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 June 30, 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
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Delaware 95-0740960
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 North 4th Street, Richmond, Virginia 23219
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(804) 788-1800
- --------------------------------------------------------------------------------
(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 July 31, 2002 there were 74,867,805 shares of common stock, $0.625 par
value, outstanding.
1
MASSEY ENERGY COMPANY
FORM 10-Q
For the Quarterly Period Ended June 30, 2002
TABLE OF CONTENTS PAGE
- -----------------------------------------------------------------------------------------------------------
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 11
Item 3. Quantitative and Qualitative Discussions About Market Risk 15
Part II: Other Information 15
Item 1. Legal Proceedings 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 330,903 $ 305,026 $ 654,406 $ 617,716
Other revenue 16,829 9,969 35,159 21,273
----------- ---------- ---------- ----------
Total revenue 347,732 314,995 689,565 638,989
Costs and expenses
Cost of sales 304,764 259,293 594,599 516,886
Depreciation, depletion and amortization 50,054 45,046 96,880 90,195
Selling, general and administrative 9,961 9,391 15,362 18,582
----------- ---------- ---------- ----------
Total costs and expenses 364,779 313,730 706,841 625,663
(Loss) Earnings before interest and taxes (17,047) 1,265 (17,276) 13,326
Interest income 676 4,150 1,664 4,946
Interest expense 8,619 9,011 16,425 19,575
----------- ---------- ---------- ----------
Loss before taxes (24,990) (3,596) (32,037) (1,303)
Income tax benefit (8,748) (1,259) (13,652) (456)
----------- ---------- ---------- ----------
Net loss $ (16,242) $ (2,337) $ (18,385) $ (847)
=========== ========== ========== ==========
Loss per share (Note 6)
Basic $ (0.22) $ (0.03) $ (0.25) $ (0.01)
=========== ========== ========== ==========
Diluted $ (0.22) $ (0.03) $ (0.25) $ (0.01)
=========== ========== ========== ==========
Shares used to calculate loss per share (Note 6)
Basic 74,445 73,927 74,397 73,680
=========== ========== ========== ==========
Diluted 74,445 73,927 74,397 73,680
=========== ========== ========== ==========
Dividends declared per share $ 0.04 $ 0.04 $ 0.08 $ 0.08
=========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
3
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
UNAUDITED
JUNE 30, DECEMBER 31,
$ IN THOUSANDS 2002 2001
- -------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,344 $ 5,544
Trade and other accounts receivable 202,232 184,347
Inventories 180,894 155,793
Deferred taxes 13,889 13,572
Income taxes receivable - 1,880
Prepaid expenses and other 88,612 97,199
------------ ------------
Total current assets 487,971 458,335
Net Property, Plant and Equipment 1,616,622 1,619,698
Other Noncurrent Assets
Pension assets 78,024 79,747
Other 116,767 108,744
------------ ------------
Total other noncurrent assets 194,791 188,491
------------ ------------
Total assets $ 2,299,384 $ 2,266,524
============ ============
(Continued On Next Page)
4
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
UNAUDITED
JUNE 30, DECEMBER 31,
$ IN THOUSANDS 2002 2001
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, principally trade and bank overdrafts $ 148,131 $ 186,810
Short-term debt 330,450 263,101
Payroll and employee benefits 20,817 29,605
Income tax payable 2,381 -
Other current liabilities 102,238 77,590
------------- -------------
Total current liabilities 604,017 557,106
Long-term debt 300,000 300,000
Noncurrent liabilities
Deferred taxes 230,081 239,874
Other noncurrent liabilities 339,613 321,850
------------- -------------
Total noncurrent liabilities 569,694 561,724
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 - 74,866,282 and 74,773,920 shares at
June 30, 2002 and December 31, 2001, respectively 46,791 46,734
Additional capital 19,668 18,559
Retained earnings 764,193 788,534
Unamortized executive stock plan expense (4,979) (6,133)
------------- -------------
Total shareholders' equity 825,673 847,694
------------- -------------
Total liabilities and shareholders' equity $ 2,299,384 $ 2,266,524
============= =============
See Notes to Condensed Consolidated Financial Statements.
