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 July 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________to__________________
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 August 31, 2001 there were 74,400,085 shares of common stock, $0.625 par
value, outstanding.
1
MASSEY ENERGY COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2001
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 9
Item 3. Quantitative and Qualitative Discussions About Market Risk 12
Part II: Other Information 13
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------------- ---------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 301,792 $ 272,847 $ 882,797 $ 792,461
Other revenue 9,744 20,523 26,856 51,603
--------- ---------- ---------- ---------
Total revenue 311,536 293,370 909,653 844,064
Costs and expenses
Cost of sales 265,770 210,118 745,041 600,456
Depreciation, depletion and amortization 46,969 40,364 134,541 126,043
Selling, general and administrative 4,535 5,165 23,852 21,944
--------- ---------- ---------- ---------
Total costs and expenses 317,274 255,647 903,434 748,443
(Loss) earnings before interest and taxes (5,738) 37,723 6,219 95,621
Interest income 727 10,752 7,223 19,768
Interest expense 8,611 76 26,031 192
--------- ---------- ---------- ---------
(Loss) earnings before taxes (13,622) 48,399 (12,589) 115,197
Income tax (benefit) expense (4,228) 16,034 (3,924) 38,122
--------- ---------- ---------- ---------
Net (loss) earnings $ (9,394) $ 32,365 $ (8,665) $ 77,075
========= ========== ========== =========
(Loss) earnings per share (Note 7)
Basic $ (0.13) $ 0.44 $ (0.12) $ 1.05
========= ========== ========== =========
Diluted $ (0.13) $ 0.44 $ (0.12) $ 1.05
========= ========== ========== =========
Shares used to calculate (loss) earnings per share (Note 7)
Basic 73,951 73,469 73,806 73,469
========= ========== ========== =========
Diluted 73,951 73,469 73,806 73,472
========= ========== ========== =========
Dividends Per Share $ 0.04 $ - $ 0.12 $ -
========= ========== ========== =========
See Notes to Condensed Consolidated Financial Statements.
3
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2001 and October 31, 2000
UNAUDITED
JULY 31, OCTOBER 31,
$ IN THOUSANDS 2001 2000 *
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ASSETS
Current Assets
Cash and cash equivalents $ 3,004 $ 6,929
Trade and other accounts receivable 181,458 215,574
Inventories 114,822 104,132
Deferred taxes 10,255 8,398
Prepaid expenses and other 76,965 67,813
-------------------- ----------------------
Total current assets 386,504 402,846
Net Property, Plant and Equipment 1,579,091 1,559,426
Other Noncurrent Assets
Pension assets 77,030 67,740
Other 116,588 131,118
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Total other noncurrent assets 193,618 198,858
-------------------- ----------------------
Total assets $ 2,159,213 $ 2,161,130
==================== ======================
* Amounts at October 31, 2000 have been derived from audited financial
statements.
(Continued On Next Page)
4
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2001 and October 31, 2000
UNAUDITED
JULY 31, OCTOBER 31,
$ IN THOUSANDS 2001 2000 *
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, principally trade, and bank overdrafts $ 151,729 $ 153,457
Short-term debt 191,204 -
Payroll and employee benefits 32,338 30,784
Income taxes payable 627 12,222
Other current liabilities 63,345 78,420
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Total current liabilities 439,243 274,883
Long-term debt 300,000 -
Noncurrent liabilities
Deferred taxes 262,286 254,022
Other noncurrent liabilities 292,678 257,607
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Total noncurrent liabilities 554,964 511,629
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 - 74,390,229 shares 46,494 -
Additional capital 10,443 -
Retained earnings 813,028 -
Unamortized executive stock plan expense (4,959) -
Net investment by Fluor Corporation - 1,653,682
Due from Fluor Corporation - (279,064)
---------------------- ---------------------
Total shareholders' equity 865,006 1,374,618
---------------------- ---------------------
Total liabilities and shareholders' equity $ 2,159,213 $ 2,161,130
====================== =====================
* Amounts at October 31, 2000 have been derived from audited financial
statements.
