Market Risk 14
Part II: Other Information 15
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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2
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2002 and 2001
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2002 2001
------------------------------------------------------------------------------------
Net sales $ 323,503 $ 312,690
Other revenue 18,330 11,304
--------- ---------
Total revenue 341,833 323,994
Costs and expenses
Cost of sales 289,835 257,593
Depreciation, depletion and amortization 46,826 45,149
Selling, general and administrative 5,401 9,191
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Total costs and expenses 342,062 311,933
(Loss) Earnings before interest and taxes (229) 12,061
Interest income 988 796
Interest expense 7,806 10,564
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(Loss) Earnings before taxes (7,047) 2,293
Income tax (benefit) expense (4,904) 803
--------- ---------
Net (loss) earnings $ (2,143) $ 1,490
========= =========
(Loss) Earnings per share (Note 5)
Basic $ (0.03) $ 0.02
========= =========
Diluted $ (0.03) $ 0.02
========= =========
Shares used to calculate (loss) earnings per share (Note 5)
Basic 74,349 73,434
========= =========
Diluted 74,349 73,964
========= =========
Dividends declared per share $ 0.04 $ 0.04
========= =========
See Notes to Condensed Consolidated Financial Statements.
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MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
UNAUDITED
MARCH 31, DECEMBER 31,
$ IN THOUSANDS 2002 2001
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ASSETS
Current Assets
Cash and cash equivalents $ 17,922 $ 5,544
Trade and other accounts receivable 190,348 184,347
Inventories 172,490 155,793
Deferred taxes 13,622 13,572
Income taxes receivable -- 1,880
Prepaid expenses and other 91,875 97,199
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Total current assets 486,257 458,335
Net Property, Plant and Equipment 1,618,201 1,619,698
Other Noncurrent Assets
Pension assets 83,093 81,354
Other 104,372 108,744
---------- ----------
Total other noncurrent assets 187,465 190,098
---------- ----------
Total assets $2,291,923 $2,268,131
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(Continued On Next Page)
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4
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
UNAUDITED
MARCH 31, DECEMBER 31,
$ IN THOUSANDS 2002 2001
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, principally trade and bank overdrafts $ 181,740 $ 186,810
Short-term debt 300,549 263,101
Payroll and employee benefits 34,887 31,212
Income tax payable 247 --
Other current liabilities 66,107 77,590
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Total current liabilities 583,530 558,713
Long-term debt 300,000 300,000
Noncurrent liabilities
Deferred taxes 237,408 239,874
Other noncurrent liabilities 327,478 321,850
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Total noncurrent liabilities 564,886 561,724
Shareholders' Equity
Capital Stock
Preferred - authorized 20,000,000 shares without par value;
none issued -- --
Common - authorized 150,000,000 shares of $0.625 par value;
issued and outstanding - 74,810,317 and 74,773,920 shares at
March 31, 2002 and December 31, 2001, respectively 46,756 46,734
Additional capital 19,055 18,559
Retained earnings 783,412 788,534
Unamortized executive stock plan expense (5,716) (6,133)
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Total shareholders' equity 843,507 847,694
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Total liabilities and shareholders' equity $ 2,291,923 $ 2,268,131
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See Notes to Condensed Consolidated Financial Statements.
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5
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
UNAUDITED
$ IN THOUSANDS 2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings $ (2,143) $ 1,490
Adjustments to reconcile net loss to cash utilized by operating activities:
Depreciation, depletion and amortization 46,826 45,149
Deferred taxes (2,466) (3,817)
Loss (Gain) on disposal of assets 120 (20)
Changes in operating assets and liabilities (20,675) (9,035)
-------- --------
Cash provided by operating activities 21,662 33,767
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (46,114) (64,285)
Proceeds from sale of assets 1,856 4,168
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Cash utilized by investing activities (44,258) (60,117)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt, net 37,448 16,654
Dividends paid (2,975) (2,870)
Stock options exercised 501 7,921
Other, net -- 1,000
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Cash provided by financing activities 34,974 22,705
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Increase (Decrease) in cash and cash equivalents
12,378 (3,645)
Cash and cash equivalents at beginning of period 5,544 4,381
-------- --------
Cash and cash equivalents at end of period $ 17,922 $ 736
======== ========
See Notes to Condensed Consolidated Financial Statements.
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6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Effective January 1, 2002, Massey Energy Company ("Massey" or "the
Company") changed its fiscal year-end from October 31 OR to December 31 to
enhance the financial community's ability to analyze and compare Massey to
others within the coal industry.
The condensed consolidated financial statements do not include footnotes
and certain financial information normally presented annually under
accounting principles generally accepted in the United States and,
therefore, should be read in conjunction with Massey's Annual Report on
Form 10-K for the fiscal year ended October 31, 2001. Accounting
measurements at interim dates inherently involve greater reliance on
estimates than at year-end. The results of operations for the quarterly
period ended March 31, 2002 are not necessarily indicative of results that
can be expected for the full year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal
recurring accruals) which, in the opinion of the Company, are necessary to
present fairly its consolidated financial position at March 31, 2002 and
December 31, 2001, and its consolidated results of operations and cash
flows for the three months ended March 31, 2002 and 2001, in conformity
with accounting principles generally accepted in the United States.