5
MASSEY ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
UNAUDITED
$ IN THOUSANDS 2002 2001
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (18,385) $ (847)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation, depletion and amortization 96,880 90,195
Deferred taxes (9,902) (3,722)
Loss on disposal of assets 124 97
Changes in operating assets and liabilities (45,400) 50,081
------------ ------------
Cash provided by operating activities 23,317 135,804
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (93,569) (114,251)
Proceeds from sale of assets 4,267 4,573
------------ ------------
Cash utilized by investing activities (89,302) (109,678)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in short-term debt, net 67,349 (24,547)
Dividends paid (5,956) (5,827)
Stock options exercised 1,392 9,013
Other, net - 1,000
------------ ------------
Cash provided (utilized) by financing activities 62,785 (20,361)
------------ ------------
(Decrease) Increase in cash and cash equivalents (3,200) 5,765
Cash and cash equivalents at beginning of period 5,544 4,381
------------ ------------
Cash and cash equivalents at end of period $ 2,344 $ 10,146
============ ============
See Notes to Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) General
Effective January 1, 2002, Massey Energy Company ("Massey" or "the
Company") changed its fiscal year-end from October 31 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 three months and six months ended June 30, 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 June 30, 2002
and December 31, 2001, its consolidated results of operations for the
three months and six months ended June 30, 2002 and 2001, and its
consolidated cash flows for the six months ended June 30, 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) New Accounting Standards
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
Inventories are comprised of:
June 30, December 31,
$ in thousands 2002 2001
-------------------------------------------------------
Coal $ 157,423 $ 132,267
Other 23,471 23,526
------------- -------------
$ 180,894 $ 155,793
============= =============
(4) Property, Plant and Equipment
Net Property, Plant and Equipment is comprised of:
June 30, December 31,
$ in thousands 2002 2001
------------------------------------------------------------------------------------
Property, Plant and Equipment, at cost $ 2,827,763 $ 2,751,026
Accumulated depreciation, depletion and amortization (1,211,141) (1,131,328)
------------ ------------
$ 1,616,622 $ 1,619,698
============ ============
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(5) Short Term Debt
The Company had $330.5 million of short-term debt as of June 30, 2002,
of which, $330.0 million consisted of borrowings under the revolving
credit facilities. At June 30, 2002 the weighted average interest rate
under the credit facilities was approximately 2.91 percent. The Company
has $150 million 364-day and $250 million 3-year revolving credit
facilities. The $150 million 364-day facility has been renewed through
November 26, 2002, however, the facility allows for the conversion of
outstanding obligations at the termination date to a term loan for a
one-year period. 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 Investors Service
("Moody's") and Standard & Poor's Ratings Service ("S&P")(ii) the Base
Rate (as defined in the facility agreements), and (iii) the Competitive
Bid rate (as defined in the facility agreements).
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 our net worth to be less than a
specified amount. We were in compliance with these covenants at June
30, 2002.
In determining EBITDA as defined in the debt agreements for use in
computing the leverage ratio, the Company has excluded certain items,
including the $25.6 million reserve relative to the Harman litigation
described in Note 8. The Company believes that the exclusion of such
items is appropriate and has notified the lenders' Administrative Agent
of this exclusion. If the accrual for the Harman litigation were to be
included in the EBITDA calculation and no further adjustments were
made, the Company would still be in compliance with the covenant at
June 30, 2002. However, depending on future operating results, it would
be possible that the Company would not be in compliance with such
covenant at September 30, 2002. Excluding this matter, the Company
expects to remain in compliance with these covenants in the foreseeable
future.