See Notes to Condensed Consolidated Financial Statements.
5
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS Nine Months Ended July 31, 2001
and 2000
UNAUDITED
$ IN THOUSANDS 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings $ (8,665) $ 77,075
Adjustments to reconcile net (loss) earnings to cash utilized by operating
activities:
Depreciation, depletion and amortization 134,541 126,043
Deferred taxes 6,795 22,522
Changes in operating assets and liabilities, excluding effects of
business acquisitions/dispositions 39,222 (121,706)
Other, net 1,874 (26,108)
------------------- -----------------
Cash provided by operating activities
173,767 77,826
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (165,765) (146,832)
Cash from sale of interest in Appalachian Synfuel, LLC 3,600 -
Proceeds from sale of property, plant and equipment 313 29,361
------------------- -----------------
Cash utilized by investing activities (161,852) (117,471)
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CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term debt, net (87,025) -
Decrease in amount due from Fluor Corporation 67,554 25,495
Equity contributions from Fluor Corporation 2,476 11,164
Cash dividends paid (8,788) -
Stock options exercised 8,839 -
Other, net 1,104 -
------------------- -----------------
Cash (utilized) provided by financing activities (15,840) 36,659
------------------- -----------------
Decrease in cash and cash equivalents (3,925) (2,986)
Cash and cash equivalents at beginning of period 6,929 8,051
------------------- -----------------
Cash and cash equivalents at end of period $ 3,004 $ 5,065
=================== =================
See Notes to Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) 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 Energy Company's
("Massey" or "the Company") Annual Report on Form 10-K for the fiscal year
ended October 31, 2000. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The results of
operations for the three months and nine months ended July 31, 2001 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 July 31, 2001, its
consolidated results of operations for the three months and nine months
ended July 31, 2001 and 2000, and its consolidated cash flows for the nine
months ended July 31, 2001 and 2000.
Certain 2000 amounts have been reclassified to conform with the 2001
presentation.
(2) On November 30, 2000, Fluor Corporation ("Fluor") completed a reverse spin-
off, which divided it into two separate publicly-traded corporations. As a
result of the reverse spin-off (the "Spin-Off"), Fluor separated into (i)
the spun-off corporation, "new" Fluor Corporation ("New Fluor"), which owns
all of Fluor's then existing businesses except for the coal-related
business conducted by A. T. Massey Coal Company, Inc. ("A.T. Massey"), and
(ii) Fluor Corporation, subsequently renamed Massey Energy Company, which
owns the coal-related business. Further discussion of the Spin-Off may be
found in Massey's Annual Report on Form 10-K for the fiscal year ended
October 31, 2000 as filed with the Securities and Exchange Commission.
Immediately after the Spin-Off, Massey had 73,468,707 shares of $0.625 par
value common stock outstanding. In connection with the Spin-Off, A. T.
Massey became the sole direct, and wholly owned subsidiary of Massey. A. T.
Massey now represents the sole operating subsidiary of Massey, as Massey
has no separate independent operations.
Due to the relative significance of the businesses transferred to New Fluor
following the Spin-Off, New Fluor has been treated as the "accounting
successor" for financial reporting purposes and the Company has been
treated by New Fluor as a discontinued operation despite the legal form of
separation resulting from the Spin-Off.
As a result of the Spin-Off, the following occurred which affected Massey's
ongoing operations:
. Massey no longer invests in Fluor commercial paper;
. Massey no longer loans amounts in excess of operating and capital
needs to Fluor and the amounts due from Fluor were repaid as part of
the Spin-Off;
. Fluor's previously issued $300 million of 6.95 percent Senior Notes
due March 1, 2007, with interest payable semi-annually on March 1 and
September 1 of each year, became the obligation of Massey; and
. Massey issued $275 million of its own commercial paper and utilized
$3.5 million of cash to refund the $278.5 million of Fluor commercial
paper assumed as a result of the Spin-Off.