The condensed consolidated financial statements include the accounts of
Massey, its wholly owned subsidiary A. T. Massey Coal Company, Inc. ("A. T.
Massey") and its subsidiaries. The Company has no independent assets or
operations. A. T. Massey, which fully and unconditionally guarantees the
Company's obligations under the 6.95% Senior Notes due 2007, is the
Company's sole direct operating subsidiary.
Certain 2001 amounts have been reclassified to conform with the 2002
presentation.
(2) In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). The standard requires that retirement
obligations be recorded as a liability based on the present value of the
estimated cash flows. SFAS 143 is effective for fiscal years beginning
after June 15, 2002, and transition is by cumulative catch-up adjustment.
The Company will adopt SFAS 143 during its fiscal year 2003. The Company is
currently evaluating the impact that the standard will have on its
financial statements.
(3) Inventories are comprised of:
March 31, December 31,
$ in thousands 2002 2001
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Coal $148,782 $132,267
Other 23,708 23,526
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$172,490 $155,793
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(4) Net Property, Plant and Equipment is comprised of:
March 31, December 31,
$ in thousands 2002 2001
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Property, Plant and Equipment, at cost $ 2,788,933 $ 2,751,026
Accumulated depreciation, depletion and amortization (1,170,732) (1,131,328)
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$ 1,618,201 $ 1,619,698
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(5) The number of shares used to calculate basic (loss) earnings per share for
the three months ended March 31, 2002 and 2001 is based on the weighted
average outstanding shares of Massey Energy during the respective periods.
The number of shares used to calculate diluted (loss) earnings per share is
based on the number of shares used to calculate basic (loss) earnings per
share plus the dilutive effect of stock options and other stock-based
instruments held by Massey employees each period. In accordance with
accounting principles generally accepted in the United States, the effect
of dilutive securities was excluded from the calculation of the diluted
loss per common share in the three months ended March 31, 2002, as such
inclusion would result in antidilution.
The computations for basic and diluted (loss) earnings per share are based
on the following per share information:
March 31, March 31,
In thousands 2002 2001
----------------------------------------------------------------------
Average shares of common stock outstanding:
Basic 74,349 73,434
Effect of stock options/restricted stock -- 530
------ ------
Diluted 74,349 73,964
====== ======
(6) On March 15, 2001, the Company sold a substantial interest in its synfuel
producing subsidiary, Appalachian Synfuel, LLC, contingent upon a favorable
Internal Revenue Service ruling, which was received in September 2001. The
Company received cash of $3.6 million, a recourse promissory note for $15.2
million that will be paid in quarterly installments of $765,000 plus
interest, and a contingent promissory note that is paid on a cents per
Section 29 credit dollar earned based on synfuel tonnage shipped. Deferred
gains of $11.0 million and $11.4 million as of March 31, 2002 and December
31, 2001, respectively, are included in other noncurrent liabilities to be
recognized ratably through 2007. Marfork Coal Company, Inc., a subsidiary
of the Company, will continue to manage the facility under an operating
agreement.
(7) During the first quarter of 2002, the Company reduced its bad debt reserves
for receivables from two large bankrupt customers, Enron Corp. and Wheeling
Pittsburgh Steel. This positive adjustment of $5.5 million (pre-tax) is
reflected in selling, general and administrative expense for the first
quarter of 2002.
Additionally, income from a contract buyout payment from a large customer
in the amount of $5.1 million (pre-tax) is included in Other Revenue for
the first quarter of 2002.
A refund for the settlement of a state tax dispute in the amount of $2.4
million, net of federal tax, is included in income tax benefit for the
first quarter of 2002.
(8) As a result of the impoundment failure at Martin County Coal on October 11,
2000, and certain other events, the Company was unable to deliver a portion
of the coal under our contracts with Duke Energy Corporation. Among other
defenses, we have asserted that our inability to perform our obligations
under the contracts should be excused by reason of force majeure. On
December 14, 2001, Duke Energy made a demand for arbitration, disputing our
claim that an event of force majeure had occurred and claiming $20.5
million in damages. The Company intends to defend this claim vigorously.
On January 2, 2002, the West Virginia Division of Environmental Protection
("WVDEP") entered an order finding a pattern of violations relating to
water quality and suspending an idled Green Valley Coal Company refuse area
permit for three days. Green Valley obtained a stay of the order pending
appeal to the West Virginia Surface Mining Board (the "Surface Mining
Board"). A hearing was held before the Surface Mining Board, but no
decision has been made by the Surface Mining Board.
On February 14, 2002, WVDEP entered an order finding a pattern of
violations relating to water quality and suspending another idled Green
Valley refuse area permit for 30 days. Green Valley obtained a stay of the
order pending appeal to the Surface Mining Board, which upheld the 30-day
suspension on April 9, 2002. The Company is considering an appeal to the
circuit court.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
On January 14, 2002, WVDEP entered an order finding a pattern of violations
relating to water quality and suspending operations on the refuse
impoundment permit of Marfork Coal Company, Inc. for fourteen days. Marfork
Coal obtained a stay of the order pending appeal to the Surface Mining
Board, which heard the appeal and reduced the suspension to nine days. The
suspension has been temporarily stayed pending entry of the order and an
appeal to the circuit court.