In early May 2002, Moody's and S&P downgraded our credit ratings. These
ratings actions effectively prevented us from accessing the commercial
paper market due to the restrictive investment policy credit guidelines
of potential commercial paper investors and caused us to draw on the
credit facilities for short-term financing needs.
(6) Earnings Per Share
The number of shares used to calculate basic loss per share for the
three months and six months ended June 30, 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
earnings (loss) per share is based on the number of shares used to
calculate basic earnings (loss) 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 six months ended June 30, 2002 and
2001, as such inclusion would result in antidilution.
The computations for basic and diluted loss per share are based on the
following per share information:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
In thousands 2002 2001 2002 2001
----------------------------------------------------------------------------------------
Average shares of common stock outstanding:
Basic 74,445 73,927 74,397 73,860
Effect of stock options/restricted stock - - - -
------ ------ ------ ------
Diluted 74,445 73,927 74,397 73,860
====== ====== ====== ======
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(7) Appalachian Synfuel, LLC
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.
On May 9, 2002, the Company sold substantially all of its remaining
interest in Appalachian Synfuel, LLC, contingent upon a favorable
Internal Revenue Service ruling, which was received in June 2002. The
Company received cash of $3.6 million, a recourse promissory note for
$19.4 million that will be paid in quarterly installments of $1.1
million 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 $26.7 million and $11.4 million as of June 30, 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.
(8) Other Items Affecting Net Income
During the second quarter of 2002, the Company recorded a charge in
the amount of $25.6 million (pre-tax) related to an adverse jury
verdict in the West Virginia Harman Mining Corporation action, which
was rendered on August 1, 2002 (see Note 9 for further discussion).
This charge is included in cost of sales for the three month and six
month periods ended June 30, 2002.
During the first quarter of 2002, the Company reduced its bad debt
reserves for receivables from two large bankrupt customers, Enron
Corp., based on a reassessment of our total exposure, and Wheeling
Pittsburgh Steel, due to a long-term repayment agreement. This positive
adjustment of $5.5 million (pre-tax) is reflected in selling, general
and administrative expense for the first six months 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 six months 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 six months of 2002.
(9) Contingencies and Commitments
Harman Mining Corporation and certain of its affiliates (collectively
"Harman") instituted two civil actions against Massey or its present or
former subsidiaries. In June 1998, Harman filed a breach of contract
action against Wellmore Coal Corporation ("Wellmore"), a former Massey
subsidiary, in Buchanan County, Virginia Circuit Court. Harman claimed
that Wellmore breached a coal supply agreement, pursuant to which
Harman sold coal to Wellmore, by declaring a force majeure event and
reducing the amount of coal to be purchased from Harman as a result
thereof. Wellmore claimed force majeure when its major customer was
forced to close its Pittsburgh coke plant due to regulatory action. At
trial, a jury found that Wellmore had breached its contract and
Wellmore was assessed $6 million in damages. Massey's subsidiary, Knox
Creek Coal Corporation, 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. The Supreme Court of Virginia heard the case and a decision
is expected in September 2002.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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
and, as a result, caused Harman to go out of business. On August 1,
2002, the jury in the case awarded the plaintiffs $50 million in
compensatory and punitive damages. Massey intends to vigorously pursue
post-judgment remedies, including appeal to the West Virginia Supreme
Court of Appeals if necessary. An appeal to the West Virginia Supreme
Court of Appeals must be filed no later than four months after a final
judgment is entered by the trial court.
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 14, 2002, the West Virgina Division of Environmental
Protection ("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 Mine
Board, which heard the appeal, and on June 27, 2002, reduced the
suspension to nine days. Marfork appealed the Surface Mine Board
decision to the circuit court and the suspension has been temporarily
stayed pending the circuit court's decision.
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 appealed the order to the Surface Mine
Board and a hearing is scheduled for August 14, 2002. The suspensions
have been temporarily stayed pending the decision of the Surface Mine
Board.