Massey's equity structure was also impacted as a result of the Spin-Off. As
noted above, Massey assumed from Fluor $300 million of 6.95 percent Senior
Notes, $278.5 million of Fluor commercial paper, other equity contributions
from Fluor, and assumed Fluor's common stock equity structure. These Spin-
Off occurrences, in addition to the net income for the nine months ended
July 31, 2001, dividends paid, and options exercised, resulted in a change
in shareholders' equity from $1,374.6 million at October 31, 2000 to $865.0
million at July 31, 2001, a net reduction of $509.6 million.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(3) Effective November 1, 2000, the Company adopted Statement of Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Hedging Activities". The Company has
determined that the adoption of these accounting standards and subsequent
implementation guidance did not have a material impact on the Company's
financial statements.
(4) In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 is effective for the Company beginning
in fiscal year 2003. The Company is currently evaluating the impact that
SFAS 143 will have on its financial condition and results of operations.
(5) Inventories are comprised of:
July 31, October 31,
$ in thousands 2001 2000
-------------------------------------------------------------------------------------------------------------
Coal $ 94,208 $ 82,636
Other 20,614 21,496
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$ 114,822 $ 104,132
=========== ===========
(6) Net Property, Plant and Equipment is comprised of:
July 31, October 31,
$ in thousands 2001 2000
-------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at cost $ 2,633,664 $ 2,517,052
Accumulated depreciation, depletion and amortization (1,054,573) (957,626)
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$ 1,579,091 $ 1,559,426
============ =============
(7) The number of shares used to calculate basic earnings per share for the
three months and nine months ended July 31, 2000 is based on the number
of Massey shares outstanding immediately following the Spin-Off. The
number of shares used to calculate basic earnings per share for all
other periods presented is based on the weighted average outstanding
shares of Massey Energy during the respective periods. The number of
shares used to calculate diluted earnings per share is based on the
number of shares used to calculate basic 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 and nine months ended July
31, 2001 as such inclusion would result in antidilution.
(8) During the third fiscal quarter of 2001, management decided to move a
longwall to better mining conditions in another mine location by the
end of October 2001. As a result, unamortized longwall panel
development costs of $7.6 million as of July 31, 2001 were determined
to be impaired. These development costs were written off at the end of
the third quarter.
8
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, 2000.
FORWARD-LOOKING INFORMATION
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From time to time, the Company makes 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 Company growth, the adequacy of funds to service debt and the
Company's opinions about trends and factors which may impact future operating
results. These forward-looking statements could also involve, among other
things, statements regarding the Company's intent, belief or expectation with
respect to (i) the Company's results of operations and financial condition, (ii)
the consummation of acquisition, disposition or financing transactions and the
effect thereof on the Company's business, and (iii) the Company's 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 Company's control. As a result, the reader is
cautioned not to rely on these forward-looking statements.
The Company wishes to caution readers that forward-looking statements,
including disclosures, which use words such as the Company "believes,"
"anticipates," "expects," "estimates" 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 the Company about its
businesses, including without limitation the risk factors more specifically
described in Item 1. Business, under the heading "Business Risks", in the
Company's Annual Report on Form 10-K for its fiscal year ended October 31, 2000.
Such filings are available publicly and upon request from Massey's Investor
Relations Department: (866) 814-6512. The Company disclaims any intent or
obligation to update its forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
Three months ended July 31, 2001 compared with the three months ended July 31,
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2000.
- ----
In the third fiscal quarter of 2001, net sales increased 10.6 percent to $301.8
million in 2001 compared with $272.8 million for the same period in 2000. Two
factors that impacted net sales during the third quarter 2001 were:
. The volume of tons sold increased 4.8 percent from 10.2 million tons to
10.7 million tons consisting of an increase of utility and industrial
tons sold of 16 and 28 percent, respectively, and a decrease of
metallurgical tons sold of 17 percent.
. The average per ton sales price for coal increased 5.4 percent from
$26.69 per ton for the three months ended July 31, 2000 to $28.12 per ton
for the same period in 2001.