On January 19, 2002, WVDEP issued an order to Peerless Eagle Coal Co. to
show cause why its permit for a surface mine should not be suspended or
revoked due to an alleged pattern of violations relating to water quality.
Peerless Eagle has requested a hearing to show cause and that hearing is
scheduled for May 21, 2002.
On February 19, 2002, WVDEP issued an order to Omar Mining Company to show
cause why its permit for a refuse area and preparation plant should not be
suspended or revoked due to an alleged pattern of violations relating to
water quality. Omar has requested a hearing to show cause, but no such
hearing has been scheduled.
(9) The following events occurred subsequent to March 31, 2002:
On April 9, 2002, the rupture of a pipe at Sidney Coal Company, Inc. caused
the discharge of approximately 135,000 gallons of coal slurry into a
tributary stream of the Big Sandy River in eastern Kentucky. On April 23,
2002, the WVDEP filed a civil action against the Company and its
subsidiary, Massey Coal Services, Inc., in connection with the coal slurry
discharge. The lawsuit seeks unspecified damages to compensate for the
alleged destruction of natural resources and the state's costs in
responding to the spill, civil penalties and punitive damages. We are
defending this action vigorously.
On April 16, 2002, Appalachian Power Company, a subsidiary of American
Electric Power, filed suit against the Company in the Franklin County, Ohio
Court of Common Pleas. The suit alleges that the Company improperly claimed
force majeure with respect to a tonnage shortfall under the Company's
agreements with Appalachian Power in 2000 and 2001. The complaint further
alleges that the Company's claim of force majeure constitutes fraud, and
seeks to recover profits made by the Company on sales to other customers of
the coal Appalachian Power claims should have been delivered to it. The
Company intends to defend this claim vigorously.
On April 22, 2002, WVDEP entered an order finding a pattern of violations
relating to water quality and suspending Independence Coal Company's (1)
preparation plant permit for 16 days, (2) Jake Gore coal refuse impoundment
permit for 12 days and (3) Justice longwall permit for seven days.
Independence obtained a stay of the order pending appeal to the Surface
Mining Board.
On April 29, 2002, WVDEP issued an order to Majestic Mining, Inc. to show
cause why its permit for an underground mine, which has been inactive since
1988, should not be suspended or revoked due to an alleged pattern of
violations relating to water quality. Majestic will request a hearing to
show cause.
On May 2, 2002, Standard and Poor's Ratings Service ("S&P"), downgraded
Massey's short-term debt rating from A-2 to A-3 and long-term debt rating
from BBB+ to BBB, and put the Company on CreditWatch with negative
implications. In addition, on May 8, 2002, Moody's Investors Service, Inc.
("Moody's") downgraded Massey's short-term debt rating from P-2 to P-3 and
long-term debt rating from Baa2 to Baa3 with a negative outlook. The
actions by these credit rating agencies will effectively require the
Company to cease issuance of commercial paper and to draw on existing
credit facilities to fund short-term liquidity needs.
On May 9, 2002, the Company sold the majority of its remaining interest in
Appalachian Synfuel, LLC, contingent upon a favorable Internal Revenue
Service ruling. The Company will receive cash, a promissory note that will
be paid in quarterly installments, and a contingent promissory note based
on synfuel tonnage shipped.
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9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase understanding
of, and should be read in conjunction with, the Condensed Consolidated Financial
Statements and accompanying notes and the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 2001 and Transition Report on Form 10-Q
for the transitional period November 1, 2001 to December 31, 2001. Unless
otherwise noted herein, all references to first quarter of 2001 in the following
discussion shall refer to the three months ended March 31, 2001.
FORWARD-LOOKING INFORMATION
---------------------------
From time to time, we make certain comments and disclosures in reports and
statements, including this report or statements made by its officers or
directors which may be forward-looking in nature. Examples include statements
related to our growth, the adequacy of funds to service debt and our opinions
about trends and factors which may impact future operating results. These
forward-looking statements could also involve, among other things, statements
regarding the our intent, belief or expectation with respect to (i) our results
of operations and financial condition, (ii) the consummation of acquisition,
disposition or financing transactions and the effect thereof on our business,
and (iii) our plans and objectives for future operations and expansion or
consolidation.
Any forward-looking statements are subject to the risks and uncertainties
that could cause actual results of operations, financial condition, cost
reductions, acquisitions, dispositions, financing transactions, operations,
expansion, consolidation and other events to differ materially from those
expressed or implied in such forward-looking statements. Any forward-looking
statements are also subject to a number of assumptions regarding, among other
things, future economic, competitive and market conditions generally. These
assumptions would be based on facts and conditions as they exist at the time
such statements are made as well as predictions as to future facts and
conditions, the accurate prediction of which may be difficult and involve the
assessment of events beyond the our control. As a result, the reader is
cautioned not to rely on these forward-looking statements.