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 also alleged
that our claim of force majeure constituted fraud, and sought to
recover profits made by us on sales to other customers of the coal
Appalachian Power claims should have been delivered to it. However, by
order entered July 25, 2002, the Court dismissed this fraud claim. We
intend to defend the remaining claims vigorously.
(10) Subsequent Events
On August 1, 2002, the Company received an adverse jury verdict in
connection with the West Virginia Harman Mining Corporation action
mentioned above in the amount of $50 million. As a result, the Company
recorded a charge in the amount of $25.6 million (pre-tax) in the
second quarter of 2002, which is included in cost of sales.
On August 2, 2002, S&P downgraded Massey's long-term debt rating from
BBB to BBB-, with a stable outlook.
On August 5, 2002, a shareholder derivative complaint was filed in the
Boone County, West Virginia, Circuit Court naming as defendants the
Company, each of the Company's directors (including Don L. Blankenship,
Chairman, President and Chief Executive Officer), James L. Gardner,
Executive Vice President and Chief Administrative Officer, Jeffrey M.
Jarosinski, Vice President - Finance and Chief Financial Officer,
Madeleine M. Curle, Vice President - Human Relations, and Bennett K.
Hatfield, former Executive Vice President and Chief Operating Officer.
The complaint alleges (i) breach of fiduciary duties against all of the
defendants for refusing to cause the Company to comply with
environmental, labor and securities laws, and (ii) improper insider
trading by Don L. Blankenship, Jeffrey M. Jarosinski, Madeleine M.
Curle, and Bennett K. Hatfield. The Company intends to vigorously
pursue defense of this case.
10
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 Quarterly Reports on Form 10-Q
for the periods ending December 31, 2001 (transitional report) and March 31,
2002. Unless otherwise noted herein, all references to second quarter of 2001 in
the following discussion shall refer to the three months ended June 30, 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 our 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 that may impact future operating results. These
forward-looking statements could also involve, among other things, statements
regarding 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 our
forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
Three months ended June 30, 2002 compared with the three months ended June 30,
- ------------------------------------------------------------------------------
2001.
- -----
For the three months ended June 30, 2002, net sales increased 8 percent to
$330.9 million in 2002 compared with $305.0 million for the three months ended
June 30, 2001. Two factors that impacted net sales for the second quarter of
2002 compared to the second quarter of 2001 were:
. The volume of tons sold decreased 7 percent from 11.1 million tons to
10.3 million tons, attributable to a reduction in metallurgical and
industrial tons sold of 12 and 19 percent, respectively; and
. The average per ton sales price for coal increased 16 percent from $27.53
per ton to $32.06 per ton consisting of increases of 19, 14, and 18
percent of the prices for utility, metallurgical and industrial coal,
respectively.
Realized prices for our tonnage sold in the second quarter of 2002 reflect
some of the improvement seen in the market during 2001, as spot market prices of
Central Appalachian coal increased to 20-year highs, and we were able to obtain
sales commitments at relatively higher prices. However, demand for coal remained
weak during the second quarter of 2002, due to the lack of growth in the
economy, soft steel demand and the unusually mild weather that prevailed in the
Eastern United States during the winter.
11
Other revenue, which consists of royalties, rentals, miscellaneous income
and gains on the sale of non-strategic assets, increased to $16.8 million for
the second quarter of 2002 from $10.0 million for the second quarter of 2001.
The increase was primarily due to increased earnings related to the operations
of Appalachian Synfuel, LLC.