The market for utility coal continued to improve during the third quarter of
fiscal year 2001 as spot market prices of Central Appalachian coal have
increased to 20-year highs. However, most of the Massey tonnage sold in the
third quarter was committed prior to the upturn in the market. While realized
prices for utility sales in the third fiscal quarter continued to reflect a
bottoming of the market prior to the recent market upturn, the Company is
starting to benefit from the improved market conditions.
Other revenue, which consists of royalties, rentals, miscellaneous income and
gains on the sale of non-strategic assets, decreased 53 percent to $9.7 million
for the third quarter of 2001 compared with $20.5 million for the same period in
2000. The decline was
9
primarily due to a decrease in income from dispositions of non-strategic mineral
reserves, which generated $10.6 million in 2000 compared to $1.1 million for
2001. As part of its management of coal reserves, Massey regularly sells
reserves located in less strategic areas or exchanges them for reserves located
in more synergistic locations.
Cost of sales increased 26 percent to $265.8 million for the third quarter of
2001 from $210.1 million in the same period in 2000. This was primarily due to
the 4.8 percent increase in tons sold. Cost of sales on a per ton basis
increased by 21 percent in the third quarter of 2001 compared with the same
period in 2000 as operating difficulties at several of Massey's longwall mines
continued to negatively impact production and costs during the third quarter. In
addition, heavy rains in Central Appalachia during July increased employee
absenteeism and disrupted loading operations and rail service, delaying coal
shipping. The Company's labor costs were higher in the quarter due to the
extremely tight labor market in Central Appalachia and decreases in productivity
related to the training of new miners. Cost of sales for the third quarter of
2001 included a $7.6 million pre-tax write-off of unamortized panel development
costs at the Jerry Fork longwall mine. The Company decided late in the third
quarter to move this longwall unit to Sidney's Rockhouse Mine in late October to
take advantage of better mining conditions.
The increase in cost of sales for the third quarter of fiscal year 2001 was
partially offset by a $3.0 million pre-tax refund related to black lung excise
taxes paid on coal export sales tonnage. During the third fiscal quarter of 2000
a $12.0 million pre-tax refund for black lung excise tax was recorded, reducing
third quarter 2000 cost of sales. Black lung excise taxes on exported coal were
determined to be unconstitutional by a 1998 federal district court decision.
Depreciation, depletion and amortization increased by 16 percent to $47.0
million in the third quarter of 2001 compared to $40.4 million in 2000. The
increase of $6.6 million was primarily due to capital expenditures made in
recent years.
Selling, general and administrative expenses were $4.5 million for the third
quarter of 2001 compared to $5.2 million for 2000. The decrease was attributed
to decreases in accruals for long-term executive stock-based compensation plans
as a result of decreases in the Massey stock price during the quarter, partially
offset by additions in the administrative workforce due to the increased
workload that is part of running a stand-alone publicly traded company.
Earnings before interest, taxes, depreciation, depletion and amortization
("EBITDA"), was $41.2 million for the three months ended July 31, 2001 compared
to $78.1 million for the same period in 2000.
Interest income decreased to $0.7 million for the three months ended July 31,
2001 compared with $10.8 million for the same period in 2000. Interest income
for the third quarter of fiscal year 2000 reflected $5.3 million of interest
receivable on the black lung excise tax refund as discussed above and income
from an intercompany receivable from Fluor Corporation, which was only in place
in 2000 until the Spin-Off.
Interest expense increased to $8.6 million for the three months ended July 31,
2001 compared with $0.1 million for the same period in 2000. The increase was
primarily due to the addition of the 6.95 percent Senior Notes and commercial
paper borrowings subsequent to the Spin-Off.
Income tax benefit was $4.2 million for the third quarter 2001 compared with
income tax expense of $16.0 million for the same period in 2000. This primarily
reflects the decrease in earnings before interest and taxes in the third quarter
of 2001 compared to the income for 2000.
Nine months ended July 31, 2001 compared with the nine months ended July 31,
- ----------------------------------------------------------------------------
2000.