We wish to caution readers that forward-looking statements, including
disclosures, which use words such as we "believe," "anticipate," "expect,"
"estimate" and similar statements, are subject to certain risks and
uncertainties, which could cause actual results of operations to differ
materially from expectations. Any forward-looking statements should be
considered in context with the various disclosures made by us about our
businesses, including without limitation the risk factors more specifically
described in Item 1. Business, under the heading "Business Risks", in our Annual
Report on Form 10-K for its fiscal year ended October 31, 2001. Such filings are
available publicly and upon request from Massey's Investor Relations Department:
(866) 814-6512. We disclaim any intent or obligation to update its
forward-looking statements.
RESULTS OF OPERATIONS
---------------------
For the three months ended March 31, 2002, net sales increased 3 percent to
$323.5 million in 2002 compared with $312.7 million for the three months ended
March 31, 2001. Two factors that impacted net sales for the first quarter of
2002 compared to the first quarter of 2001 were:
. The volume of tons sold decreased 10 percent from 11.7 million tons to
10.5 million tons, attributable to a reduction in metallurgical and
industrial tons sold of 31 and 9 percent, respectively; and
. The average per ton sales price for coal increased 15 percent from
$26.72 per ton to $30.80 per ton consisting of increases of 13, 21,
and 26 percent of the prices for utility, metallurgical and industrial
coal, respectively.
Realized prices for our tonnage sold in the first quarter of 2002 reflect
some of the improvement seen in the market during fiscal year ended October 31,
2001, as spot market prices of Central Appalachian coal increased to 20-year
highs. However, during the first quarter of 2002 the economic environment
continued to soften, steel demand remained weak and unusually mild winter
weather prevailed in the Eastern United States, significantly reducing demand
for all grades of coal.
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10
Other revenue, which consists of royalties, rentals, miscellaneous income
and gains on the sale of non-strategic assets, increased to $18.3 million for
the first quarter of 2002 from $11.3 million for the first quarter of 2001. The
increase was primarily due to a contract buyout payment from a large customer of
approximately $5.1 million, as well as increased fees related to the operations
of Appalachian Synfuel, LLC.
Cost of sales increased approximately 13 percent to $289.8 million for the
first quarter of 2002 from $257.6 million for the first quarter of 2001. Cost of
sales on a per ton of coal sold basis increased by 25 percent in the first
quarter of 2002 compared with the first quarter of 2001. These increases were
due to lower productivity at several of our longwall mining operations, expenses
related to 15 idled continuous miner sections, and higher staffing and wage
levels. During fiscal 2001, we increased staffing levels in order to increase
production. However, due to the recent market weakness, we reduced total
workforce during the first quarter of 2002 by approximately 7 percent and idled
15 continuous miner sections.
Depreciation, depletion and amortization increased by approximately 4
percent to $46.8 million in the first quarter of 2002 compared to $45.1 million
for the first quarter of 2001. The increase of $1.7 million was primarily due to
capital expenditures made in fiscal 2001 in an effort to increase production.
Selling, general and administrative expenses were $5.4 million for the
first quarter of 2002 compared to $9.2 million for the first quarter of 2001.
The decrease was primarily attributable to reductions in bad debt reserves for
receivables from two large bankrupt customers, Enron Corp. and Wheeling
Pittsburgh Steel, totaling $5.5 million on a pre-tax basis. These reductions
were offset by increases in accruals related to long-term executive compensation
programs and costs of legal services.
Earnings before interest, taxes, depreciation, depletion and amortization
("EBITDA"), was $46.6 million for the first quarter of 2002 compared to $57.2
million for the first quarter of 2001.
Interest expense decreased to $7.8 million for the first quarter of 2002
compared with $10.6 million for the first quarter of 2001. The lower interest
expense was primarily due to the decrease in the average interest rate in the
commercial paper market to 2.56 percent at March 31, 2002 from 5.77 percent at
March 31, 2001.
Income tax benefit was $4.9 million for the first quarter of 2002 compared
with income tax expense of $0.8 million for the first quarter of 2001. This
reflects the loss before taxes in the three months ended March 31, 2002 compared
to the earnings before taxes for the same three-month period ended March 31,
2001. Additionally, the first quarter of 2002 includes a refund for the
settlement of a state tax dispute in the amount of $2.4 million, net of federal
tax.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
---------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect reported amounts. These estimates and
assumptions are based on information available as of the date of the financial
statements. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year-end. The results of operations for the
quarterly period ended March 31, 2002 are not necessarily indicative of results
that can be expected for the full year. The following critical accounting
estimates and assumptions used in the preparation of the financial statements
are materially impacted by estimates and assumptions:
Other Post Employment Benefits
Our sponsored defined benefit health care plans provide retiree health
benefits to eligible union and non-union retirees who have met certain age and
service requirements. Depending on year of retirement, benefits may be subject
to annual deductibles, coinsurance requirements, lifetime limits, and retiree
contributions. These plans are not funded. Costs are paid as incurred by
participants. The estimated cost and benefits of our retiree health care plans
are determined by independent actuaries, who, with our input, use various
actuarial assumptions, including discount rate, expected trend in health care
costs and per capita costs. The discount rate is determined each year at the
measurement date. The discount rate is an estimate of the current interest rate
at which the other post employment benefit liabilities could be effectively
settled at the measurement date. In estimating this rate, we look to rates of
return on high-quality, fixed-income investments that receive one of the two
highest ratings given by a recognized ratings agency. At October 31, 2001, the
discount rate was determined to be 7.25% compared to the discount rate at
October 31, 2000 of 7.75%. Significant changes to these interest rates introduce
substantial volatility to our costs. At October 31, 2001 our assumptions of our
company health care cost trend were projected at an annual rate of 8.0% ranging
down to 5.0% by 2007, and remaining level thereafter. If the actual increase
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11
in the cost of medical services or other post retirements benefits are
significantly greater or less than the projected trend rates, the cost
assumptions would need to be adjusted which could have a significant effect on
the costs and liabilities recognized in the financial statements.