Cost of sales increased approximately 18 percent to $304.8 million for the
second quarter of 2002 from $259.3 million for the second quarter of 2001. Cost
of sales on a per ton of coal sold basis increased by 26 percent in the second
quarter of 2002 compared with the second quarter of 2001. These increases were
due to a charge taken in the second quarter of 2002 in the amount of $25.6
million (pre-tax) related to an adverse jury verdict in the West Virginia Harman
Mining Corporation action, as well as the reduction in tons sold, lower
productivity at several of our longwall and room and pillar mining operations,
and higher wage levels. Costs of sales for the second quarter of 2001 was also
partially offset by a $6.5 million (pre-tax) refund related to black lung excise
taxes paid on coal export sales tonnage. Tons produced in the second quarter of
2002 were 11.0 million compared to 11.7 million in the second quarter of 2001.
Depreciation, depletion and amortization increased by approximately 11
percent to $50.1 million in the second quarter of 2002 compared to $45.0 million
for the second quarter of 2001. The increase of $5.1 million was primarily due
to capital expenditures made in 2001 in an effort to increase production.
Selling, general and administrative expenses were $10.0 million for the
second quarter of 2002 compared to $9.4 million for the second quarter of 2001.
The increase was primarily attributable to 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 $33.0 million for the second quarter of 2002 compared to $46.3
million for the second quarter of 2001.
Interest income decreased to $0.7 million for the second quarter of 2002
compared to $4.2 million for the second quarter of 2001. This decrease is due to
$3.2 million (pre-tax) of interest income in the second quarter of 2001 for
interest due on the black lung excise tax refund.
Interest expense decreased to $8.6 million for the second quarter of 2002
compared with $9.0 million for the second quarter of 2001. The lower interest
expense was primarily due to the decrease in interest rates in the short-term
debt markets, as seen in our weighted average rates for short-term debt of 2.91
percent at June 30, 2002 compared to 4.23 percent at June 30, 2001.
Income tax benefit was $8.7 million for the second quarter of 2002 compared
with income tax benefit of $1.3 million for the second quarter of 2001. This
reflects the increase in the loss before taxes in the three months ended June
30, 2002 compared to the loss before taxes for the same three-month period ended
June 30, 2001.
Six months ended June 30, 2002 compared with the six months ended June 30, 2001.
- --------------------------------------------------------------------------------
For the six months ended June 30, 2002, net sales increased 6 percent to
$654.4 million in 2002 compared with $617.7 million for the six months ended
June 30, 2001. Two factors that impacted net sales for the first six months of
2002 compared to the first six months of 2001 were:
. The volume of tons sold decreased 9 percent from 22.8 million tons to
20.8 million tons, attributable to a reduction in metallurgical and
industrial tons sold of 22 and 16 percent, respectively; and
. The average per ton sales price for coal increased 16 percent from $27.11
per ton to $31.42 per ton consisting of increases of 16, 18, and 22
percent of the prices for utility, metallurgical and industrial coal,
respectively.
Realized prices for our tonnage sold in the first six months of 2002
reflected the improvement seen in the market during 2001, as spot market prices
of Central Appalachian coal increased to 20-year highs, and we were able to
obtain sales commitments at relatively higher prices. However, during the first
six months of 2002 the soft economic environment, weak steel demand and
unusually mild weather during the winter significantly reduced demand for all
grades of coal.
Other revenue, which consists of royalties, rentals, miscellaneous income
and gains on the sale of non-strategic assets, increased to $35.2 million for
the first six months of 2002 from $21.3 million for the first six months 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 earnings related to
the operations of Appalachian Synfuel, LLC.
Cost of sales increased approximately 15 percent to $594.6 million for the
first six months of 2002 from $516.9 million for the first six months of 2001.
Cost of sales on a per ton of coal sold basis increased by 26 percent in the
first six months of 2002 compared with the first six months of 2001. These
increases were due to a charge taken in the second quarter of 2002 in the amount
of $25.6 million (pre-tax) related to an adverse jury verdict in the West
Virginia Harman Mining Corporation action, as well as the reduction in tons
sold, lower
12
productivity at several of our longwall and room and pillar mining operations,
and higher wage levels. During 2001, we increased staffing levels in order to
increase production. However, due to the market weakness, we reduced total
workforce during the first quarter of 2002 by approximately 7 percent and idled
15 continuous miner sections. Cost of sales for the first six months of 2001 was
also partially offset by a $6.5 million (pre-tax) refund related to black lung
excise taxes paid on coal export sales tonnage. Tons produced in the first six
months of 2002 were 22.8 million compared to 23.3 million in the first six
months of 2001.