- ----
For the nine month period ended July 31, 2001, net sales increased 11.4 percent
to $882.8 million compared with $792.5 million for the same period in 2000. Two
factors that impacted net sales during the first nine months of 2001 were:
. The volume of tons sold increased 9.3 percent from 29.7 million tons to
32.4 million tons consisting of an increase of utility and industrial
tons sold of 16 and 19 percent, respectively, and a decrease of
metallurgical tons sold of 4 percent.
. The average per ton sales price for coal increased 2.0 percent from
$26.66 per ton for the nine months ended July 31, 2000 to $27.19 per ton
for the same period in 2001.
The market for utility coal has improved during the first nine months of 2001 as
spot market prices of Central Appalachian coal increased to a 20 year high. Most
of the Massey tonnage sold in the first nine months was committed prior to the
upturn in the
10
market, although prices in the third quarter began to improve with market
conditions. Realized prices for utility sales in the first six months of 2001
reflect a bottoming of the market prior to the recent market upturn.
Other revenue, which consists of royalties, rentals, miscellaneous income and
gains on the sale of non-strategic assets, decreased 48 percent to $26.9 million
for the nine month period ended July 31, 2001 compared with $51.6 million for
the same period in 2000. The decline was primarily due to a decrease in income
from dispositions of non-strategic mineral reserves, which generated $26.5
million in 2000, compared to $1.1 million for 2001.
Cost of sales increased 24 percent to $745.0 million for the nine months ended
July 31, 2001 from $600.5 million in the same period in 2000. This was primarily
due to the 9.3 percent increase in tons sold. Cost of sales on a per ton basis
increased by 14 percent for the nine month period ended July 31, 2001 compared
with the same period in 2000. Operational problems continued to impact
production and costs, and heavy rains in Central Appalachia in July increased
employee absenteeism and disrupted loading operations and rail service, delaying
coal shipping. Operating difficulties and problematic geologic conditions were
encountered at several longwall mines and during the expansion of two large
surface mines. Two new longwall mines, which started in January 2001,
experienced normal start-up problems. One longwall mine encountered unfavorable
mining conditions while mining at an interim location during November and
December. The Ellis Eagle longwall mine experienced flooding that caused
significant disruption to coal production during April and May. The flooding
caused reduced shipments from both the Marfork and Goals preparation plants. The
two surface mines experienced higher than expected overburden ratios in the
first and second quarters. Increases in operating costs related to the Martin
County Coal slurry spill and the idling of the Martin County Coal preparation
plant also negatively impacted cost of sales. Cost of sales for the third
quarter of 2001 included a $7.6 million pre-tax write-off of unamortized panel
development costs at the Jerry Fork longwall mine. The Company decided late in
the third quarter to move this longwall unit to Sidney's Rockhouse Mine in late
October to take advantage of better mining conditions.
The increase in cost of sales for the first nine months of 2001 was partially
offset by a $9.5 million pre-tax refund related to black lung excise taxes on
coal export sales tonnage. Black lung excise taxes on exported coal were
determined to be unconstitutional by a 1998 federal district court decision.
During the second quarter, the Internal Revenue Service substantially completed
its audit of the Company's requested refund of black lung excise tax payments.
Depreciation, depletion and amortization increased by 7 percent to $134.5
million for the nine month period ended July 31, 2001, compared to $126.0
million in 2000. The increase of $8.5 million was primarily due to capital
expenditures made in recent years.
Selling, general and administrative expenses were $23.9 million for 2001, an
increase from $21.9 million for 2000. The increase was attributed to additions
in the administrative workforce due to the increased workload that is part of
running a stand-alone publicly traded company and increased accruals for
long-term executive stock-based compensation plans.
Earnings before interest, taxes, depreciation, depletion and amortization
("EBITDA"), was a positive $140.8 million for the nine months ended July 31,
2001 compared to $221.7 million of the same period in 2000.