Coal Workers' Pneumoconiosis
We are responsible under the Federal Coal Mine Health and Safety Act of
1969, as amended, and various states' statutes, for the payment of medical and
disability benefits to eligible recipients resulting from occurrences of coal
workers' pneumoconiosis disease (black lung). After review and consultation with
us, an annual evaluation is prepared by our independent actuaries based on
assumptions regarding disability incidence, medical costs, mortality, death
benefits, dependents and interest rates. In January 2001, the United States
Department of Labor amended the regulations implementing the federal black lung
laws to give greater weight to the opinion of a claimant's treating physician,
expand the definition of black lung disease and limit the amount of medical
evidence that can be submitted by claimants and respondents. The amendments also
alter administrative procedures for the adjudication of claims, which according
to the Department of Labor, results in streamlined procedures that are less
formal, less adversarial and easier for participants to understand. These and
other changes to the federal black lung regulations could result in changes in
assumptions used in our actuarial determination of the liability, including
interest, disability and mortality assumptions. These changes could
significantly increase our exposure to black lung benefits liabilities.
Workers' Compensation
Workers' Compensation is a system by which individuals who sustain physical
or mental injuries due to their jobs are compensated for their disabilities,
medical costs, and on some occasions, for the costs of their rehabilitation, and
by which the survivors of workers who are killed receive compensation for lost
financial support. The workers' compensation laws are administered by state
agencies with each state having its own set of rules and regulations regarding
compensation that is owed to an employee that is injured in the course of
employment. Our operations are covered by a combination of either a
self-insurance program, as a participant in a state run program, or by an
insurance policy. We accrue for the self-insured liability by recognizing cost
when it is probable that the liability has been incurred and the cost can be
reasonably estimated. To assist in the determination of this estimated liability
we utilize the services of third party administrators in various states that we
do business to determine the liability that exists for workers' compensation.
These third parties provide information to independent actuaries, who after
review and consultation with us with regards to actuarial rate assumptions,
including discount rate, prepare an evaluation of the self-insured program
liabilities. Actual losses could differ from these estimates which could
increase our costs.
Reclamation and Mine Closure Obligations
The Surface Mining Control and Reclamation Act establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
most aspects of deep mining. Estimates of our total reclamation and mine-closing
liabilities are based upon permit requirements and our engineering expertise
related to these requirements. We accrue for the costs of current mine
disturbance and final mine closure, including the cost of treating mine water
discharge as coal is mined, on a unit-of-production basis over the estimated
recoverable tons. The estimate of ultimate reclamation liability is reviewed
annually by our management and engineers. The estimated liability can change
significantly if actual costs vary from assumptions or if governmental
regulations change significantly. SFAS 143 requires that asset retirement
obligations be recorded as a liability based on the present value of the
estimated cash flows. SFAS 143 is effective for fiscal years beginning after
June 15, 2002, and transition is by cumulative catch-up adjustment. We are
currently reviewing the impact of SFAS 143 on our financial statements.
Contingencies
We are the subject of, or a party to, various suits and pending or
threatened litigation involving governmental agencies or private interests. We
have accrued an estimate of the probable and reasonably estimable costs for the
resolution of these claims based upon consultation with legal counsel handling
the defense in these matters and an analysis of potential results, assuming a
combination of litigation and settlement strategies. The outcome or timing of
current legal or environmental matters or the impact, if any, of pending
legislation or regulatory developments (including the matters noted herein) on
future operations is not currently estimable.
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Deferred Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" which requires that
deferred tax assets and liabilities be recognized using enacted tax rates for
the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. SFAS No. 109 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some portion
of the deferred tax asset will not be realized. At October 31, 2001, we had
deferred tax liabilities in excess of deferred tax assets of approximately $241
million. The deferred tax assets are evaluated annually to determine if a
valuation allowance is necessary. As of October 31, 2001, we had recorded a
valuation allowance of approximately $67 million, primarily related to
alternative minimum tax credits. Realization of the deferred tax assets is
principally dependent upon our achievement of projected future taxable income.