Depreciation, depletion and amortization increased by approximately 7
percent to $96.9 million in the first six months of 2002 compared to $90.2
million for the first six months of 2001. The increase of $6.7 million was
primarily due to capital expenditures made in 2001 in an effort to
increase production.
Selling, general and administrative expenses were $15.4 million for the
first six months of 2002 compared to $18.6 million for the first six months 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 $79.6 million for the first six months of 2002 compared to
$103.5 million for the first six months of 2001.
Interest income decreased to $1.7 million for the first six months of 2002
compared with $4.9 million for the first six months of 2001. This decrease is
due to $3.2 million (pre-tax) of interest income in the first six months of 2001
for interest due on the black lung excise tax refund.
Interest expense decreased to $16.4 million for the first six months of
2002 compared with $19.6 million for the first six months of 2001. The lower
interest expense was primarily due to the decrease in interest rates in the
short-term debt markets, as seen in our weighted average rates for short-term
debt of 2.91 percent at June 30, 2002 compared to 4.23 percent at June 30, 2001.
Income tax benefit was $13.7 million for the first six months of 2002
compared with income tax benefit of $0.5 million for the first six months of
2001. This reflects a refund in the first six months of 2002 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 three
months and six months ended June 30, 2002 are not necessarily indicative of
results that can be expected for the full year. Please refer to the Critical
Accounting Estimates and Assumptions of the Management's Discussion and Analysis
of Financial Condition and Results of Operation section of the Quarterly Report
on Form 10-Q for the period ended March 31, 2002, for a discussion of our
critical accounting estimates and assumptions.
Capitalized Development Costs
Development costs applicable to the opening of new coal mines and certain
mine expansion projects are capitalized and reported in property, plant and
equipment. We periodically assess the continuing economic viability of
capitalized development costs. We are currently assessing the future operating
potential of several coal mines that were recently placed in idled status in
light of the weak coal market. This assessment includes a consideration of the
future operating cashflows from such idled mines as measured using various
potential operating plans and market assumptions of future coal demand and
prices. At the conclusion of this review, it may be necessary to write off all
or a portion of the capitalized development costs associated with one or more
of these mines.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 2002 our available liquidity was $72.3 million, including cash
and cash equivalents of $2.3 million and $70.0 million from our revolving credit
facilities. We had $330.5 million of short-term debt as of June 30, 2002, of
which, $330.0 million consisted of borrowings under the revolving credit
facilities. 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. 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 S&P, 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).
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 our net worth to be less than a specified amount. We
were in compliance with these covenants at June 30, 2002. The total debt-to-book
capitalization ratio was 43.3 percent at June 30, 2002.
13
In determining EBITDA as defined in the debt agreements for use in
computing the leverage ratio, the Company has excluded certain items, including
the $25.6 million reserve relative to the Harman litigation described in Note 8.
The Company believes that the exclusion of such items is appropriate and has
notified the lenders' Administrative Agent of this exclusion. If the accrual for
the Harman litigation were to be included in the EBITDA calculation and no
further adjustments were made, the Company would still be in compliance with the
covenant at June 30, 2002. However, depending on future operating results, it
would be possible that the Company would not be in compliance with such covenant
at September 30, 2002. Excluding this matter, the Company expects to remain in
compliance with these covenants in the foreseeable future.