Interest income decreased to $7.2 million for the nine months ended July 31,
2001 compared with $19.8 million for the same period in 2000. This decrease was
primarily due to an intercompany receivable from Fluor Corporation, which was
outstanding for one month in the nine months of fiscal 2001 compared to nine
months in 2000. In the second quarter of 2001, $3.2 million was accrued for
interest due on the black lung excise tax refund as noted above, while in the
third fiscal quarter of 2000, $5.3 million was accrued for interest on the black
lung excise tax refund.
Interest expense increased to $26.0 million for the nine months ended July 31,
2001 compared with $0.2 million for the same period in 2000. The increase was
primarily due to the addition of the 6.95 percent Senior Notes and commercial
paper borrowings subsequent to the Spin-Off.
Income tax benefit was $3.9 million for the nine month period ended July 31,
2001 compared with income tax expense of $38.1 million for the same period in
2000. This primarily reflects the decrease in earnings before taxes in the first
three quarters of 2001 compared to the income for 2000.
11
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At July 31, 2001, the Company's available liquidity was $204 million, including
cash and cash equivalents of $3 million and $200.8 million from the Company's
commercial paper program. Massey had $191.2 million of short-term debt as of
July 31, 2001 consisting of $183.5 million of consolidated commercial paper
(outstanding commercial paper of $198.8 million net of discount offset by $15.3
million of Massey commercial paper purchased by various Massey subsidiaries),
and a $7.7 million promissory note payable November 1, 2001 related to a
strategic property purchase during the third quarter. Massey has $150 million
364-day and $250 million 3-year revolving credit facilities that serve to
provide liquidity backstop to Massey's commercial paper program and are also
available to meet the Company's ongoing liquidity needs. The total debt-to-book
capitalization ratio was 36.2 percent at July 31, 2001. The cash flow provided
by operating activities was $173.8 million in the first nine months of 2001 and
$77.8 million for the same period in 2000. 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 $161.9
million for the first nine months in 2001, and $117.5 million for the same
period in 2000. The cash used in investing activities reflects capital
expenditures in the amount of $165.8 million and $146.8 million for the nine
months ended July 31, 2001 and 2000, respectively. These capital expenditures
are for replacement of mining equipment, the expansion of mining capacity and
projects to improve the efficiency of mining operations. Financing activities
primarily reflect changes in amounts due from Fluor Corporation and additional
capital investments from Fluor prior to the Spin-Off. In addition to the cash
spent on capital expenditures, during the first nine months of 2001, the Company
leased, through operating leases, $79.4 million of longwall and surface mining
equipment.
OUTLOOK
- -------
Operational, expansion and labor shortage issues are expected to continue to
negatively impact the Company's financial results for the fourth quarter. The
Company expects that record spot coal prices and increasing demand for coal will
positively impact sales in 2002 and 2003 and has decided to increase its capital
spending, both in the second half of fiscal 2001 and 2002, to take advantage of
opportunities to expand production capacity, reduce production cost and improve
processing and shipping capability.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Massey's interest expense is sensitive to changes in the general level of
interest rates in the United States. At July 31, 2001, Massey had outstanding
$300 million aggregate principal amount of debt under fixed-rate instruments;
however, the Company's primary exposure to market risk for changes in interest
rates relates to its commercial paper program. At July 31, 2001, Massey had
$199.2 million of aggregate principal amount of commercial paper outstanding
($198.8 million net of discount). At July 31, 2001 Massey's commercial paper
bore interest at an average rate of 4.05 percent. Based on the commercial paper
balance outstanding at July 31, 2001, a 100 basis point increase in the average
issuance rate for Massey's commercial paper would increase Massey's annual
interest expense by approximately $2.0 million.
Almost all of Massey's transactions are denominated in U.S. dollars, and, as a
result, it does not have material exposure to currency exchange-rate risks.
Massey has not engaged in any interest rate, foreign currency exchange rate or
commodity price-hedging transactions.