Our judgments regarding future profitability may change due to future market
conditions, the ability to continue to successfully execute our business
strategy and other factors. These changes, if any, may require additional
valuation allowances to be recognized. These allowances could materially impact
net income.
Coal Reserve Values
There are numerous uncertainties inherent in estimating quantities and
values of economically recoverable coal reserves. Many of these uncertainties
are beyond our control. As a result, estimates of economically recoverable coal
reserves are by their nature uncertain. Information about our reserves consists
of estimates based on engineering, economic and geological data assembled and
analyzed by our staff. Some of the factors and assumptions that impact
economically recoverable reserve estimates include:
- geological conditions;
- historical production from the area compared with production from
other producing areas;
- the assumed effects of regulations and taxes by governmental agencies;
- assumptions governing future prices; and
- future operating costs.
Each of these factors may in fact vary considerably from the assumptions
used in estimating reserves. For these reasons, estimates of the economically
recoverable quantities of coal attributable to a particular group of properties,
and classifications of these reserves based on risk of recovery and estimates of
future net cash flows, may vary substantially. Actual production, revenues and
expenditures with respect to reserves will likely vary from estimates, and these
variances may be material.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At March 31, 2002 our available liquidity was $117.1 million, including
cash and cash equivalents of $17.9 million and $99.2 million from our commercial
paper program. We had $300.5 million of short-term debt as of March 31, 2002,
which consisted entirely of commercial paper, net of discount. The total
debt-to-book capitalization ratio was 41.6 percent at March 31, 2002. On
November 30, 2000, the date of the Spin-Off, we entered into $150 million
364-day and $250 million 3-year revolving credit facilities, which have been
guaranteed by A. T. Massey, that serve to provide liquidity backstop to our
commercial paper program and are also available to meet our ongoing liquidity
needs. The $150 million 364-day facility has been renewed through November 26,
2002. Borrowings under these facilities bear interest based on (i) the London
Interbank Offer Rate (LIBOR) plus a margin, which is based on our credit rating
as determined by Moody's and Standard & Poor's, national rating agencies, (ii)
the Base Rate (as defined in the facility agreements), and (iii) the Competitive
Bid rate (as defined in the facility agreements). There were no borrowings
outstanding under the credit facilities at March 31, 2002.
The revolving credit facilities contain financial covenants requiring us to
maintain various financial ratios. Failure by us to comply with these covenants
could result in an event of default, which if not cured or waived could have a
material adverse effect on us. The financial covenants consist of a maximum
leverage ratio, a minimum interest coverage ratio, and a minimum net worth test.
The leverage ratio requires that we not permit the ratio of total indebtedness
at the end of any quarter to adjusted EBITDA for the four quarters then ended to
exceed a specific amount. The interest coverage ratio requires that we not
permit the ratio of our adjusted EBITDA to interest expense for the four
quarters then ended to be less than a specified amount. The net worth test
requires that we not permit its net worth to be less than a specified amount. As
of March 29, 2002, these financial covenants were amended by the bank syndicate.
We were in compliance with these covenants at March 31, 2002, and expect to
remain in compliance with these covenants in the foreseeable future. We also
have available a $500 million debt shelf registration filed with the Securities
and Exchange Commission in March 1999.
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Cash flow provided by operating activities was $21.7 million and $33.8
million for the first quarters of 2002 and 2001, respectively. Cash provided by
operating activities reflects net earnings adjusted for non-cash charges and
changes in working capital requirements.
Net cash utilized by investing activities was $44.3 million and $60.1
million for the first quarters of 2002 and 2001, respectively. The cash used in
investing activities reflects capital expenditures in the amount of $46.1
million and $64.3 million for the first quarters of 2002 and 2001, respectively.
These capital expenditures are for replacement of mining equipment, the
expansion of mining and shipping capacity, and projects to improve the
efficiency of mining operations. In addition to the cash spent on capital
expenditures, during first quarter of 2002, we leased, through operating leases,
$4.6 million of longwall and surface mining equipment compared to $10.8 million
for the first quarter of 2001. Additionally, the first quarters of 2002 and 2001
included $1.9 million and $4.2 million, respectively, of proceeds provided by
the sale of assets.
Financing activities primarily reflect changes in short term financing for
the first quarter of 2002 and 2001, as well as the exercising of stock options.
Net cash provided by financing activities was $35.0 million and $22.7 million
for the first quarter of 2002 and 2001, respectively.
We have historically funded our operations, working capital requirements
and capital expenditures through a combination of cash flow from operations and
borrowings from the commercial paper market. In early May 2002, Moody's and S&P
downgraded our credit ratings. These ratings actions have effectively prevented
us from accessing the commercial paper market for our short-term funding needs
due to the restrictive investment policy credit guidelines of potential
commercial paper investors. As a result, we are relying on borrowings under our
revolving credit facilities, which bear interest at higher rates than our
commercial paper, for our short-term liquidity needs. We believe that cash
generated from operations and borrowings, which we expect to be available from
our credit facilities, will be sufficient to meet our debt service, capital
expenditures and working capital requirements for the foreseeable future. Our
$150 million 364-day facility expires on November 26, 2002. In the event we
are not able to negotiate an extension of the term of that facility, we may need
to seek alternative sources for capital.