Cash flow provided by operating activities was $23.3 million and $135.8
million for the first six months 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 $89.3 million and $109.7
million for the first six months of 2002 and 2001, respectively. The cash used
in investing activities reflects capital expenditures in the amount of $93.6
million and $114.2 million for the first six months 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 six months of 2002, we leased, through
operating leases, $10.6 million of primarily surface mining equipment compared
to $39.8 million for the first six months of 2001. Additionally, the first six
months of 2002 and 2001 included $4.3 million and $4.6 million, respectively, of
proceeds provided by the sale of assets.
Financing activities primarily reflect changes in short term financing for
the first six months of 2002 and 2001, as well as the exercising of stock
options. Net cash provided (utilized) by financing activities was $62.8 million
and ($20.4) million for the first six months 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, however, the
facility allows for the conversion of outstanding obligations at the termination
date to a term loan for a one-year period. We have begun efforts to put in place
a replacement credit facility and anticipate closing that transaction within the
next 60 days. In the event we are not able to complete the successful
establishment of the replacement 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 our financial
statements.
14
OUTLOOK
- -------
Given the weak market conditions that prevailed throughout the first half
of 2002, we have revised our sales expectations for 2002 to 44 to 45 million
tons, approximately the same as in fiscal 2001. Virtually all of this tonnage is
committed for 2002, with contract prices at significantly higher rates than in
fiscal 2001. A variety of initiatives have been put in place to address the
higher costs per ton we have experienced during the first six months of the
year.
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 June 30, 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 short-term debt financing. At June 30, 2002, we
had $330.0 million outstanding under the revolving credit facilities. At June
30, 2002 the weighted average interest rate under the credit facilities was
approximately 2.91 percent. Based on the short-term debt balance outstanding at
June 30, 2002, a 100 basis point increase in the average issuance rate for our
borrowings would increase our annual interest expense by approximately $3.3
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,
and Quarterly Reports on Form 10-Q for the periods ending December 31, 2001
(transitional report) and March 31, 2002, as they relate to the fiscal quarter
ended June 30, 2002.
On August 5, 2002, a shareholder derivative complaint was filed in the
Boone County, West Virginia, Circuit Court naming as defendants the Company,
each of the Company's directors (including Don L. Blankenship, Chairman,
President and Chief Executive Officer), James L. Gardner, Executive Vice
President and Chief Administrative Officer, Jeffrey M. Jarosinski, Vice
President - Finance and Chief Financial Officer, Madeleine M. Curle, Vice
President - Human Relations, and Bennett K. Hatfield, former Executive Vice
President and Chief Operating Officer. The complaint alleges (i) breach of
fiduciary duties against all of the defendants for refusing to cause the Company
to comply with environmental, labor and securities laws, and (ii) improper
insider trading by Don L. Blankenship, Jeffrey M. Jarosinski, Madeleine M. Curle
and Bennett K. Hatfield. The Company intends to vigorously pursue defense of
this case.
The Company previously reported certain litigation pending in Boone County,
West Virginia, Circuit Court, in which Harman Mining Corporation and certain of
its affiliates (collectively "Harman"), and Harman's sole shareholder, Hugh
Caperton, alleged that Massey and certain of its subsidiaries tortiously
interfered with Harman's coal supply contract with Wellmore Coal Corporation (a
former Massey subsidiary) and caused Harman to go out of business. On August 1,
2002, the jury in the case awarded the plaintiffs $50 million in compensatory
and punitive damages. Massey intends to vigorously pursue post-judgment
remedies, including appeal to the West Virginia Supreme Court of Appeals if
necessary. An appeal to the West Virginia Supreme Court must be filed no later
than four months after a final judgment is entered by the trial court.
The Company continued discussions with various Kentucky and West Virginia
agencies in connection with notices of violation relating to the October 11,
2000, partial failure of Martin County Coal Corporation's coal refuse
impoundment. On July 31, 2002, Martin County settled the claims set forth in
Kentucky's notices of violation by agreeing to pay approximately $3.25 million
in penalties, costs and damages. On July 18, 2002, a West Virginia circuit court
ruled that West Virginia is preempted by the Federal Clean Water Act from
assessing penalties against Martin County.