12
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The following describes material developments in legal proceedings
affecting the Company, as previously described in Part II, Item 1 in the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April
30, 2001, as they relate to the fiscal quarter ended July 31, 2001.
a) With respect to the Martin County Coal impoundment discharge
described in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 2000, and further discussed in the Company's
Quarterly Reports on Form 10-Q for the first and second quarters of
fiscal year 2001, Martin County Coal is continuing to negotiate with
the applicable agencies for refuse disposal areas that would allow
for a long-term continuation of operations of Martin County Coal's
preparation plant.
As of July 31, 2001, cleanup costs of approximately $36.9 million
were expended, $27.1 million of which have been paid or reimbursed by
insurance companies to date. Massey continues to seek insurance
reimbursement of any and all covered costs, the majority of which are
recorded as a receivable in the Company's financial statements.
On June 26, 2001, the West Virginia Department of Environmental
Protection ("WVDEP") filed a civil action against Martin County Coal
in the Wayne County, West Virginia Circuit Court to redress alleged
injury to, destruction or loss of natural resources in the State of
West Virginia and alleged violations of law resulting from the
impoundment discharge.
b) In June 1998, Harman Mining Corporation ("Harman") filed a breach of
contract action against Wellmore Coal Corporation ("Wellmore"), a
former Massey subsidiary, in Buchanan County, Virginia Circuit Court,
described in the Company's Form 10-K for the fiscal year ended
October 31, 2000. On August 24, 2000, Harman received a jury verdict
against Wellmore assessing $6 million in damages. Massey's
subsidiary, Knox Creek Coal Corporation, has assumed the defense of
this action under the terms of the stock purchase agreement by which
it sold the stock of Wellmore and, on August 6, 2001 filed a petition
for appeal of the adverse determination on liability and damages to
the Supreme Court of Virginia.
Additionally, Harman and its sole shareholder, Hugh Caperton, filed a
separate action against Massey and certain subsidiaries in Boone
County, West Virginia Circuit Court, alleging that Massey and its
subsidiaries tortiously interfered with Harman's contract with
Wellmore. This action is described in the Company's Form 10-K for the
fiscal year ended October 31, 2000. Massey is defending this action
vigorously and believes that it has numerous valid defenses to the
claims. This action is set for trial beginning February 19, 2002.
c) On April 28, 2000, WVDEP issued two show cause orders to Marfork Coal
Company, Inc. ("Marfork"). The orders alleged patterns of violations
relating, respectively, to water quality and air quality at Marfork's
coal preparation plant. On December 20, 2000, WVDEP issued Marfork a
third show cause order, relating to alleged water quality violations
at the coal preparation plant. In lieu of a show cause hearing,
Marfork entered into a consent agreement with WVDEP in April 2001.
The agreement required Marfork to undertake remedial actions and to
expend $100,000 on community improvement projects approved by WVDEP.
d) WVDEP has also issued orders to (i) Marfork on June 7, 2001, ordering
it to show cause why the permit for its refuse impoundment should not
be suspended or revoked because of an alleged pattern of violations
relating to water quality, (ii) Green Valley Coal Company ("Green
Valley") on August 21, 2001,ordering it to show cause why the permit
for a refuse disposal area should not be suspended or revoked in
response to an alleged pattern of violations relating to water
quality, and (iii) Independence Coal Company, Inc. ("Independence")
on August 24, 2001, ordering it to show cause why the permit for its
preparation plant should not be suspended or revoked because of an
alleged pattern of violations relating to water quality, waste
disposal and refuse placement. The hearing related to Marfork will be
scheduled for late September 2001. Green Valley and Independence each
intend to timely request a hearing and each hearing should be
scheduled within thirty (30) days after such request. In the event of
an adverse determination, the affected permits could be suspended or
revoked. If a permit is revoked, Massey and its subsidiaries could be
prohibited from receiving additional permits. The companies intend to
vigorously defend these enforcement actions.