INFLATION
---------
Inflation in the United States has been relatively low in recent years and
did not have a material impact on our results of operations for the periods
presented.
NEW ACCOUNTING STANDARDS
-------------------------
On August 15, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations". The standard will require that retirement
obligations be recorded as a liability based on the present value of the
estimated cash flows. SFAS 143 is effective for fiscal years beginning after
June 15, 2002 and transition is by cumulative catch-up adjustment. We
are currently evaluating the impact that the standard will have on its financial
statements.
OUTLOOK
-------
As we have previously reported, the extremely mild winter weather,
softening steel demand, and the general economic recession have led us to reduce
our estimate of 2002 Central Appalachian coal demand. We, therefore, currently
expect to sell approximately 48 million tons of coal in 2002, a 10% increase
over fiscal 2001. Approximately 98% of expected tonnage is under contract for
2002, with contract prices at significantly higher rates than in fiscal 2001. We
expect approximately breakeven financial results for the second calendar quarter
of 2002.
Item 3: QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Our interest expense is sensitive to changes in the general level of
interest rates in the United States. At March 31, 2002, we had outstanding $300
million aggregate principal amount of long-term debt under fixed-rate
instruments; however, our primary exposure to market risk for changes in
interest rates relates to our commercial paper program and other short-term debt
financing. At March 31, 2002, we had $300.8 million of aggregate principal
amount of commercial paper outstanding ($300.5 million net of discount). At
March 31, 2002, our commercial paper bore interest at an average rate of 2.56
percent. Based on the short-term debt balance
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outstanding at March 31, 2002, a 100 basis point increase in the average
issuance rate for our borrowings would increase our annual interest expense by
approximately $3.0 million.
Almost all of our transactions are denominated in U.S. dollars, and, as a
result, we do not have material exposure to currency exchange-rate risks.
We have not engaged in any interest rate, foreign currency exchange rate or
commodity price-hedging transactions.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The following describes material developments in legal proceedings
affecting us, as previously described in Item 3, "Legal Proceedings," in the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2001,
as they relate to the fiscal quarter ended March 31, 2002.
As a result of the impoundment failure at Martin County Coal on October 11,
2000, and certain other events, we were unable to deliver a portion of the coal
under our contracts with Duke Energy Corporation. Among other defenses, we have
asserted that our failure to perform our obligations under the contracts should
be excused by reason of force majeure. On December 14, 2001, Duke Energy made a
demand for arbitration, disputing our claim that an event of force majeure had
occurred and claiming $20.5 million in damages. We intend to defend this claim
vigorously.
On January 2, 2002, the West Virginia Division of Environmental Protection
("WVDEP") entered an order finding a pattern of violations relating to water
quality and suspending an idled Green Valley Coal Company refuse area permit for
three days. Green Valley obtained a stay of the order pending appeal to the West
Virginia Surface Mining Board (the "Surface Mining Board"). A hearing was held
before the Surface Mining Board, but no decision has been made by the Surface
Mining Board.
On February 14, 2002, WVDEP entered an order finding a pattern of
violations relating to water quality and suspending another idled Green Valley
refuse area permit for 30 days. Green Valley obtained a stay of the order
pending appeal to the Surface Mining Board, which upheld the 30-day suspension
on April 9, 2002. We are considering an appeal to the circuit court.
On January 14, 2002, WVDEP entered an order finding a pattern of violations
relating to water quality and suspending operations on Marfork Coal Company,
Inc.'s refuse impoundment permit for 14 days. Marfork obtained a stay of
enforcement of the order pending appeal to the Surface Mining Board, which heard
the appeal and reduced the suspension to nine days. The suspension has been
temporarily stayed pending entry of the order and an appeal to the circuit
court.
On January 19, 2002, WVDEP issued an order to Peerless Eagle Coal Co. to
show cause why its permit for a surface mine should not be suspended or revoked
due to an alleged pattern of violations relating to water quality. Peerless
Eagle has requested a hearing to show cause, which is scheduled for May 21,
2002.
On February 19, 2002, WVDEP issued an order to Omar Mining Company to show
cause why its permit for a refuse area and preparation plant should not be
suspended or revoked due to an alleged pattern of violations relating to water
quality. Omar has requested a hearing to show cause, but no such hearing has
been scheduled.
On April 9, 2002, the rupture of a pipe at Sidney Coal Company, Inc. caused
the discharge of approximately 135,000 gallons of coal slurry into a tributary
stream of the Big Sandy River in eastern Kentucky. On April 23, 2002, the WVDEP
filed a civil action against us and our subsidiary, Massey Coal Services, Inc.,
in connection with the coal slurry discharge. The lawsuit seeks unspecified
damages to compensate for the alleged destruction of natural resources and the
state's costs in responding to the spill, civil penalties and punitive damages.
We are defending this action vigorously.
On April 22, 2002, WVDEP entered an order finding a pattern of violations
relating to water quality and suspending Independence Coal Company's (1)
preparation plant for 16 days, (2) Jake Gore coal refuse impoundment permit for
12 days and (3) Justice longwall permit for seven days. Independence obtained a
stay of the order pending appeal to the Surface Mining Board.