15
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 and appealed to the West
Virginia Surface Mine Board (the "Surface Mine Board"), where the order was
overturned on June 7, 2002.
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 Mine Board. On April 9, 2002, the Board upheld the
30-day suspension, but modified parts of the order at Green Valley's request.
Green Valley elected not to appeal the order as modified.
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 Mine Board, which heard
the appeal, and on June 27, 2002, reduced the suspension to nine days. Marfork
appealed the Surface Mine Board decision to the circuit court and the suspension
has been temporarily stayed pending the circuit court's decision.
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. The hearing
to show cause that was originally scheduled for May 21, 2002 has been postponed
and has not yet been rescheduled.
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
appealed the order to the Surface Mine Board and a hearing is scheduled for
August 14, 2002. The suspensions have been temporarily stayed pending the
decision of the Surface Mine 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 requested a hearing to show cause but the
hearing has not yet been scheduled.
Investigations into various water quality violations, including those
described above, are continuing and may result in additional sanctions against
us.
In addition, the Company and its subsidiaries, incident to their normal
business activities, are parties to a number of other legal and regulatory
proceedings in various stages of development. While the Company cannot predict
the outcome of these proceedings, based on reports of counsel, the facts now
known to the Company, assuming the reasonableness of any ultimate outcome
(which, in our opinion, was not reflected in the jury award in the Harman case),
and also assuming reasonable coverage decisions by the Company's insurance
carriers, the Company does not believe that any liability arising from these
proceedings individually or in the aggregate should have a material adverse
affect upon the consolidated financial position, cash flows or results of
operations of the Company.
Item 5. Other Information
a) 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 and industry intervenors moved for a stay of the
ruling pending an appeal; the District Court denied
16
the motion for stay on June 17, 2002. The Corps of Engineers and
industry intervenors have appealed the order to the Fourth Circuit
Federal Court of Appeals.
b) On August 1, 2002, James L. Gardner resigned from the Board of
Directors in connection with his acceptance on July 1, 2002, of the
position of Massey's Executive Vice President and Chief Administrative
Officer, and accordingly, the Bylaws of the Company were amended to
reduce the required number of directors by one.
c) The employment agreement between the Company and Don L. Blankenship was
amended and restated on July 16, 2002 to provide that (i) the number of
"shadow stock" units received annually by Mr. Blankenship as part of
his compensation is subject to review and approval by the Board prior
to the commencement of each annual vesting period and (ii) if Mr.
Blankenship resigns from his employment at any time after October 31,
2002 and prior to October 31, 2004, he shall provide consulting
services to the Company on an exclusive, full-time basis for six months
after the date of such resignation and shall receive as compensation
the compensation payable to him had he remained in the Company's
employment through the next succeeding October 31.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Bylaws (as amended effective August 1, 2002) of
Massey Energy Company
10.1 Amended and Restated Employment Agreement between Massey Energy
Company, A. T. Massey Coal Company, Inc. and Don L. Blankenship
dated as of November 1, 2001 [amending and restating on July
16, 2002, the Employment Agreement between Massey Energy
Company, A. T. Massey Coal Company, Inc. and Don L. Blankenship
dated as of November 1, 2001]
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
Form 8-K filed on August 2, 2002, reporting jury verdict in press
release attached thereto
Form 8-K filed on August 13, 2002, reporting an adjustment to second
quarter earnings in press release attached thereto
Form 8-K filed on August 14, 2002, containing Statements of Oath of
Principal Executive and Principal Financial Officers Regarding Facts
and Circumstances Relating to Exchange Act Filings
17
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: August 14, 2002 /s/ J. M. Jarosinski
-------------------------------
J. M. Jarosinski,
Vice President - Finance
and Chief Financial Officer
/s/ E. B. Tolbert
-------------------------------
E. B. Tolbert, Controller
18