13
Item 5. Other Information
a) The Company's West Virginia and Kentucky operations were affected by
flooding that occurred in July in Central Appalachia. The flooding
disrupted coal production and shipments. This event adversely
impacted the Company's efforts to mitigate the previous force majeure
events resulting from the slurry spill at Martin County and the
longwall flooding at Marfork's Ellis Eagle mine. Certain customers
have complained about shortfalls in coal shipments. The Company has
taken a number of steps to deal with these complaints, including
starting up new mines and purchasing additional coal trucks to
expedite shipping. Several customers have agreed to defer tonnage
into calendar year 2002. The Company continues to seek to resolve any
other customer complaints through similar arrangements.
b) On October 20, 1999, the United States District Court for the
Southern District of West Virginia ("District Court") issued an
injunction against the WVDEP prohibiting it from issuing permits for
the construction of valley fills over both intermittent and perennial
stream segments as part of mining operations. While Massey is not a
party to this litigation, virtually all mining operations (including
those of Massey) utilize valley fills to dispose of excess materials
mined during coal production. On April 24, 2001, the Fourth Circuit
Court of Appeals overruled the district court, finding that the 11th
Amendment to the U.S. Constitution barred the suit against DEP in
Federal Court. On July 13, 2001, the Fourth Circuit Court of Appeals
denied the plaintiffs' petition for rehearing en banc. The plaintiffs
may appeal the Fourth Circuit decision to the U.S. Supreme Court.
c) On August 21, 2001, the Kentuckians for the Commonwealth, an
environmental group, sued the U.S. Corps of Engineers (the "Corps")
for issuing a Nationwide Permit (i.e., a general permit issued for a
class of activities that does not require a permit applicant to
undergo individual review) to Martin County Coal allowing
construction of valley fills in waters of the United States. The
lawsuit, filed in the United States District Court for the Southern
District of West Virginia, alleges that the Corps lacks the authority
under the Clean Water Act to issue permits for valley fills in waters
of the United States. Alternatively, the plaintiffs argue that fills
cannot be approved: (i) pursuant to a Nationwide Permit rather than
an individual permit; (ii) without an environmental impact statement;
(iii) without analyzing measures for avoiding and minimizing impacts
on streams; and (iv) without waiting for the U.S. Environmental
Protection Agency to complete proceedings under the Clean Water Act
to veto Martin County Coal's permit. Prior to the lawsuit being
filed, Martin County Coal sold the property subject to the permit to
an unrelated company and the Corps is in the process of transferring
the permit to that company. While neither Martin County Coal nor
Massey are a party to this litigation, virtually all mining
operations (including those of Massey) utilize valley fills to
dispose of excess materials mined during coal production.
d) On August 31, 2001, the United States District Court for the Southern
District of West Virginia issued a ruling on a suit by the West
Virginia Highlands Conservancy, an environmental group, against the
federal Office of Surface Mining ("OSM"). The court ruled that OSM
has failed to require the WVDEP to insure that adequate reclamation
bonds exist to ensure the reclamation of mining operations in the
event of bond forfeitures. However, prior to the court's ruling, OSM
initiated proceedings that could lead to it taking over the West
Virginia bonding program by setting deadlines for WVDEP to increase
the amount paid toward reclamation bonds. Consequently, the court did
not order immediate takeover by OSM of the West Virginia bonding
program; rather, it ruled that the court intends to enforce OSM's
established deadlines against WVDEP.
e) On July 17, 2001, the Board of Directors established the Public and
Environmental Policy Committee and appointed James H. Harless, James
L. Gardner and E. Gordon Gee, as members. Mr. Harless will also serve
as chairman of the committee.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description
----------- -----------
10 Amendment to Massey Energy Company 1982 Shadow Stock
Plan dated July 17, 2001
(b) Reports on Form 8-K.
None
14
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: September 14, 2001 /s/ J. M. Jarosinski
-----------------------------------
J. M. Jarosinski,
Vice President - Finance
and Chief Financial Officer
/s/ E. B. Tolbert
-----------------------------------
E. B. Tolbert, Controller
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10 Amendment to Massey Energy Company 1982 Shadow Stock Plan dated July
17, 2001
15