On April 29, 2002, WVDEP issued an order to Majestic Mining, Inc. to show
cause why its permit for an underground mine, which has been inactive since
1988, should not be suspended or revoked due to an alleged pattern of violations
relating to water quality. Majestic will request a hearing to show cause.
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Investigations into various water quality violations, including those
described above, are continuing and may result in additional sanctions against
us.
On April 16, 2002, Appalachian Power Company, a subsidiary of American
Electric Power, filed suit against us in the Franklin County, Ohio Court of
Common Pleas. The suit alleges that we improperly claimed force majeure with
respect to a tonnage shortfall under our agreements with Appalachian Power in
2000 and 2001. The complaint further alleges that our claim of force majeure
constitutes fraud, and seeks to recover profits made by us on sales to other
customers of the coal Appalachian Power claims should have been delivered to it.
We intend to defend this claim vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
a) On April 16, 2002, the shareholders of Massey voted on the following
proposals at the Annual Meeting of Shareholders:
(1) Proposal to elect Don L. Blankenship and Bobby R. Inman as Class
III directors to hold office for three years and until their
respective successors are elected and qualified. Mr. Blankenship
was elected by a vote of 65,090,228 shares "For" and 191,548
shares "Withhold Authority". Mr. Inman was elected by a vote of
65,043,621 shares "For" and 238,155 shares "Withhold Authority".
(2) Proposal to ratify the appointment of Ernst & Young LLP as
auditors for the fiscal year ending December 31, 2002. This
proposal was approved by a vote of 64,060,381 shares to 1,136,243
shares, with 85,152 shares abstaining
(3) Shareholder proposal to urge the Board of Directors of the
Company to seek shareholder approval for future severance
agreements with senior executives that provide benefits in an
amount exceeding 2.99 times the sum of the executive's base
salary plus bonus. This proposal was defeated by a vote of
26,144,386 shares "For", 29,785,557 shares "Against" and 905,392
shares abstaining.
Item 5. Other Information
a) On March 27, 2002, the United States District Court for the District
of Columbia issued an order invalidating the U.S. Secretary of
Interior's interpretation that Section 522(e) of the Surface Mining
Control and Reclamation Act does not apply to subsidence caused by
underground mining. Section 522(e) prohibits mining near certain
structures, such as dwellings (absent permission by the owner),
cemeteries and public buildings, or on certain public lands, including
national parks and forests. Underground mining causing subsidence in
these areas could be prohibited if the ruling is upheld. The Secretary
of the Interior and National Mining Association have appealed the
ruling and a motion to stay the effect of the ruling has been filed.
b) On August 21, 2001, the Kentuckians for the Commonwealth, an
environmental group, sued the U.S. Army Corps of Engineers alleging
that the Corps of Engineers lacks the authority under its regulations
pursuant to the Clean Water Act to issue permits for valley fills in
the waters of the United States. While neither the Company nor its
subsidiaries is a party to this litigation, virtually all mining
operations (including ours) utilize valley fills to dispose of excess
materials mined during coal production.
The EPA and the Corps of Engineers published a rule on May 9, 2002
designed to clarify that the Corps of Engineers has the authority to
issue permits for valley fills in the waters of the United States.
However, on May 8, 2002, prior to the rule being published, the United
States District Court in this litigation entered an order holding that
the Corps of Engineers is prohibited by the Clean Water Act from
issuing permits for valley fills in waters of the United States and
holding that the EPA and the Corps of Engineers are without authority
under the Clean Water Act to issue any rule giving the Corps of
Engineers such authority. The order enjoins the Corps of Engineers
from issuing any permits for valley fills in waters of the United
States. The Corps of Engineers has moved for a stay of the ruling
pending an appeal.
c) On May 9, 2002, the Company sold the majority of its remaining
interest in Appalachian Synfuel, LLC, contingent upon a favorable
Internal Revenue Service ruling. The Company will receive cash, a
promissory note that will be paid in quarterly installments, and a
contingent promissory note based on synfuel tonnage shipped.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Amendment No. 2 to Credit Agreement dated as of March 29,
2002, among Massey Energy Company, as Borrower, A. T. Massey
Coal Company, Inc., as Guarantor, Citibank, N. A., as
Administrative Agent, PNC Bank, National Association, as
Syndication Agent, First Union National Bank, as
Documentation Agent, and the lenders party thereto, for a
maximum principal amount at any one time outstanding not to
exceed $250,000,000.
10.2 First Supplemental Indenture, dated as of the 9th day of
February, 2001, between Massey Energy Company (successor by
name change to Fluor Corporation) and Bankers Trust Company,
supplementing that certain Indenture dated as of February
18, 1997.
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MASSEY ENERGY COMPANY
-----------------------------------------
(Registrant)
Date: May 15, 2002 /s/ J. M. Jarosinski
-----------------------------------------
J. M. Jarosinski,
Vice President - Finance
and Chief Financial Officer
/s/ E. B. Tolbert
-----------------------------------------
E. B. Tolbert, Controller
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